When Rhode Island leaders bet on a retired baseball starin 2010 to help reshape the state's long-troubled economy, questions swirled around the state's commitment to an untested company that had no revenue.
Why pledge $75 million toward a single company in the risky business of creating video games? What would happen if Curt Schilling's company, 38 Studios, cratered? Who would be left paying the bills?
Then-Governor Donald Carcieri championed the deal, which was approved by the agency he chaired, the Economic Development Corporation. As the former businessman prepared to leave office that fall, Carcieri told The Providence Journal:"This is only a risk if everything goes wrong."
Rather swiftly, everything did go wrong.
Rhode Island taxpayers are still paying the bills -- by today's reckoning, a total of$53,883,303 for thecollapse of 38 Studios.
The Providence Journal hasanalyzed the $75-million bond deal that created the mess, how the state is paying the debt, and the millions it has spent to investigate the deal and sue its architects.
The $53.9 million to be covered by taxpayers includes:
* $23.6 million already paid;
* $2.5 million budgeted for this fiscal year; and
* $27.7 million in future fiscal years.
The taxpayer burden of $53.9 million could shrink or grow.
It could be reduced by settlements with or court judgments against the remaining defendants that the state alleges caused the disaster. Schilling, the former Boston Red Sox star and founder of 38 Studios, is one of six defendants remaining in the state's lawsuit, which is set for trial on Oct. 18.
The $53.9 million could increase if those defendants appealed the recent court-approved settlement with two other defendants, Wells Fargo Securities and Barclays Capital, and the state Supreme Court overturned that settlement.
Also, Governor Raimondo is considering whether it makes sense to pay off the remaining bonds early or to renegotiate the terms, which could change the overall amount owed.
Four years after the company collapsed into bankruptcy, its very name has become shorthand for thedebate over the role of state government, insider politics, public officials and taxpayer incentives in rebuilding the economy. And the state continues its legal battle to recover money from those who crafted the deal.
The 38 Studios fiasco began when state leaders bet on a baseball celebrity who had pitched the Sox to a World Series title. Unemployment had soared to 12 percent. State leaders hoped38 Studios, in the vanguard of a new technology economy, would begin to replace Rhode Island's withering industrial base and help the state recover from the Great Recession.
In 2010, the General Assembly approved a new program to guarantee loans made to companies that promised to create jobs. The Rhode Island Economic Development Corporation, chaired by then-Governor Donald Carcieri, used the new authority to craft a $75-million bond sale and use the proceeds to support 38 Studios' move from Massachusetts to Rhode Island. The company was developing a massive multiplayer online video game.
Under the terms of the deal between 38 Studios and the EDC, Schilling’s company agreed to hire hundreds of highly paid technology workers to create a game — nicknamed "Project Copernicus" — that it would sell to the public.The principal and interest owed on the $75 million in bonds over 10 years totaled $112.6 million.
38 Studios was expected to pay back nearly all of the principal and interest due in installments through 2020, with revenue from the sale of the game.As a backstop, Rhode Island guaranteed the payback to investors who bought the "moral obligation" bonds.
When Schilling's company failed only 14 months after arriving in downtown Providence, with no revenue to pay back the bonds, the state was stuck with the remaining debt.
The state has used a variety of ways to reduce the $112.6 million once owed.Some of the following amounts have been paid to bondholders, and some are anticipated future payments from money that will be set aside in escrow. Here's where the money is coming from:
$26,157,374:From Rhode Island’s general fund — i.e., taxpayer dollars. This is the amount already paid and what has been budgeted this yearto pay bondholders what 38 Studios was expected to pay between 2013 and 2016.
$21,300,000:From the latest court settlement, in the state's lawsuit, with bond-placement agent Wells Fargo Securities and investment firm Barclays Capital PLC. This is the state's estimate of the amount that will be available after legal costs are paid.
$13,122,797:From two earlier settlements, after legal bills and fees were deducted. The first settlement totaled $4.4 million from Antonio Afonso Jr. and his firm, Moses Afonso Ryan Ltd., which served as bond counsel on the loan deal. The other totaled $12.5 million from former EDC executives Keith W. Stokes and J. Michael Saul and the agency's outside legal counsel, Robert I. Stolzman, and his Providence-based law firm, Adler Pollock & Sheehan.
$12,749,913:From a "Capital Reserve Fund" set aside from the proceeds of the $75-million bond sale to be used to make bond payments only if the company defaulted. When 38 Studios failed, the state quickly depleted the fund.
$10,604,077:From a "Capitalized Interest Account" set aside from the proceeds of the $75-million bond sale to pay the first two years of interest.
$920,000:From 38 Studios’ annual "guaranty fees," which the company was required to pay the EDC. Although the company’s 2011 and 2012 payments totaled about $1.7 million, the terms of the loan deal stipulated only some of that money could help pay off the bonds.
$7,000: Interest the state had earned, through the latest reporting period in March, in the escrow accounts where it holds money before payments are due.
That totals $84,861,160, which has been committed to paydown the bonds. Subtracting that sum from $112.6 million leaves$27.7 million.
