RI Commerce Corp to Pay $50,000 Penalty in 38 Studios Settlement with SEC

SCHILLING'S CLAIM: "One of my favorite sayings is 'you can achieve anything as long as no one cares who gets the credit.' For five-plus years, I was on a team of world-changing talent. The team at 38 Studios created a video game that is today nearing 4 million copies sold worldwide, and was working on a game that was so innovative it has yet to be matched."

REALITY: It is estimated that more than 100 different video games have sold more than 4 million copies. Moreover, the vast majority of video games are profitable.  

According to Business Insider, “Analysts estimate that the video game industry is going to pull in north of $100 billion in revenues in 2015.”

In addition, gaming industry reports show that more than 80 percent of all video games are unprofitable. Thus, Schilling’s statement about the first game success is overstated.

In fact, an email exchange between top 38 Studio leadership and Mike Corso, confidant to Speaker Gordon Fox, in preparation to meeting with the RIEDC Board led by Governor Don Carcieri showed that 38 Studios wanted to keep certain financial realities under wraps. 

Tom Zaccagnino wrote to CEO Jen McLean, CFO Rick Webster, and Corso, “I really don’t think we should highlight the fact we might be undercapitalized…won’t go over well with staff or board."

Two and a half weeks earlier EDC Board gave preliminary approval and on July 26, the RIEDC Board gives final approval to the $75 million.

SCHILLING'S CLAIM: "The man who touted himself as 'the state’s most vocal opponent of the 38 Studios deal' was also, outside of me, the person most responsible for the collapse."

REALITY: The deal between the State of Rhode Island developed under Governor Donald Carcieri and Speaker of the House Gordon Fox was deeply flawed as it released funding based almost solely on hiring and encouraging the gaming company to burn cash over any other accomplishment.

Prior to Governor Lincoln Chafee, the deal was fatally flawed from the beginning. 

SCHILLING'S CLAIM: "There were a 'variety of reasons' 38 Studios asked in spring 2012 for help through the state’s film tax credit program and that [Chafee] urged the Economic Development Corporation to reject the assistance, he exposed his sheer ignorance of just what was happening. The state-backed program existed for exactly the sort of company we were."

REALITY:

Schillings claims are at odds with the statements he made in 2010 when interviewed in 2010.

As GoLocalProv reported in 2012:

Less than 20 months after Curt Schilling told a Boston radio station that his video game company was not looking for tax credits in exchange for moving to Rhode Island, state officials say the troubled 38 Studios has applied for roughly $21 million in tax credits between 2011 and 2012.

Schilling’s 38 Studios defaulted on a $1.125 million payment due to the Economic Development Corporation (EDC) on May 1 and failed to make payroll last week. The company has already used up $49.8 million of a $75 million loan it received two years ago. The rest of the funds are set aside to pay bondholders.

In 2010, the EDC voted to give Schilling’s company a $75 million loan guarantee in exchange for moving his business (and 450 jobs) to the Ocean State. The deal came only two months after the General Assembly voted to expand the EDC’s loan guarantee fund from $50 million to $125 million.

At the time, GoLocalProv reported that a loophole in the Motion Picture Production Tax Credits law could have allowed 38 Studios to grab nearly all of the credits before other film and television projects could utilize them.

“I think that would be the icing on the cake,” URI Business Professor Dr. Edward Mazze said at the time. “I think that would be a smack on the head.”

But Schilling argued that he had zero intentions of applying for the tax credits in a WEEI radio interview (the conversation was transcribed by WPRI) that ran the night before GoLocalProv published its story. He said tax credits were meant for larger companies and suggested 38 Studios’ “burn rate” wasn’t high enough yet.

“Unbeknownst to a lot of people, we’re not looking for tax credits,” Schilling said in the interview. “Tax credits are an endgame play.”

Rhode Island’s Film Tax Credit Law was created to help attract movie and television production. The Showtime series helped to spawn the passage of the legislation. The legislation was later amended to include over media and game production would have fallen under the language.

But, the additional state commitment would have not only have provided a greater Rhode Island commitment. The amount of film tax credits would have only kept the company going for weeks.

SCHILLING'S CLAIM: "Close to 100 percent of that money and the bonds’ $49 million went directly into the Rhode Island economy. I never took a dime in salary or anything else, so the money was spent on the things you must spend it on to grow and create a successful business: salaries, health care, infrastructure etc.”

REALITY:

It is clear that significant portions of the state’s investment were misspent on illegal lobbying by Speaker Fox’s crony Michael Corso and a GoLocal investigation that monies were used to make improvements to Corso’s restaurant Tazza and charged to 38 Studios.

