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38 Studios Tried to Keep Public in the Dark, E-Mails Say

Wednesday, August 01, 2012

 

In an e-mail sent shortly after Curt Schilling’s 38 Studios moved its headquarters to Providence last year, the company’s lead director Tom Zaccagnino accused Economic Development Corporation (EDC) officials of releasing “sensitive and confidential information” to the press and requested that a process be put in place to “safeguard against this happening again.”

Over the next year, Zaccagnino and other company executives would make several attempts to prevent information about the finances of 38 Studios from being released to reporters and in one case, members of the General Assembly, according to e-mails released by the EDC.

The messages shed more light on the now-bankrupt video game company which, despite receiving a taxpayer-backed $75 million loan guarantee from the state, displayed a pattern of secrecy during its short time in the Ocean State.

A “Breach”

Zaccagnino’s May 2011 e-mail stemmed from a Providence Journal reporter’s request for information related to the company’s payroll. He accused the EDC of releasing the information without first consulting with 38 Studios and noted that executives were assured that payroll information would always be kept private.

Zaccagnino said releasing such information would be a “competitive risk” for the company.

"My hope is that [EDC legal counsel] David [Gilden] has not released anything yet,” Zaccagnino wrote. “However if he has, we expect that he will notify the Projo immediately regarding this breach and that RIEDC will use all means necessary to prevent the Projo from releasing or using the information in anyway."

While it is unclear exactly what the company’s payroll was, records show the company was spending between $4 and $5 million per month on operating expenses and had burned through $133 million since 2006 before finally going belly up last month.

Questions About IBM Agreement

But it wasn’t just payroll information the company was concerned about being made public. Two months after Zaccagnino’s first complaint, executives were up in arms again over the potential release of the company’s “project monitoring agreement” with IBM.

IBM originally reached an agreement with 38 Studios in November 2010 to analyze the company’s financial records and providence quarterly reports on the status of “Project Copernicus,” the massively multiplayer online (MMO) game being developed in Providence. Under the terms of the deal, IBM would also release its findings to the EDC.

But when a reporter requested information about the scope of the agreement between 38 Studios and IBM, another executive made the case that the EDC should not release the information.

In a four-page e-mail sent to Zaccagnino and chief executive officer Jen MacLean, 38 Studios’ general manager Gavin Whishaw argued that competitors would gain an advantage if the agreement was made public and suggested that the company could become a target for hackers.

"I do not mean to be an alarmist and maybe we do not have much choice in the matter but we really should not be releasing anything,” Whishaw wrote.”It is hard to overstate but anything, regardless of how seemingly innocuous, is a security risk if it gets out. We will always be subject to technical and socially engineers hacking attempts and we shouldn't be helping nefarious elements in that cause."

The e-mail was then forwarded to the EDC, but the agency decided to move forward with releasing the details of the agreement (with portions redacted) to the press. Zaccagnino later followed up with Gilden to request that more information be redacted.

"As you know, we feel strongly that releasing these two documents gravely risks the company's ability to compete in the marketplace,” he wrote.

Attempted to Block Information from House Finance Committee

Over the next six months, the company remained relatively quiet as it prepared for the release of its first game, “Kingdoms of Amalur: Reckoning.”

But behind the scenes, executives were scrambling to raise capital and eventually approached the state about obtaining motion picture film tax credits. Michael Corso, a lawyer for 38 Studios, is considered the state’s top film tax credit broker. In January, Corso pledged $14.3 million in tax credits that had not been issued as collateral to obtain a $9.6 million loan from BankRI.

By February, Zaccagnino was again on the defensive in regards to a public records request, this time from the House Finance committee. While it is unclear exactly what information the committee was seeking, Zaccagnino said he was concerned lawmakers might leak confidential documents if the EDC complied with the request.

"Don't you need a written request to release the docs,” Zaccagnino wrote. “Also my understanding is that reps are not bound by any confidentiality so anything provided will likely be released. I am very nervous that we are giving out the document set base upon a 'staffer's' request. I would think at a minimum you need the request to be made formally in writing by the requesting representative, right? Otherwise what is to prevent any staffer from requesting and obtaining otherwise confidential information for their own use."

“Heads Up” E-Mail

Two months later, with 38 Studios about to miss a $1.125 million payment due to the EDC, Zaccagnino and Corso received a “heads up” e-mail from Steve Feinberg in the Film & Television office explaining that information about the company seeking tax credits could become public.

Feinberg said that he was going to give testimony at a twice-yearly revenue hearing and would need to reveal information about which companies were seeking and receiving tax credits.

“I just wanted to let you know in advance so you are prepared in the small chance the paper picks up on this and makes a story out of it,” he wrote.

Fourteen days later, Governor Chafee confirmed that the state was working on keeping 38 Studios solvent. The company had nowhere to hide.

By May 24, unable to make payroll, 38 Studios laid off every single employee.

 

Editor's Note: The e-mails quoted in this piece were not corrected for grammar or spelling.

Dan McGowan can be reached at [email protected]. Follow him on Twitter: @danmcgowan.

 

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