Rhode Island Sues Over 38 Studios

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Rhode Island Sues Over 38 Studios

The Rhode Island Economic Development Corporation has launched a sweeping lawsuit against Curt Schilling and numerous others involved in the 38 Studios debacle.

The Rhode Island Economic Development Corporation has filed a lawsuit in an effort to recover some of the $100 million it lost in the 38 Studios debacle, following a review to determine whether such legal action could be undertaken. Named in the suit are 38 Studios founder Curt Schilling, 38 Studios board member Thomas Zaccagnino, Chief Financial Officer Richard Wester, Chief Executive Officer Jennifer MacLean, former EDC Executive Director Keith Stokes, former EDC Deputy Director J. Michael Saul and Antonio Afonso Jr. and Robert Stolzman, lawyers for the state who helped put the deal together. Also named are Wells Fargo Securities, Barclays Capital, First Southwest Co., Starr Indemnity and Liability Co., and law firm Adler Pollock & Sheehan.

The suit states that none of the members of the Economic Development Corporation were "experts in law, lending, video gaming or economic development," and thus relied on "advisors" to lay things out for them. The information they were given led them to decide that the deal, "although not without risk, had a reasonable probability of bringing high-quality jobs and creating a new industry in Rhode Island, with 38 Studios as the anchor tenant and a cluster of companies performing related activities."

"38 Studios failed in May of 2012," it continues. "If that failure had resulted from the risks that these advisors had disclosed to the EDC Board, there would be little or no cause for complaint. In fact, 38 Studios failed because of risks that had not been disclosed to the EDC Board, but were or should have been known by all of these advisors, and by 38 Studios, and defendants Schilling, Zaccagnino, Wester and MacLean."

Chief among those risks was that even with the $75 million EDC loan, 38 Studios was "undercapitalized by many millions of dollars and would not have nearly enough money to relocate to Rhode Island and complete Copernicus, and that, as a result of this cash shortfall, 38 Studios was likely to run out of money in 2012." The lawsuit states that the cost of relocating to Rhode Island alone was more than $10 million.

The action was filed "with the clear goal of protecting the taxpayers of Rhode Island," Governor Lincoln Chafee said. "My message to Rhode Islanders is this: I know you work hard for your paychecks, and for your tax dollars to be squandered is unacceptable. The board's legal action was taken to rectify a grave injustice put upon the people of Rhode Island."

The suit also alleges that Well Fargo "secretly" received more than $473,000 in fees from 38 Studios, that lawyers withheld expert information that 38 Studios was likely to fail, that the EDC was denied an opportunity to reconsider the deal before things got out of hand and that the requirement for "third-party assessment and monitoring" was ignored. It's a hefty thing, but if that's how you like it you can grab a copy of the full complaint from the RIEDC.

via: WPRI.com

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Although I feel bad for Schilling and crew, I can't fail to see the Governor's point. The squandering we've read about over these months seemed outside of the scope of the presentation to the Rhode Island government.

On the other hand...it may be kind of ridiculous to expect a video game company to cause some massive boom in employment and such for the area, and this may be some major saving face in our time of people really starting to get angry about misappropriated tax dollars. Either way, some really mismanaged business, banking, and government going on here. Shame.

So they're basically claiming "we were too stupid to know better!" and wanting to get paid for it.

Okay, I kid. While that's a way of describing what happened here, it really does look like they were taken for a ride by someone exploiting their lack of industry knowledge.

Moral of the story. Never start a company is Rhode Island.

Sound advice.

They're right, they are too stupid to know what they're doing. I have no doubt that the amount of money it will cost to fund this stupid lawsuit will nullify any money they get back. Give your governor the boot RI, he's a dumbass of the highest caliber.

ironically, the original governer that made the deal got thrown out, this is the new guy that basically killed any chance of further funding to 38 by all those public "we're going to try to keep them solvent!" comments (neatly also destroying any worth the remaining studio that they basically owned had =P)

dragongit:
Moral of the story. Never start a company is Rhode Island.

