NEW: Is Curt Schilling’s 38 Studios Going Broke?

Tuesday, May 15, 2012

Dan McGowan, GoLocal News Editor

State officials spent the weekend discussing ways to keep the video game company founded by former Red Sox star Curt Schilling solvent, Governor Chafee acknowledged Monday.

Concerns regarding the financial health of 38 Studios, which moved from Massachusetts to Rhode Island in 2011 thanks to a controversial $75 million taxpayer-funded loan guarantee from the Economic Development Corporation (EDC), began to emerge last week, but an EDC spokesperson said the company made its interest-only payment of $2,654,706.25 on time through account trustee BNY Mellon on May 1.

Asked last Friday whether 38 Studios was having financial difficulty, EDC spokeswoman Judy Chong said, “I do not have any additional information.” A spokeswoman in the Governor’s office said Friday she wasn’t aware of financial issues with the company. But while short on details, Chafee said the state is working with 38 Studios on "different issues," according to a Channel 10 report in Providence.

The EDC now has no comment and 38 Studios did not return a request for comment. Multiple e-mails sent directly to Schilling beginning last week went unanswered.

Chafee Threatened to Sue Carcieri Over Deal

At the time, supporters of the deal said Schilling’s company would bring 450 “high-wage, high-skilled jobs” to Rhode Island. The EDC board ultimately voted to grant 38 Studios $75 million of the $125 million available through the Job Creation Guaranty Program created by the General Assembly in 2010.

But the size of the guarantee became a hot button issue during the 2010 governor’s campaign when several candidates—including Governor Chafee— questioned the terms of the deal, which was supported by former Governor Don Carcieri and EDC executive director Keith Stokes. In a WPRI debate a month before the election, Chafee said his calls to let the next Governor make a decision on any deal with 38 Studios had “fallen on deaf ears” and suggested he would considering filing suit against Carcieri if the company went under.

“I guess I can best advise Governor Carcieri to pay up on his premiums for his insurance, because there is an avenue for those aggrieved to come after someone for fiduciary irresponsibility,” Chafee said at the time. “I suppose that’s the last recourse.”

More Transparency Needed

The company’s first game, “Kingdoms of Amalur: Reckoning,” debuted to excellent reviews and strong sales, finishing as the fourth best-selling video game in February. But sales in March dropped off and the company fell out of the top ten.

Dr. Edward Mazze, distinguished University Professor of Business Administration at the University of Rhode Island said that while it is too early to tell whether 38 Studios will “live up to the hype” it was given when the EDC agreed to the loan guarantee, there needs to be more transparency related to how the company is using its funds.

“EDC needs to report to Rhode Island taxpayers and government officials whether 38 Studios met the milestones required as a condition of the loan,” Mazze said. “This should be reported immediately since it has not been done since the loan was made. How many new people were hired? How many of them were Rhode Islanders? What is the average salary for each new hire?”

Mazze said the EDC has a responsibility to monitor the loan and that if it goes into default, the state would be on the hook for the outstanding amount. He suggested allowing 38 Studios to fail now would send another negative message to companies looking to do business in Rhode Island.

“This was a risky loan to begin with,” he said. “The economic data supporting the loan was self-serving with little opportunity for outside review. If this loan fails, Rhode Island's reputation for supporting businesses comes into question again.”

“A Taxpayer Boondoggle”

Other government watchdogs and elected officials were outraged to learn that Schilling’s company could be having financial problems. Lisa Blais, who heads up the Ocean State Tea Party in Action, criticized a deal she claims has been “shrouded in secrecy.”

Blais called for both the EDC and the Governor’s office to explain exactly what is happening with Schilling’s company.

“The EDC and the Governor's office owe the taxpayers a full and complete explanation,” Blais said. “We cannot continue to invest public dollars in private enterprise. [This is] no different than Deepwater or the current legislation promoted by the East Bay Energy Consortium. A taxpayer boondoggle that costs us more money without reaping any perks.”

The Providence Journal reported late Monday evening that the city of Providence has even been approached by 38 Studios regarding the company’s financial difficulties. Councilman David Salvatore, who was opposed to the deal in 2010, said 38 Studios going under would be a loss for all of Rhode Island.

“In this tough economy, no one wants to see a business fail, but the sad fact is there were serious concerns from day one about the 38 Studios deal,” Salvatore said. “This isn’t just a potential loss in terms of that particular business failing…it’s a loss in terms of what could have been done with that money if we had a targeted approach to helping businesses in high growth sectors here in Providence and throughout Rhode Island. The state needs to learn from this experience and craft a new approach to economic development.”

The “Let’s Make a Deal” State

Schilling has already been paid back much of the $4 million he poured into the company, sources said Monday.

According to Mazze, the deal with Schilling is another example of the state’s flawed approach to bringing in new businesses.

“Rhode Island continues as the ‘Let's Make a Deal’ state where ‘name’ is more important than business feasibility,” he said. “Many believe the loan would have been of greater benefit if it was given in smaller amounts to a larger number of Rhode Island businesses and entrepreneurs to grow their ideas/businesses and create jobs.”