That's how much the General Assembly would still need to appropriate in future years to cover remaining principal and interest payments on the bonds. Although more than that is currently owed on the bonds, settlement and other taxpayer money in escrow accounts would cover the remainder.
The state could exercisean option in the loan deal that allows it to pay off the remaining debt early.
Raimondo said she doesn't know yet whether it would make sense to pay the bonds early. In an interview, she said she has entrusted Commerce Secretary Stefan Pryor and Jeremy Licht — general counsel for the Executive Office of Commerce, who was recently named the governor’s senior counsel — to analyze the financial implications.
Pryor said no decision has been made.
Meanwhile, Raimondo said, her administration is "working as hard as we can to recover every dollar that we can" for Rhode Islanders.
That includes pursuing the state’s lawsuit alleging fraud and negligence against the remaining defendants. They are: Schilling and other 38 Studios executives — Thomas Zaccagnino, Richard Wester and Jennifer MacLean; Starr Indemnity and Liability Company, which wrote the $10-million "directors and officers" insurance policy for 38 Studios; and First Southwest Company, the state’s financial adviser on the deal.
That suit sought monetary damages from 14 original defendants, eight of whom have already settled. On some charges, it sought triple the amount of actual damages.
Raimondo said any potential settlements require her to weigh the risks of going to trial, and potentially not winning as big a judgment as possible, against the value of accepting a settlement offer.
"We’re not afraidto go to trial," the governor said, "Or, if they [the remaining defendants] offer us something that’s unacceptably low, then we’re going to fight it. That’s our job."
First Southwest and Schilling have said they're preparing for trial.However, mediator and retired Superior Court Judge Francis J. Darigan Jr., who worked on the most recent settlement, has said he is hopeful more settlements will come — and that First Southwest will return to bargaining. First Southwest spokeswoman Patti Doyle has said the firm has participated in each round of talks.
Schilling declined a request for an interview by The Providence Journal. But he has said publicly he's looking forward to having his day in court.
"When the story finally is made public, and everyone is able to hear how this happened, andthe staggering ineptitude put on display by the then Governor and his 'staff,' I assume people will be even more livid and more stunned," Schilling wrote on his "38 Pitches" blog in December.
Three othercasesconnected to 38 Studios are proceeding in various courts.
The U.S. Securities and Exchange Commission has charged the Rhode Island Commerce Corporation and bond underwriter Wells Fargo Securities with defrauding investors in a civil complaint filed in U.S. District Court in Providence. Some other defendants have settled, but the case continues.
That settlement money has been held in a U.S. Treasury account pending a decision whether the SEC would distribute it to investors or transfer it to the Treasury's general fund. It's unclear whether Rhode Island taxpayers would recover any money from the federal complaint, but it's unlikely.
The 38 Studios bankruptcy case continues in U.S. Bankruptcy Court in Delaware, where the lawyer handling the case has been working to recover any money for creditors, including the State of Rhode Island.
The company is in receivership in Rhode Island Superior Court, where Providence lawyer Richard J. Land is still working to sell offthe intellectual property, technology and other assets from 38 Studios that could help pay back the bonds.Land has to pay to store and maintain the technology duringlitigation.
After Land sold some assets, he was paid an initial amount out of money he had recovered. When the matter is concluded, he said, any remaining money could help offset bond payments. However, Land said, "Relative to the total amount owed, these assets are not going to make that material of a difference, unfortunately."
As the legal actions wind through the courts, Rhode Island’s next 38 Studios bond payment is due Nov. 1. The total: $10,804,156.
Additional payments are due each May 1 and Nov. 1.
As it stands today, it will be Nov. 1, 2020 before taxpayers will finish paying for the wild pitch that brought 38 Studios to Rhode Island.
Sources
To our readers:
This story has been reported with multiple documents and interviews. Here's a summary:
Interviews:Governor Raimondo, Commerce Secretary Stefan Pryor, Rhode Island State Police Col. Steven G. O'Donnell, Public Information Officer Amy Kempe in the Office of Attorney General, Director of Communications and Stakeholder Outreach Matthew Sheaff in the Rhode Island Commerce Corporation, lawyer Max Wistow of the firm Wistow, Sheehan & Loveley.
Documents:
The Loan and Trust Agreement among the Rhode Island Economic Development Corporation, 38 Studios and The Bank of New York Mellon Trust Co., dated Nov. 1, 2010, which details the loan deal.
Private Placement Memorandum, dated Oct. 22, 2010, which detailed the terms of the then-proposed $75-million bond deal.
Lawsuit filed in Rhode Island Superior Court on Nov. 1, 2012, outlining the EDC's complaints against the 14 defendants (individuals and firms) who orchestrated the loan deal.
Affidavits, memorandums, settlements, receivership and bankruptcy records and other court documents obtained from Rhode Island Superior Court and U.S. Bankruptcy Court in Delaware.
Requisition documents that detail the payments that the then-Economic Development Corporation made to lawyers, financial advisers and 38 Studios from the $75-million bond sale. Other documents related to the 38 Studios matter, from the agency now known as the Rhode Island Commerce Corporation.
--kbramson@providencejournal.com
(401) 277-7470
On Twitter @JournalKate