Sound advice.

Another moral of the story: never accept a loan from the government in an election year.

Correct me if I am wrong but... did Rhode Island not specifically wave money around at 38 Studios to relocate their -already established HQ- to Rhode Island?

Relocating takes a lot of resources and finances, which in itself will have to be aquired from somewhere.

I do not have a degree in economics or buisness practices but... that should be fairly common knowledge to anyone, especially the guys making the calculations. I do not know which side is to blame more here really. The side that waved around sponsorship, but did not even check if it was an investment or a money sink. Or the guys that took the bait, without investigating if it was a heavy gamble or an all expenses included deal.

Then again, 38 Studios did muck things up a bit as far as I have heard... so it is basicly a choice between sickness and the plague. Huh.

And thus this whole affair continues to degenerate into a bloody pit of hungry wolves.

Sour Grapes, Rhode Island. Next time, have a clue what you're investing in

So ... correct me if I'm wrong, but ... did he just proudly proclaim he's paying a lawyer with the bleeding tax-payers' money to retrieve money that doesn't even exist anymore?

Politicians in Election Year ... Jesus.

great, captain dickmove strikes again.. and again on a half dead beaten horse.

Well Rhode-Island, maybe next time you will think twice before you make a bad investment. This isn't kick-starter, studios who need substantial capital but fail to raise it normally tend to do so for a reason. Putting all your money into one massive money-making project ot reallt linked to your expertise is a bad way to go.

image

...Wow, just... WOW. Overreacting much? I hate politicians...

Its funny to me, in this election cycle we keep hearing about government should not be in the business of picking winners and losers. I really hate that this happened for 38, but simple fact is, this was government picking and honestly the lawsuit should immediately be dismissed because they made an investment, they failed on that investment. It was their own stupidity for trying to make such an investment, especially if they did not have direct experience and foreknowledge of the sort of company they were investing in.

I cant help but to think this suit is nothing more than the state trying to recoup anything because of this investment so those who are currently in power dont run the risk of losing it in election cycle.

The suit states that none of the members of the Economic Development Corporation were "experts in law, lending, video gaming or economic development,"

Wait a minute...

none of the members of the Economic Development Corporation were "experts in...economic development,"

Hey, here's a suggestion, next time you set up an organisation with a specific purpose, try to ensure that the members of that organisation are at all qualified to fulfill that purpose.

the bulls*** is strong in this one, yes

CrazyGirl17:
...Wow, just... WOW. Overreacting much? I hate politicians...

You just got screwed out of $100,000,000, possibly due to fraud, because advisers you hired to make an objective assessment failed to disclose serious risks that, you know, might have told you that this wasn't such a good idea (commonly referred to as Breach of Fiduciary Duty). If there was a possibility of getting at least some of that money back, would you?

For example:

lawyers withheld expert information that 38 Studios was likely to fail, that the EDC was denied an opportunity to reconsider the deal before things got out of hand and that the requirement for "third-party assessment and monitoring" was ignored.

This smells a lot like basic legal malpractice and breach of fiduciary duty.

After taking a quick look at the complaint, which alleges breach of fiduciary duty (Counts I & II, pages 70-74), fraud (counts III and IV, 75-77), misrepresentation (count V, 77-78), malpractice (count VI, 78-79), negligence (count VII, 80-82), RICO claims (counts XII and XIII, 87-91), civil conspiracy (count XIV, 91-92) and unjust enrichment (yes, that is a cause of action; count XV, 92), at the very least there is enough to send this to trial, and a fair amount of what we have learned about the event suggests there's at least some potential wrongdoing against the state.

Let it go into the legal system and let the judiciary sort it out.

Probably shouldn't have named your first game Reckoning.
Or had it endorsed by Conan O'Brien.

Shingro:
ironically, the original governer that made the deal got thrown out, this is the new guy that basically killed any chance of further funding to 38 by all those public "we're going to try to keep them solvent!" comments (neatly also destroying any worth the remaining studio that they basically owned had =P)

Exactly. More importantly, by making those announcements the way they did they are going to be up shit creek regarding the lawsuit as their own actions greatly caused a loss in the company's value.

