2013-09-05 / Front Page

Judge Rules EDC Can Proceed Against Stokes

Motion to dismiss EDC suit on basis of immunity is rejected
By Daniel Highet

Last Wednesday, Aug. 28, Rhode Island Superior Court Judge Michael Silverstein ruled that the Rhode Island Economic Development Corporation, where Newport’s Keith Stokes served as executive director until his May 2012 resignation, can proceed with its lawsuit against former Red Sox pitcher Curt Schilling’s video game company, 38 Studios, its former executives, and former EDC officials. The EDC sued in November, naming 14 defendants, nine of whom worked for the agency, including Stokes and former Deputy Director Michael Saul, in addition to several attorneys and financial advisers. 

The lawsuit alleges fraud, negligence, breach of fiduciary duty, racketeering and conspiracy.  It claims the EDC board was misled into approving the $75 million loan guarantee for Schilling’s company in 2010. Among other things, the lawsuit claims the defendants knew the company would run out of money by 2012, but concealed that from the EDC board, which made the final decision to back the deal. Indeed, 38 Studios filed for bankruptcy last year.

Stokes and Saul are seeking protection under the ‘‘public duty’’ immunity doctrine that would protect them from liability because they were public officials who were doing their jobs and following orders. Donald Carcieri, who was R.I. governor at the time, was a proponent of the guaranteed loan to 38 Studios, believing it would create hundreds of high-paying jobs and bring much-needed tax revenue. Newport This Week could not reach Mr. Stokes to provide comment for this article.

The state, represented by Providence lawyer Max Wistow, is seeking compensatory damages of at least the amount it has to pay to bondholders, as well as punitive damages. 38 Studios’ collapse left the state with a $100 million liability related to the deal.

While Stokes’ involvement will be determined in court—the EDC is seeking a jury trial—at least one former public official has gone on record claiming that Stokes had an influential role in the decision to back 38 Studios. Lawrence Ehrhardt, the former North Kingstown state representative who was a Republican minority member of the Finance Committee at the time, wanted to introduce a bill that would cap the guaranteed loan program at $10 million per company.

“Speaking as a Republican and as a minority member of the Finance Committee,” Ehrhardt stated during a phone interview with Newport This Week on Tuesday, Sept. 3, about the time the loan was under consideration, “we were absolutely unaware that a loan of that magnitude was in the planning.”

Initially the EDC loan program was only supposed to be for $50 million, but Stokes lobbied to increase it to $125 million in order to back 38 Studios, according to Ehrhardt.

On Aug. 12, 2010, Stokes issued a statement that read in part, “Independent industry and financial experts performed an extensive analysis of the interactive entertainment sector and 38 Studios. Based on months of due diligence, the board then crafted an agreement that includes strict performance milestones 38 Studios must meet and that goes to great lengths to safeguard taxpayers and ensure economic performance. It was the right call at the right time, but the decision was never only about 38 Studios," Stokes’ statement read. "It was about establishing the company as a catalyst for a broader digital media industry cluster in Rhode Island. As an 'anchor tenant,' 38 Studios will be a magnet for other related businesses that will set up shop here and generate thousands of additional jobs in our state.”

In fact, Strategy Analytics and Perimeter Partners, the two consultants hired to examine the advisability of the loan to 38 Studios, each noted the difficulties of pulling off Stokes’ plan to use one company as the anchor to attract other similar businesses. Additionally, one analyst compared 38 Studios’ product marketing strategy to an “all-in” hand in poker, a turn of phrase that now seems prescient on more than one level.

Stokes joined the Mayforth Group, a lobbying firm with offices in Washington, D.C., and Providence, as president of strategic economic planning and development just three months after his exit from the EDC. In a press release, the company noted Stokes’ “experienced, strategic counsel to guide municipalities, small businesses and community organizations using a full array of economic planning, evaluation, development and implementation.” At press time, the website for the Mayforth Group still listed Stokes as a president with the company.

Ehrhardt, who questioned the 38 Studios deal at its inception, stated, “The big question is who knew what and when. What’s certain is that making a decision of this nature was clearly beyond the skill level and experience of everyone involved, and that included the legislative and executive leadership.”

Asked if Stokes and others at the EDC were swayed in their decision by Schilling’s charisma and the memory of the pitcher’s bloody sock heroism in helping the Boston Red Sox to win their first World Series in 86 years, Ehrhardt said, “Celebrity blinds people and you get the herd instinct.”

Stokes served on Newport’s City Council from 1987 through October 1993, when he resigned to become the executive director of the Newport County Chamber of Commerce. Current Chamber of Commerce Executive Director Jody Sullivan, who worked with Stokes at the Chamber for 15 years, including time spent as his deputy director, was unequivocal in her assessment of the integrity of his judgment. In a brief telephone interview, Sullivan characterized Stokes as a conservative director while he was in charge of the Chamber.
“I have incredible respect for Keith Stokes and have always known him to be motivated by what’s best for Newport County and the State of Rhode Island,” stated Sullivan.

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