SEC Probing Schilling’s Failed 38 Studios Video-Game Bond Deal

The U.S. Securities and Exchange Commission is investigating a $75 million financing by a Rhode Island agency for Curt Schilling’s bankrupt video-game company.

The Rhode Island Economic Development Corp. sold federally taxable municipal bonds backed with the state’s moral obligation to induce the former Boston Red Sox pitcher to move 38 Studios LLC from Massachusetts to Providence in 2010. The company declared bankruptcy last year, with taxpayers on the hook to repay the bonds.

Rhode Island television station WPRI was first to report that the Economic Development Corp. hired a law firm to help respond to the SEC’s staff during five months last year, citing documents it obtained through an open-records request. Melissa Czerwein, a spokeswoman for the Economic Development Corp., said in an e-mail that the report was accurate and that the agency wouldn’t comment at the SEC’s request.

John Nester, a spokesman for the SEC, declined to comment on the investigation in an e-mail. Christine Hunsinger, a spokeswoman for Democratic Governor Lincoln Chafee, also declined to comment.

“We don’t talk about the 38 Studios issue because of pending litigation,” Hunsinger said.

Rhode Island is suing the insolvent company. The complaint claims that Schilling conspired with Wells Fargo & Co. bankers and other advisers to persuade the state to lend the company $75 million, knowing it wouldn’t be enough to finish development of a new video game.

Covering Payments

The financing shows the risks that states and localities take when offering businesses incentives to add or create jobs.

Lawmakers in June approved a $2.5 million payment to cover bond payments this year and avoid a credit-rating downgrade. Moody’s Investors Service in June threatened to cut the state’s Aa2 rating, the third-highest, if Rhode Island failed to follow through with its obligation.

Bonds maturing November 2020 last traded July 1 with an average yield of about 5.5 percent, data compiled by Bloomberg show. The debt is rated A2, sixth highest, and insured by Assured Guaranty Ltd.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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