T'Generalissimo:

The suit states that none of the members of the Economic Development Corporation were "experts in law, lending, video gaming or economic development,"

Wait a minute...

none of the members of the Economic Development Corporation were "experts in...economic development,"

Hey, here's a suggestion, next time you set up an organisation with a specific purpose, try to ensure that the members of that organisation are at all qualified to fulfill that purpose.

Unless they were using the off-hand definition of "has practiced for more than 10,000 hours" regarding the word expert, than the only one of those vocations that has experts would be law.

Don't forget the part where the board used representatives of the company they were thinking of lending money to, to justify the lending of money...yeah. I'm sorry Rhode island your government is pathetic.

dragongit:
Moral of the story. Never start a company is Rhode Island.

Sound advice.

I think the moral of the story is "Don't blow a $100,000,000 loan on an MMO sequel to the game you haven't even finished yet."

The state invested poorly, admittedly, but 38 Studios basically pissed away all that money on a pipe-dream that had no hope of finishing.

ravenshrike:
Unless they were using the off-hand definition of "has practiced for more than 10,000 hours" regarding the word expert, than the only one of those vocations that has experts would be law.

How so?
A little math says that 10,000 hrs is a little less than 5 years working 40 hr work weeks.
(10k hrs / 1 expert) * (1 week / 40 hrs) * (1 year / 52 weeks) = 4.8 years / expert

Hell by that definition I'm an expert in my field ...

Man, These guys can't catch a break.

ravenshrike:

Shingro:
ironically, the original governer that made the deal got thrown out, this is the new guy that basically killed any chance of further funding to 38 by all those public "we're going to try to keep them solvent!" comments (neatly also destroying any worth the remaining studio that they basically owned had =P)

Exactly. More importantly, by making those announcements the way they did they are going to be up shit creek regarding the lawsuit as their own actions greatly caused a loss in the company's value.

T'Generalissimo:

The suit states that none of the members of the Economic Development Corporation were "experts in law, lending, video gaming or economic development,"

Wait a minute...

none of the members of the Economic Development Corporation were "experts in...economic development,"

Hey, here's a suggestion, next time you set up an organisation with a specific purpose, try to ensure that the members of that organisation are at all qualified to fulfill that purpose.

Unless they were using the off-hand definition of "has practiced for more than 10,000 hours" regarding the word expert, than the only one of those vocations that has experts would be law.

So... the guy that sabotaged the company, is suing the company he sabotaged because he sabotaged it... Only in America. I was hoping Rhode Island would sue the governer. That would be justice.

Nimzabaat:
So... the guy that sabotaged the company, is suing the company he sabotaged because he sabotaged it... Only in America. I was hoping Rhode Island would sue the governer. That would be justice.

If that's what actually happened. A lot of people think he saved the state from losing millions more by throwing good money after bad. The lawsuit will hopefully clarify a lot of what actually went on, including Chafee's role in the mess.

Call me cynical, but this sounds a lot like throwing good money after bad in order to be able to put some ham-handed bullet point on an election pamphlet about "fighting hard to prevent the mis-use of taxpayer dollars".

You're suing a bunch of bankrupt people to get back money they no longer have. I believe that's almost the classic definition of "no win situation".

Rhode Island Sues Over 38 Studios

OVER 38 Studios?! That's a f** lot of studios! Da he..

*squints and reads closer

Oh...

>_>

FEichinger:
So ... correct me if I'm wrong, but ... did he just proudly proclaim he's paying a lawyer with the bleeding tax-payers' money to retrieve money that doesn't even exist anymore?

Politicians in Election Year ... Jesus.

Callate:
Call me cynical, but this sounds a lot like throwing good money after bad in order to be able to put some ham-handed bullet point on an election pamphlet about "fighting hard to prevent the mis-use of taxpayer dollars".

You're suing a bunch of bankrupt people to get back money they no longer have. I believe that's almost the classic definition of "no win situation".

