Yep: Corruption, Mismanagement (Probably) Killed 38 Studios

The suggestion that the end of 38 Studios was brought about by official action by the State of Rhode Island has been roundly challenged.

New court documents, made public earlier this month and first published by The Providence Journal, describe a company that was dead on arrival well before it ever moved to the Ocean State, and worse, paint an unambiguously damning portrait of corporate ineptitude and corruption.

At issue: the financial health of 38 Studios at the time the company wrangled a $75 Million loan from the state of Rhode Island’s Economic Development Corporation as part of a plan to build a tech industry in the Ocean State. Former 38 Studios executives have long claimed that the company’s future was bright, and it was only bad faith activity on the part of the State of Rhode Island that led to its rapid and now legendary collapse.

However, documents filed as part of the ongoing lawsuit against the defunct video game publisher by the state of Rhode Island, (read them here), provide a different picture: 38 Studios was already on the fiscal ropes when the loan was granted and could never have repaid it. The loan was only granted, so the documents allege, because the company, in collusion with creditors and members of the Rhode Island Economic Development Corporation, actively concealed the true state of its fiscal health.

Related: 38 Studios Saga Gets Real As Docs Reveal Massive Spending

In order to receive the loan, which was granted as part of an effort to establish a tech center in Rhode Island, 38 Studios had to meet several qualifications. Among them, 38 Studios needed to demonstrate strong growth potential and an ability to repay the loan as scheduled. As part of the loan approval process, an internal credit review was conducted at the behest of the EDC.

On May 28, the EDC analyst informed EDC Deputy Director J. Michael Saul that “There is no financial information discussed at all and no analysis on the ability of the company to perform…. To be honest, I have more information on the typical $10k micro loan than I have on a $75 million request. This is a problem.”

Three days later, the analyst submitted an even more critical evaluation, worth reproducing in full here:

Mike,

The preliminary list of needed items is attached. I am in the
process of organizing my thoughts on this, here is where I
am currently:

The ‘worst case scenario’ as presented by the company
involves a new, commercially successful RPG [role playing
game] title every two years. Is this realistic? Big Huge
Games had their last release (that I can find) in 2006, at
least two games have been cancelled since then. The plan
does not include anything addressing cancelled games and
the associated expenses nor any possibility of delays or that
a game is not successful. The plan shows each game being
more successful than its predecessor. No one bats 1000,
especially not in this industry. Without the RPG release
every two years, the cash flow does not work to support the
debt. The more I look at this, the less comfortable I become
with the credit.

This credit aside, I believe there is an opportunity to create
an industry cluster around the assets we have in place
(RISD, etc.), however I don’t think I can support a $75 million
guarantee to any single company in this industry due to the
wide volatility in commercial success of game releases. One
success does not guarantee another, however the
repayment of debt relies upon continued success. Perhaps
we should develop a toolbox of incentives (including loan
guarantees) to attract companies into a cluster and not rely
on a single company to build the cluster around.

Let me know your thoughts.

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3 Comments on Yep: Corruption, Mismanagement (Probably) Killed 38 Studios

pooleboy87

On April 9, 2013 at 8:28 pm

But always remember folks…it is DEABLE for people to go to the government looking for handouts. We should despise such leaches and cut the lazy s off from the gov-teat and spend everybody’s tax dollars much more wisely (or not take them at all).

Curt Shilling says so.

But when you give him money “good things happen”.

pooleboy87

On April 9, 2013 at 8:29 pm

Also, your filters are killing me. Despi–cable?

Anathemize

On April 9, 2013 at 11:35 pm

First off thank you for this article. I really enjoy the business side of video games.

Their game really was pretty good. Maybe too much repetitive stuff but still good.

You need to be a private company in the video game market. Once you go public you have investors to appease rather than your customers. Adding DRM to games because you think that every stolen game is a lost sale. This is totally not true. Many people that steal a game wouldn’t buy it. They just steal it because they are either young(no income) or can’t afford the price. Not that this is right but its the truth.

Homogenization of games to make them appease the bigger audience ruins them. If you make every game multi-player or easy they ruin the uniqueness. Private or even indie companies take risks that make people want to enjoy their games. If you allow mods it extends the value of the game which makes people more willing to buy the game.

Sorry this is off topic of this specific article but its relevant to the last few business articles you wrote.
BTW thanks for no political views in this article Ross:).