Yep: Corruption, Mismanagement (Probably) Killed 38 Studios

Related: Schilling Continues To Blame Rhode Island For 38′s Collapse

Rather than take these concerns to the EDC in full, Saul instructed the analyst not to prepare an internal credit memorandum, and then actively prevented the analyst from conducting any further review of the company, the documents allege. On June 2 of 2010, a fuller analysis by Strategy Analytics and Perimeter Partners was presented to Saul, EDC Legal counsel Robert Stolzman, and some low-level EDC staff; this analysis painted an even bleaker picture of 38 Studios’ health, including that “projections for 38 Studios were not likely to be fulfilled,” and that “Strategic Analytics and/or Perimeter Partners would not put $75 Million into 38 Studios if they were in the EDC’s position.”

With now two independent analyses concluding that 38 Studios was a bad risk, Saul would have been duty bound to make certain the EDC rejected the loan. Instead, in a meeting on June 9, he presented a bullish view of the company’s prospects and, as the documents tactfully put it, proceeded to “misinform” the EDC board that 38 Studios had “completed normal credit due diligence.” The court documents affirm that no one else with knowledge of the deception spoke up about it. And it only gets murkier from here.

Despite statements from 38 Studios management to the contrary, the loan amount of $75 million was never intended to be given in full. In fact, according to the court documents, “from at least as early as May 2010, all of Defendants knew that, as a result of the debt service reserve, and other charges, 38 Studios would receive net proceeds that would be substantially less than the gross amount of its loan of $75 million from the EDC.” This is related to the fact that the loan was never given at once, but meted out on an agreed-upon schedule, with payments set to begin before the full amount of the loan was given, if that became necessary.

The company suggested to the EDC board that it would be securing an additional $20 Million in equity funding, something that never happened. According to the filings, “Defendants Wells Fargo, MacLean, Zaccagnino, Wester, and Schilling had actual knowledge that such additional funds were never obtained or even committed” at the time they were working to secure the $75 Million from the state of Rhode Island. The company also suggested to the EDC that it would ultimately utilize substantially less than the full $75 million, though how much less was never agreed upon in writing. Instead, as the documents note, 38 Studios had included in its 2010 yearly financial statement the need for the specific sum of $75 Million to keep the company running and to finance any move to Rhode Island, information that was not disclosed to the EDC board. Further, an unrealistically optimistic projection of future revenues was presented to the board.

Ultimately, it was known to all defendants that “38 Studios net proceeds would be insufficient to enable 38 Studios to relocate to Rhode Island and complete production of Copernicus, let alone capitalize 38 Studios’ operations in Rhode Island.” (Copernicus was the code name for 38 Studios’ MMO based in the world of Kingdoms of Amalur: Reckoning.) Stolzman, the filings state, “revised the Term Sheet to state the opposite.”

Further, the documents allege that these misrepresentations were not simply over-optimistic projections that weren’t met, but instead were willful deception on the part of all parties named in the lawsuit. This pattern of misbehavior would, according to the filings, continue with other potential investors. What makes this story even stranger is that there is, at this point, no apparent motive for these actions. Lawyers for the state even acknowledge that the EDC advisors may have truly thought they were bringing a wonderful opportunity into the state. It is notable that soon after helping the developer secure the loan, Saul left the EDC and attempted to get a job with the 38 Studios, but he is not known to have ever worked there. We must for now draw our own conclusions about what prompted the EDC advisors to behave thusly.

Perhaps this alleged pattern of deception and no clear motive for it helps explain why the documents take such a confrontational tone. Filed in response to the defendant’s request to dismiss the case, the documents plainly state that “Defendants’ arguments misconstrue the facts and incorrectly apply the law,” and that “Defendants also seek to get out from under the crushing evidence of their concealment of 38 Studios’ deficient finances.”

Related: Salvatore, Other 38 Defenders Well-Meaning, Probably Mistaken, and Why 38 Studios’ Demise Demands Skepticism

After 38 Studios collapsed, former company associates and employees peddled a great many reasons for the company’s demise. Unfortunately, throughout it all the defining qualities of claims made by Schilling and his former associates are their lack of consistency, and that they absolved the company of any responsibility. With these new documents, those claims have been thoroughly discredited. The documents presented to the court would appear to show that at minimum, 38 Studios, its creditors, and EDC advisors working to make the loan deal possible should have known the company was a poor risk for the State.

Of course, as damning as these new documents are, the case is very much still-ongoing and the defendants have yet to present their defense in open court. But if the motion to dismiss the lawsuit is not granted, and legal analysts do not believe it will be, the court will likely be determining whether the misbehavior associated with the loan deal was the result of negligence, or outright intent.

If Curt Schilling and his fellow defendants are found to have deliberately misled the state of Rhode Island, they will have to pay full restitution to the state. Not the best outcome for someone who has already, reportedly, lost his shirt in this mess.

Read more of Ross Lincoln’s work here, and follow him and Game Front on Twitter: @rossalincoln and @gamefrontcom.

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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:).