38 Studios Oversight Hearings Planned In R.I. House

The Rhode Island House is planning oversight hearings into the 38 Studios debacle as lawmakers consider a $2.5 million debt payment related to the state's failed investment in former Red Sox pitcher Curt Schilling's now-defunct video game company.

The new House Oversight Committee chairman said he plans to hold hearings sometime this session on the state Economic Development Corp., whose board approved a $75 million loan guarantee to lure Schilling's startup from Massachusetts to Providence. Rep. Michael Marcello, D-Scituate, said he expects the review will touch on whether the agency scrutinized the state's investment in 38 Studios closely enough. He wants to look at EDC staffing levels and the quality of its "due diligence" work.

House Speaker Gordon Fox, who initially balked at holding hearings, has promised a "substantive and thorough" look at what happened "during the vetting process at the EDC, what its review entailed and what occurred after the loan was approved."

The Senate Finance Committee will also hold a 38 Studios-related hearing, according to Greg Pare, a spokesman for Senate President Teresa Paiva Weed. Pare described it as "forward-looking" and said it would aim to make sure a loan guarantee program under which 38 Studios got its funding is effective and has the proper safeguards.

But Finance Chairman Dan DaPonte, D-East Providence, said his committee intends to hold budget hearings on the EDC just as it does for any state department or agency. In such hearings, lawmakers often ask pointed questions about an agency's performance.

DaPonte said he isn't "comfortable" holding hearings on 38 Studios until he's confident the state investigation is complete. A federal probe of 38 Studios' finances resulted in no charges, but state police are still investigating.

No legislative hearings have been held to date on 38 Studios, which laid off all its employees in May and filed for bankruptcy protection in June. The General Assembly in 2010 signed off on the loan guarantee program that allowed the EDC to back up to $125 million in loans to companies as a way to create jobs. The legislation made no mention of 38 Studios, although it ended up getting $75 million of the total.

The EDC in November sued Schilling, other 38 Studios executives and several of its own former officials, including Keith Stokes, who as executive director helped push through the loan guarantee. The lawsuit claims they knew 38 Studios would run out of money by 2012 but kept that from the EDC board.

It asks Schilling and others to pay back the bonds floated on the company's behalf, which could total over $100 million when interest is factored in. The suit also seeks triple damages.

The Superior Court judge assigned to the case has scheduled a conference Friday with the parties' lawyers.

Gov. Lincoln Chafee's proposed budget for fiscal year 2014 includes $2.5 million in debt service on the bonds - which would be the first 38 Studios-related expenditure approved by lawmakers. Earlier payments were drawn from reserve funds set aside by the EDC.

Marcello said the state probably has little choice but to pay the money, though he conceded it stings a little. "Of course it does, especially when you know the whole basis for the payment is gone," he said.

He said that as the civil case and the bankruptcy proceedings continue, the state may have an opportunity to lower future payments.

DaPonte also said he hopes the state can recoup some of its investment in 38 Studios to reduce or prevent future payments. But in the meantime, he said, Rhode Island is going to be on the hook for at least a portion of the money.

Chafee, who opposed the loan guarantee when he was a candidate for governor, took Schilling and the EDC to task in his state-of-the-state address last week.

"We tried the 'get rich quick' approach by giving $75 million to a retired baseball player with no business experience," he said. "We cannot make such panic-driven decisions again."

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Associated Press writer David Klepper contributed to this report.