One should note that the lawsuits names Wells Fargo and other banks as defendants. These are the people they are going to try and collect money from.

Andy Chalk:

Nimzabaat:
So... the guy that sabotaged the company, is suing the company he sabotaged because he sabotaged it... Only in America. I was hoping Rhode Island would sue the governer. That would be justice.

If that's what actually happened. A lot of people think he saved the state from losing millions more by throwing good money after bad. The lawsuit will hopefully clarify a lot of what actually went on, including Chafee's role in the mess.

So far my understanding of the situation (which may not be accurate) is that the state of Rhode Island gave 38 Studios a loan. Rhode Island didn't give 38 Studios the entire loan (this part gets glossed over a lot, but it is a really important part to the story. The State of Rhode Island never came through with the money promised). In the mean time 38 Studios produced a pretty damn awesome game (Kingdoms of Amalur was basically everything the Fable series could have been, if Fable had ever been done well, but that's another story). Before Rhode Island finished giving 38 Studios the money they were promised, the new governer sabotages the studio by saying they're having problems. Thus causing the problems. There was no mention of the studio having problems before. 38 Studios was still waiting on money from the State of Rhode Island to complete their next project, which based on Kingdoms of Amalur, would have made a lot of money for Rhode Island. Then Rhode Island wanted 38 Studios to start paying back the loan that they've never fully received (again really important. If a bank gives you half of the loan they promised you, they can't just decide to start charging interest until you have the whole thing). Now this is just a basic summary based on what i've read about the situation on the Escapist and other sites. But if that is the case, somebody should indeed be getting sued, just not Curt Schilling. The name does have a "C" and an "H" and rhymes with Afee...

Nimzabaat:

Andy Chalk:

Nimzabaat:
So... the guy that sabotaged the company, is suing the company he sabotaged because he sabotaged it... Only in America. I was hoping Rhode Island would sue the governer. That would be justice.

If that's what actually happened. A lot of people think he saved the state from losing millions more by throwing good money after bad. The lawsuit will hopefully clarify a lot of what actually went on, including Chafee's role in the mess.

So far my understanding of the situation (which may not be accurate) is that the state of Rhode Island gave 38 Studios a loan. Rhode Island didn't give 38 Studios the entire loan (this part gets glossed over a lot, but it is a really important part to the story. The State of Rhode Island never came through with the money promised). In the mean time 38 Studios produced a pretty damn awesome game (Kingdoms of Amalur was basically everything the Fable series could have been, if Fable had ever been done well, but that's another story). Before Rhode Island finished giving 38 Studios the money they were promised, the new governer sabotages the studio by saying they're having problems. Thus causing the problems. There was no mention of the studio having problems before. 38 Studios was still waiting on money from the State of Rhode Island to complete their next project, which based on Kingdoms of Amalur, would have made a lot of money for Rhode Island. Then Rhode Island wanted 38 Studios to start paying back the loan that they've never fully received (again really important. If a bank gives you half of the loan they promised you, they can't just decide to start charging interest until you have the whole thing). Now this is just a basic summary based on what i've read about the situation on the Escapist and other sites. But if that is the case, somebody should indeed be getting sued, just not Curt Schilling. The name does have a "C" and an "H" and rhymes with Afee...

The Company was grossly mismanaged, even Schillings has said so:
http://www.escapistmagazine.com/news/view/118682-Curt-Schilling-Opens-Up-About-38-Studios-Collapse

This is fascinating. The Rhode Island Economic Development Corporation doesn't know the overall success rate for entrepreneurial endeavors is only 40%? The big joke of course is them being able to prove to any court that the advisers knew it would fail but proceeded to call it a good investment. All businesses are likely to fail, more so than succeed. Kahneman wrote extensively about the reasoning that people think their business endeavor is likely to succeed even though other such businesses have failed.

