38 Studios: We Shut Up and They Took Our Money

Bob Giusti

It was supposed to be a jobs bill much needed by Rhode Island’s unemployed population,which was almost 3 percent greater than the national average. It passed through the legislative process on a fast track urged by House leadership -- and the rank and file (per usual) blindly followed along.

That’s the formula for much of the RI House and Senate’s legislative activity. It has been that way forever, as one party (Democrat in this state) has held an overwhelming majority in both the House and Senate, making their leadership as powerful (if not more) than the governor.

In the case of 38 Studios, a defaulted loan was the result  of a stacked deck from the beginning. The usual insider political forces of the time (Governor Donald Cacieri, House Speaker Gordon Fox, and Senate President Teresa Paiva Weed) lobbied for Curt Schilling to move his fledgling company from Maynard, Massachusetts, to Providence, Rhode Island, citing again how it would bring more jobs to the state and add “high tech” presence to the State’s economic landscape.

Speaking for the state’s (politically appointed) Economic Development Corporation (EDC), then Executive Director Keith Stokes stated that the video games were a consistently proven growth industry. In fact, had he done a diligent analysis he may have found that the Entertainment Software Association, an industry group, showed  in 2009 the amount spent on games in the United States dropped 10.3 percent compared with the previous year.
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Lacking stimulation

Adding insult to injury, the legislation was amended (in a late night session) to increase the loan amount to accommodate 38 Studios' fleeting solvency, altering a $50 million jobs bill to a $125 million dollar guaranteed loan program appropriated by the EDC. The decision to increase the budget was cited as increased demand in the community for small business. Being that Rhode Island was fourth in the nation for unemployment, it seemed, on the surface to be a good stimulus package.

The possibilities for job creation could have been amazing. Let’s do some basic math. If the budget pie had been distributed fairly and actually allowed small business’s to apply for a slice, that $125 million could have provided 500 startups with a $250,000 dollars each. Had each business hired just five people (at $50K a year) the potential for total jobs could have exceeded 2,500.

Even the most optimistic pitch from Schilling  promised only 450 new jobs by 2012. Had he received an equitable portion based on his employment contribution, at most, he should have been offered about $23 million, or roughly 18 percent of the total pie. So how did he end up with 60 percent?

Throwing good money after bad

38 Studios, by all accounts, was hemorrhaging cash-flow long before negotiations with the state began. Aside from putting $50 million of his own money up, his company, had nearly $151 million in debt and just $22 million in assets. By all reports, Schilling was an inexperienced executive who was spending almost one million dollars each year in traveling expense for meetings, and for hosting expensive business luncheons.

It has been four years since Schilling’s company defaulted on his payment schedule and filed for bankruptcy. In that time, Cacieri has moved away from the Ocean State and has been conspicuously silent about his involvement with the loan. Gordon Fox is currently serving a three year sentence for taking $52,500 in bribes from the owners of the Shark Sushi Bar & Grill, and for looting his campaign fund of $108,000 over six years -- then covering his actions by filing numerous false campaign finance reports.

Fox in the Big House

Rumor has it that Fox accepted this plea agreement in exchange for the testimony he could provide should a full investigation of the 38 Studios occur. So far, the only legal action taken is a lawsuit filed by former governor Lincoln Chafee (currently running for the Democratic Presidential nomination) against First Southwest, the Lincoln-based firm that has been the state’s financial adviser since 2001. First Southwest had a key role in pitching to both the EDC board and the nation’s bond-rating agencies the $75-million.

The state’s lawsuit says the company misrepresented — or withheld — critical information that likely would have been “fatal to the entire transaction.” The suit alleges that First Southwest and the other defendants “knowingly” made false statements about 38 Studios’ ability to repay the loan and that they “intentionally defrauded the EDC Board and the EDC … which would not have issued the Bonds but for those acts, practices and courses of conduct.”

So far however, Fox has repeatedly invoked his Fifth Amendment rights on any questions regarding his participation and his relationship with Michael Corso (the attorney who was paid a quarter million dollars to broker the deal for Schilling).

A full investigation from both the General Assembly and the Attorney General's office is still ongoing.

"We deserve to know the full set of circumstances that gave rise to our political leaders creating this terrible, terrible business–political deal,” said State Sen. Dawson Hodgson, (R) North Kingstown-East Greenwich.
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By some estimates the failed 38 Studios deal could cost Rhode Island tax payers more than 100 million dollars.