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C. Eugene Emery Jr.
By C. Eugene Emery Jr. October 12, 2014

Allan Fung claims Wall Street investors went bust on 38 Studios deal

In the drama that's playing out over who should be the next governor of Rhode Island, a key role is being played by a character known as "Wall Street."

You can see it in the "Bust" commercial from Republican gubernatorial candidate Allan Fung. It's an attack on his Democratic rival, Gina Raimondo, a venture capitalist who was elected general treasurer four years ago.

The underlying issue is 38 Studios, the now-defunct video-game company created by former Boston Red Sox star Curt Schilling. Before the company went bankrupt, the state gave it a loan guarantee of $75 million.

Whether the state is obligated to pay off the investors who purchased the bonds continues to be a hot topic in Rhode Island. With interest, the total payment would be $112.6 million over 10 years.

"Wall Street investors took a risk, and went bust," Fung's commercial says. "But Gina Raimondo wants to use our money to bail them out. A former Wall Street financier herself, Raimondo's looking out for Wall Street, not Main Street."

It's well known that Raimondo thinks the state should pay the holders of the "moral obligation" bonds and Fung thinks Rhode Island should not.

For this fact-check, we’re going to focus on whether Wall Street investors really went bust on the 38 Studios deal.

But first, a slight diversion.

We also had considered checking whether it’s accurate to call Raimondo a "former Wall Street financier," a phrase that implies significant power, influence and -- in the aftermath of the the Great Recession -- questionable dealings.

Fung spokesman Robert Coupe said the campaign was referring to the first venture capital firm Raimondo worked for, Village Ventures, which has an office in midtown Manhattan.

It may not have had an office directly in New York City's financial district, but the "Wall Street" phrase "refers to the financial services industry in general, not just firms that are physically located on Wall Street or at the southern tip of Manhattan," Coupe said.

Raimondo spokeswoman Nicole Kayner said the term doesn't apply because "Wall Street is investment banks, people who trade in stocks and bonds. It's not something Gina ever did."  Instead, she said, Raimondo traveled to areas of the country "under-served" by capital to find and help finance entrepreneurs starting companies.

We contacted more than a half dozen of the top U.S. business schools looking for experts to provide some guidance on this general question. Only one even wanted to venture an opinion, which was that, unless you're a major player, the accepted definition for "Wall Street financier" is as firm as jelly.

The evidence on the second statement -- whether "Wall Street investors . . . went bust" as a result of the 38 Studios deal -- is much clearer.

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The 38 Studios bonds were sold in three blocks totaling $75 million; buyers were promised interest rates ranging from 6 percent to 7.75 percent annually.

After 38 Studios went bankrupt, there was much debate over whether Rhode Island should repay the bonds. Ultimately, in June, the General Assembly and Gov. Lincoln Chafee approved a budget that included the $12.3 million due to 38 Studios bondholders this year.

It was the second state payment for the loan. Last year the state made an initial payment of $2.5 million as the bonds became due.

In short, the bondholders are getting their money, contrary to what Fung's commercial suggests.

Even if the state were to renege someday, the bonds come with insurance from Assured Guaranty Municipal Corporation, a AA-rated bond insurer.

If the state stopped payment, the insurance company would be on the hook to pay the investors.

In an email, Coupe said that "went bust" is a reference to 38 Studios itself, which went bankrupt. "The graphic on the screen during this line refers specifically to the 38 Studios bankruptcy," he said.

But the narrator specifically says, "Wall Street investors took a risk, and went bust."

Asked about the insurance, Coupe said, "If the State of Rhode Island does not appropriate the funds to repay investors, then insurance coverage may repay the investors, but that insurance coverage does not operate as a guarantee.

"It is accurate, therefore, to say that the investors went bust, although they may at some future point be made whole either by a state guaranty or insurance coverage," he said. "But both of those potential forms of repayment are conditional on other factors."

Our ruling

We'll leave it up to readers to decide whether Allan Fung is correct in calling Gina Raimondo "a former Wall Street financier."

But when Fung's TV commercial says that "Wall Street investors . . . went bust" on the 38 Studios deal, it's clear that those investors are doing just fine. The state is making its payments on schedule.

Even if Fung had said that the investors "might" go bust in the future, that seems highly unlikely, thanks to the insurance that came with the sale.

We rate his characterization of what happened to the 38 Studio's Wall Street investors as False.

(If you have a claim you’d like PolitiFact Rhode Island to check, email us at [email protected]. And follow us on Twitter: @politifactri.)

Our Sources, "Bust," Fung For Governor channel, Sept. 29, 2014, accessed Oct. 2, 2014, "House Oversight Committee hearings on 38 Studios to continue in 2014, committee chairman Marcello says," Dec. 18, 2013;  "38 Studio investors include hospital, higher education endowment funds, pension plan," June 10, 2014; and "R.I. Senate passes $8.7B spending plan that honors 38 Studios debt," June 16, 2014

Interview and/or email, John Boatright and Robert Kolb, both of the Quinlan School of Business at Loyola University in Chicago; Denis Arnold, Belk College of Business at the University of North Carolina at Charlotte and editor-in-chief of Business Ethics Quarterly; and Andrew Zacharakis, Arthur M. Blank Center for Entrepreneurship, Babson College, Oct. 7, 2014

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Allan Fung claims Wall Street investors went bust on 38 Studios deal

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