Nimzabaat:
snip

You hit the nail on the head. Everyone does gloss over the fact that they were granted a loan of $100Million, and spent money like they had that in preparation for future projects, then RI stopped the loan before it was even fulfilled, leaving them with the debt and inability to follow their projects through. Amalur was their first title, and the studio didn't last three full months before folding under that. No sane person can expect millions of dollars spent on an endeavor like a new game IP to be made back so quickly.

When everything is said and done, I hope the RI government sinks into the sea. 38 Studios didn't even have a chance but everyone so quick to blame them. They were told they have XYZ, but then were only given X. What about the part where the State of RI did not fulfill it's contractual obligation?

Baldr:

The Company was grossly mismanaged, even Schillings has said so:
http://www.escapistmagazine.com/news/view/118682-Curt-Schilling-Opens-Up-About-38-Studios-Collapse

If you read that article, it doesn't say that, nice spin though. It says specifically that he thought it would work out, even though he saw hardship. Others said "money was being spent at a calamitous rate, while financing never materialized". It was supposed to materialize from the rest of the government loan that was never fulfilled. Schilling also does his fair share of defending as he points a finger directly at this Governor who stopped the loan before it was fulfilled.

It's a tragedy what happened, and both sides are to blame, but I can't help but feel that the State of RI is much more responsible as they never fulfilled their financial obligation to the company.

The Gentleman:

CrazyGirl17:
...Wow, just... WOW. Overreacting much? I hate politicians...

You just got screwed out of $100,000,000, possibly due to fraud, because advisers you hired to make an objective assessment failed to disclose serious risks that, you know, might have told you that this wasn't such a good idea (commonly referred to as Breach of Fiduciary Duty). If there was a possibility of getting at least some of that money back, would you?

For example:

lawyers withheld expert information that 38 Studios was likely to fail, that the EDC was denied an opportunity to reconsider the deal before things got out of hand and that the requirement for "third-party assessment and monitoring" was ignored.

This smells a lot like basic legal malpractice and breach of fiduciary duty.

After taking a quick look at the complaint, which alleges breach of fiduciary duty (Counts I & II, pages 70-74), fraud (counts III and IV, 75-77), misrepresentation (count V, 77-78), malpractice (count VI, 78-79), negligence (count VII, 80-82), RICO claims (counts XII and XIII, 87-91), civil conspiracy (count XIV, 91-92) and unjust enrichment (yes, that is a cause of action; count XV, 92), at the very least there is enough to send this to trial, and a fair amount of what we have learned about the event suggests there's at least some potential wrongdoing against the state.

Let it go into the legal system and let the judiciary sort it out.

I agree, this is a fascinating thing and I look forward to seeing how it resolves itself. It will be most interesting to see how they prove any kind of fraud or fiduciary breach. The odds of starting a successful game studio are about equal to any other entrepreneurial endeavor. In other words, they are more likely to fail than succeed. Anyone who doesn't know that should not be part of any "Economic Development Corporation".

Can't we just all agree to throw the former governor, the current governor and Schillings into the same hessian bag and throw them into a deep and fast flowing body of water?

Baldr:
The Company was grossly mismanaged, even Schillings has said so:
http://www.escapistmagazine.com/news/view/118682-Curt-Schilling-Opens-Up-About-38-Studios-Collapse

Not only that, but I recall skimming some bit of the original contract details and one of the requirements from the state that stood out to me was that the studio reach a particular headcount of 350 or 375 or something, by a certain deadline.

I don't know about you, but I've been part of a dot.com that was invested in and grew from 40 to 80 people in the span of <6 months - coupled with not enough work to justify the increase in employee headcount. It's not pretty bloating that much, people having problems integrating with the company culture and practices, or manager types not adapting.

I can't imagine what it would be like for a what is essentially a start up studio to grow from what, 50-100 to 350+ before their first game is even out. No time for maturing in policies and such, dealing with communication issues, you end up just basically wasting money on their salaries. It's far better to grow slowly as work increases, instead of exploding in people right away like they did.

Did I mention the state themselves put this issue to them, as they were that desperate in having that many developers contributing to the economy? Yeah...

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