One Question: Who has benefited from 38 Studios Mess?
Curt Schilling’s interview with the ProJo is a must read because it provides insight from another angle into the 38 Studios mess. Thus far, to paraphrase what seems to be the current Rhody Conventional Wisdom, Schilling (along with “Caaarcheeeri”) made a backroom deal to fleece the state of millions and both have pocketed the dough (somehow, though we haven’t found it yet…we will!). The truth is a little more complicated, and quite a few more people were involved.
According to the 38 Studios founder, the State made and then broke promises that would have helped the company get through a tough financial spot. You may or may not believe Schilling regarding “potential” investors who backed out or promises that were made to him by the EDC or others. But his side of the story brings up many worthwhile points to consider and is an important addition to the narrative so far.
Schilling explains that the company needed short-term cash to keep going, so they met with the state and asked for $8.7 million in 2011 film tax credits to tie them over and submitted paperwork to get the credits. Some of the EDC members knew of the plan. Things looked to be moving along, then things got weird:
38 Studios was dealing with Keith Stokes, then-EDC’s executive director, and David Gilden, the EDC’s lawyer. On April 30, Schilling says, the company talked to Stokes about deferring the $1.12-million payment that was due the next day, May 1, and using the money for the May 15 payroll. But the company also said that if the tax credits were issued in time, 38 Studios wouldn’t need the extension.
…The company missed the May 1 payment. As a result, on May 4, the EDC issued a notice that 38 Studios had defaulted on its state loan agreement, making the company ineligible for the film-tax credits that it needed to stay afloat.
Schilling says the company was blindsided by the notice. Under terms of 38 Studio’s original agreement with the state, he says, the company should have had 30 days to address the missed payment before being declared in default.
That touched off frantic negotiations among 38 Studios, the EDC and Chafee. By the end of the following week, the word had begun leaking to reporters. Then, on Monday, May 14, Chafee said publicly that the state was working with 38 Studios to keep the company “solvent.”
…Meanwhile, Schilling says, the EDC’s Stokes and Gilden had agreed to a deal in which 38 Studios would pay the $1.12-million fee and then EDC would facilitate the release of the tax credits, by certifying that 38 Studios was no longer in default.
The night before it was to go through, company director Thomas Zaccagnino says, he learned that the embattled Stokes, who was drawing heavy criticism for the 38 Studios deal, had resigned. Since Stokes had been a point person in talks with 38 Studios, a worried Zaccagnino texted Gilden, “Please tell me that this won’t affect our agreement.”
Responded Gilden: “it will not.”
But the next day, when 38 Studios tried to pay the $1.12 million with money from a tax-credit investor, executives say they found themselves in an embarrassing scene in which Chafee announced that 38 Studios had sent a bad check with insufficient funds.
Richard O. Wester, 38 Studio’s chief financial officer, says he went to the EDC’s offices at 5 p.m. that day with a check. Meanwhile, 38 Studios’ controller was back at the office, waiting for the funds to be wired from the buyer of the tax credits into 38 Studios’ account. When that happened, Wester would receive the green light to give the EDC the check.
But the tax-credit buyer, whom 38 Studios declined to identify, backed out –– because the EDC lawyer Gilden would not provide a state guarantee to the buyer. When Wester learned that, he says, he never handed over the check.
Fifteen minutes later, he says, he saw a news story on The Providence Journal’s website, quoting Chafee’s spokeswoman that the company had given the EDC a bad check.
The next day, Friday, May 18, another tax-credit investor wired the $1.12 million directly to the EDC. But the state did not release the tax credits to 38 Studios, and still hasn’t ––raising doubts about how that investor will ultimately be repaid.
The rest of the story is well known. Schilling is critical of the way Governor Chafee portrayed the situation publicly, especially with the Governor portraying the first game, Reckoning, as a failure as well as how the Governor gave out closely held secrets like the release date of Project Copernicus and the so-called “burn rate” of the money 38 Studios was spending monthly. According to Schilling:
“We made it clear in EDC meetings how damaging it was, what was happening to our company. [My workers] are sitting there, busting their [humps] without a paycheck, we’re grinding through this, and then he’s press-conferencing on a daily basis, saying this company is a failure, our games are a failure, this was a mistake –– over and over and over again.
Schilling believes these comments undermined a potential $35 million deal that would have seen a sequel to “Reckoning” published and another $55 million deal for further financing on Copernicus. Again, believe Schilling or not, but the way the Chafee Administration publicly handled that first missed payment to the EDC is worth examining. Why did they state 38 Studios had defaulted while negotiations were still going on? I keep going back to the question: who has benefited from all of the negatives surrounding this problem? It isn’t Schilling or Carcieri, or members of the EDC or the General Assembly or RI taxpayers. No, the only person who benefits–politically–is Governor Chafee.
Chafee has been saying “I told you so” without actually saying “I told you so” since the story broke (instead, he’s been saying things like “throwing good money after bad”, or that “no criminal wrongdoing [has been found]…yet”). And while it’s true that we often ascribe malice and conspiracy to people when ineptitude may be the best explanation, Governor Chafee has shown a sort of passively-aggressive malice in his frequent press availabilities over the last couple weeks. Is it possible he facilitated this crisis? I’m not ready to go that far. But he sure seems to be the sole beneficiary of it. At least, until now.