The Providence Journal, R.I., John Kostrzewa column

Feb. 28--Trying to read the signals between a pitcher and catcher in the middle of a tight ballgame can be a challenge.

But in the case of Rhode Island's lawsuit against 38 Studios, the bankrupt company founded by Red Sox star Curt Schilling, the signs are getting clearer, and they say there will be a settlement long before the case ever gets to trial.

Consider.

The Rhode Island Commerce Corporation held an executive session this week and held several votes about the status of the lawsuit that seeks damages from Schilling and 13 others for their roles in the 38 Studios disaster.

The dozen or so RICC directors and lawyers who emerged from the one-hour secret meeting gave no hints.

"I really can't say anything," said Max Wistow, the lawyer hired by the state to bring the lawsuit and recover as much money as possible.

But make no mistake about it.

Negotiations are under way with the defendants, and a settlement could come soon --perhaps by spring -- because financial and political pressure is building to stop the suit from going much further.

The settlements would provide money to help pay back the holders of the bonds the state sold to back 38 Studios, reducing the taxpayers' burden. Settling the lawsuit also would curb any new disclosures about who put the deal together, and why, disclosures that could embarrass key players.

Lately, the signs of a settlement are coming more frequently.

Remember, the state filed the lawsuit -- alleging fraud, negligence and legal malpractice -- in November 2012 after the collapse of the video-game company. The Rhode Island Economic Development Corporation, renamed the RICC, sold $75 million in bonds to support Schilling's startup and its move to Providence.

The big-name defendants in the lawsuit are: Schilling; 38 Studios' former chief executive officer, Jennifer MacLean, and company executives Thomas Zaccagnino and Richard Wester; Keith Stokes, former EDC executive director; J. Michael Saul, former EDC deputy director; Robert I. Stolzman, former EDC legal counsel; and Antonio Afonso Jr., the EDC's bond counsel for the loan deal.

Several firms that worked on the loan deal are also listed: Wells Fargo Securities, LLC; Barclays Capital, PLC; First Southwest Company; Starr Indemnity and Liability Company; Adler Pollock & Sheehan, P.C.; and Moses Afonso Ryan Ltd.

Schilling and the other defendants deny any wrongdoing.

The suit seeks repayment of the bonds and triple damages.

There was little movement in the suit, however, until late last year when depositions started to be taken from several defendants, including Stokes, Saul, Afonso and Stolzman.

Others also will be deposed, including the remaining defendants and perhaps other players in the 38 Studios drama such as House Speaker Gordon Fox. He led the House when the General Assembly approved a $125-million loan guarantee program that gave the EDC the authority to issue $75 million in bonds for 38 Studios.

Michael Corso, a friend of Fox, was subpoenaed for records related to the deal, according to court records. He is not a defendant, but he was a lawyer and consultant for 38 Studios who helped secure financing for the video-game company.

In January, Wistow acknowledged that settlement talks had started with certain defendants.

"We've been in discussions, which I've said would be absolutely confidential until and unless something very tangible happens," he said. "I really feel very uncomfortable talking about it. But we have had discussions. This is not completely theoretical."

Wistow later testified at the State House for a bill requested by Governor Chafee to help resolve the lawsuit. The bill would shield any defendant who reaches an out-of-court settlement with the state from lawsuits from other defendants. Wistow said similar proposals helped settle litigation after the credit union crisis in the 1990s and the Station nightclub fire in 2003.

Wistow also told a House committee that many defendants in the case have insurance policies that pay defense costs out of the policy limits. As those legal bills mount, the amount the state recovers could diminish.

The General Assembly fast-tracked the bill and Chafee signed it into law in mid-February, just as discussions started about financing a tight state budget.

In his proposed budget for the year that starts July 1, Chafee included $12.3 million to pay the next installment due to the 38 Studios bondholders. In all, the bondholders are still owed $87.5 million over the next seven years.

Nobody has estimated publicly how much the settlements could bring in.

But the amount, if substantial, could be used to defray the cost of the bond payments and defuse what has been a contentious issue over whether to pay the bondholders.

There are other ramifications of a settlement. The negotiations are under way as state lawmakers gear up reelection campaigns and the 38 Studios disaster remains a hot political issue. Many of them voted for the $125-million loan guarantee fund

Also, Sen. Dawson Hodgson, R-North Kingstown, has made 38 Studios a focus of his campaign for attorney general. He has called for an independent commission to get to the bottom of what happened.

"My biggest fear is that a purely financial focus on this [lawsuit] will not offer us the opportunity to learn the lessons we need to learn from this," he said.

He's right. And that's the other side of the settlement discussion. A settlement could mean that the depositions that have yet to be taken would no longer be required. There would be no public trial in which the defendants and others would give sworn testimony.

And the media, with the lawsuit over, would have less context to provide for the public about what truly transpired.

All that would be affected by a settlement.

During this week's executive session, the RICC directors took several votes.

When they emerged, they voted unanimously in public to keep secret what the votes were about so as not to jeopardize any strategy, or negotiation or investigation undertaken -- a caveat allowed by the state's Open Meetings Law.

Wistow and Thomas E. Carlotto, RICC's</org> general counsel, attended the session.

Asked about a settlement by Journal reporter Kate Bramson, Carlotto said, "We're always hopeful that we get a positive development in the near future. I'd like it to be sooner rather than later. ... It's an important case, and I would reiterate that the point here is -- at the governor's direction -- to push forward forcefully with the litigation and try to recover as much money as possible through all means."

Nobody could miss that sign -- the clearest yet -- that a settlement is a priority.

John Kostrzewa is the Journal's assistant managing editor/business, commerce and consumer issues. Reach him at (401) 277-7330 or email [email protected]. Follow his posts at facebook.com/JohnKostrzewa or @JohnKostrzewa on Twitter.

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