As GoLocal reported in May of 2014:

A former subcontractor for 38 Studios is alleging that his firm was ordered to work on former Speaker of the House Gordon Fox's business colleague Michael Corso's bar as part of their contract - and has produced what he says is documentation to prove it.

Project manager Michael Rossi with SyNet, Inc. has revealed a budget for work which he says shows at $25,000 line item for work to be done at Corso's Tazza Cafe in 2011 -- under a job order for the failed 38 Studios.

A former subcontractor for 38 Studios is alleging that his firm was ordered to work on former Speaker of the House Gordon Fox's business colleague Michael Corso's bar as part of their contract - and has produced what he says is documentation to prove it.

Project manager Michael Rossi with SyNet, Inc. has revealed a budget for work which he says shows at $25,000 line item for work to be done at Corso's Tazza Cafe in 2011 -- under a job order for the failed 38 Studios.

SCHILLING'S CLAIM: "We were contractually obligated to submit monthly financial reports. We did, on time, every single month. As with everything else I did at 38 Studios, I made sure that we abided by the terms of the agreement, to the letter. We had quarterly (and, when asked, monthly) meetings to which we invited state legislators and the governor (Chafee never once showed). In these 'Current State of 38' meetings, we laid out exactly where we were developmentally and financially."

REALITY:

This claim is mostly true.

In fact, The New York Times wrote in a 2013 feature on the 38 Studios debacle:

"According to an investigation by GoLocalProv.com, the development corporation’s various committees held 63 meetings from September 2010 to May 2012, but not once did anyone discuss the financial health of 38 Studios. The board seemed to be under the impression that a consulting arm of I.B.M. had signed on to police its investment. In fact, I.B.M. was being paid by 38 Studios, not the state, and didn’t issue a single report to the board.”

SCHILLING'S CLAIM: "There was never any grey area about where we stood financially. No state officials were ever in the dark unless they chose to be. Had we reported even one wrong fact during the entire time, you can bet that would have been presented to the public as a 'failure' or 'lie' on our part or been something any federal agency looking into this would have called out, pursued, and prosecuted.

But it was very obvious at the first meeting of the Economic Development Corporation that Governor Chafee attended that he had neither seen nor heard about anything relating to our reports. He had been provided everything he could have wanted or needed to be informed, yet beyond of the name of our company he knew nothing.

REALITY:

Schilling's claims about financial projects are false. The financial models from the very beginning of the process were deeply flawed. The understated risk and may have intentionally mislead then-Governor Don Carcieri and the Economic Development Corporation.

As GoLocal unveiled in June 14, 2012 that documents provided to private investor in 2009 differed greatly from Well Fargo’s presentation that went before EDC’s board in June of 2010. That document greatly minimized the risks to the State's investment.

GoLocal Reported:

The document, technically known as a Private Placement Memo, was issued on May 1, 2009 by 38 Studios in a bid to secure $25 million in investment funds. The memo pulls no punches in describing the investment opportunity as “highly speculative and inherently risky.” It warns that membership interests in the company should be purchased only by those “who can afford to lose their entire investment.”

The longest section of the 37-page memo is devoted to spelling out 16 categories of risk—the unique unpredictability of the video game market, the challenges of launching in overseas markets, and the inherent risk in investing in a brand new company where the success of the venture rested on a few key individuals, to name a few.

“There is no guarantee of the economic success of any video game since the revenue derived from the production and distribution of a video game depends primarily upon the video game’s acceptance, which cannot be predicted,” the memo concludes.

SCHILLING'S CLAIM:

"It is crucial that the public understand the numbers. The $49 million was $26 million short of what the state told us the money to 38 Studios would be, and what we had allocated in our budgets to complete Copernicus. Less than two weeks prior to the move to Providence, we were informed of the change in the bond amount.

To say we were stunned would not do our reaction justice. Some might ask: 'You’re whining because we gave you $49 million?' No, not the case. Ask anyone who runs a business. Ask any entrepreneur. When you are promised X dollars, and X dollars go into your budget, and you end up getting Y dollars, much less than X, that presents enormous issues."

REALITY:

Emails released by Judge Michael Silverstein during the 38 Studios civil case show that if RIEDC had turned down the deal in July 2010, 38 Studios would likely have missed making payroll the very next month.

In a July 7 email from Rick Wester to Tom Zaccagnino, he wrote, “The latest would be the August 15th payroll at this point. I’m having doubts we can get through the 30th."

The RIEDC board approved the $75 million in bonds on July 26.

Collapse of the company was imminent.