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Rhode Island suing 38 Studios execs, state officials over $75M loan
Rhode Island suing 38 Studios execs, state officials over $75M loan
November 1, 2012 | By Eric Caoili

Rhode Island has filed a lawsuit against the numerous people involved in the state's mismanaged $75 million loan to Kingdoms of Amalur developer 38 Studios, which shut down in May after running out of money.

The suit (PDF download) was filed with the Rhode Island Superior Court by the state's Economic Development Corporation, which negotiated the loan that convinced 38 Studios to move from Massachusetts to Rhode Island two years ago.

The defendants named in the suit include the developer's founder/chairman and ex-baseball star Curt Schilling, CEO Jennifer MacLean, former EDC executive director Keith Stokes (who oversaw the negotiations and was fired following 38 Studios' closure), and other 38 Studios executives and EDC employees/lawyers.

Other companies that were involved in the loan deal such as Wells Fargo Securities, Barclays Capital, First Southwest, and Starr Indemnity and Liability were also named as defendants.

The complaint alleges that many of the "defendants knew or should have known, but failed to inform the EDC Board, that 38 Studios was destined to fail according to 38 Studiosí own financial projections."

It claims that 38 Studios' executives knew that, even with the loan, the studio would not have enough money to relocate and eventually complete its MMORPG project Copernicus, but they chose to conceal that financial shortfall from the board.

Schilling and the other defendants are accused of fraud, fraudulent misrepresentations and omissions, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing, negligence, negligent misrepresentation, legal malpractice civil conspiracy, violation of the state's RICO statute, and numerous other counts.

The EDC includes in its list of damages the $75 million loan to 38 Studios, its reduced ability to issue bonds and other guaranties, its injured reputation and credit, and its increased exposure to potential liability to third parties. The group's lawsuit is seeking a juried trial to cover those damages, plus interest, costs, and attorneys' fees.

Rhode Island governor Lincoln Chafee, who spoke out against the taxpayer-guaranteed loan even before 38 Studios' troubles emerged and condemned the company many times after its closure, pressured the EDC board to begin reviewing a potential lawsuit against the developer in June, according to local news outlet WPRI.

"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," said Governor Chafee in a video statement posted online today (above). "The board's legal action was taken to rectify a grave injustice put upon the people of Rhode Island."

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john talbot
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geeze... when it rains, it pours.

E Zachary Knight
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I am not sure if this lawsuit is the right reaction to 38's failure, but I knew from the first time I heard the proposal that it was a bad idea. You could tell that those on the government side handling the deal knew nothing about the games industry and specifically about the volatility of MMO games. Had someone with any real knowledge of the industry and the risk that comes with creating a successful MMO been in on the discussion, this never would have happened.

That said, 38 Studios still holds some responsibility as they should have been more open with sharing those risks with the RI government.

Michael Zehnich
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Eric Feliu
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Aren't the state officials who were involved with the deal also responsible? Shouldn't they have known something was not right? I am sure a lot of the accusations are true against 38 studios executives. I also believe the state officials who approved the deal are to blame as well.

Paul Marzagalli
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Going over a pothole last night, I was ruefully reminded of how indemnified the government is against legal recourse. Reading this article makes me feel much the same way.

I find this lawsuit in bad taste since they got in bed at the start of this with greedy pig eyes open. This also doesn't strike me as a wise idea, either, because a very reasonable case can be made that Chafee himself took actions and made public statements that prevented 38 Studios from salvaging their situation in whole or in part. The state isn't going to get anything out of this, at least not as far as money is concerned, and it's going to call into more serious focus their own actions when this all went down. In their own miserably bureaucratic and politically-minded way, the state government is doing exactly what Chafee said he didn't want to do last spring: throwing good money after bad.

Michael Rooney
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I'm glad somebody called out Chafee here. Not to distract blame away from the studio or other parties, but Chafee certainly deserves a good amount also. He made well and sure that the collapse was as brutal as possible. Had he not done that the problem would have been a good size smaller; still big, but a lot smaller.

Bob Allen
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"Salvaging their situation". Hmmm. Suppose another company gave 38 Studios some money to tide them over. What are the odds it would have been enough? By all accounts, zero because 38 Studios was fundamentally broken at the management level. So that would have meant ANOTHER company would have been out millions of dollars in addition to Rhode Island. 38 Studios might made some additional loan payments, but that would just be shifting the problem down the road a bit. To blame Chafee is like blaming the guy who blew the whistle on Bernie Madoff. Getting new investors to pay the old is a pyramid scheme, not a business plan. Also, if the Rhode Island government is as clueless as some are saying, then any investor wouldn't have given any value to Chafee's statements. A company like a Take Two would have done its own research before investing more money and known if Chafee's concerns were valid. Worse, if RI suspected 38 Studios was in danger of defaulting (because it knew of missed payments) and kept quiet about it, the state could have been sued by the new investor for that loan. And then RI would have been potentially out even more money. So Chafee was damned if he did and damned if he didn't.

Paul Marzagalli
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If Rhode Island was doing their part neutrally and with an eye toward navigating the process through as cleanly as possible, then you might be on to something. Chaffee isn't some whistle blower, he was the man in power when this went down. He did his level best to shit-can (no better word for it) the whole thing as it was transpiring.

What could 38 Studios have done? I honestly don't know. Among the many stories, there were reports that they were close to funding a "Reckoning" sequel that might have saved Big Huge Games, but that investors backed away over the clamor out of the governor's office. You're probably right that 38 Studios couldn't be saved, but what they might have done to mitigate the damage is something we won't know because Chafee did not at all present Rhode Island as a willing participant in anything other than the public execution it turned out to be. Had it ended there, then that would be the story.

This lawsuit is pernicious because it operates on the fallacy that Chafee's actions at the time or the government's throughout the entire process had no bearing on how bad the situation became. Singling out individuals (or individual departments) does not exempt the apparatus that empowered them, an apparatus that current officials are still very much a part of. From this vantage, it looks like nothing more than a shakedown.

Michael Rooney
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@ Paul: I was about to say the same. Bob, it's not that 38 Studios wouldn't have gone bankrupt eventually, it's that Chaffee very much caused them to devalue so rapidly that it probably ended up costing the state a lot more than it would have otherwise.

He ended up costing the state of Rhode Island a huge amount of money just so he could say, "I told you so," a couple months before he could have otherwise.

Jonathan Murphy
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Is Schilling to blame? Yes. But who agreed to the deal? The freaking government officials! It's their JOB to decide where tax payer money goes! They need to be sued!

This reminds me of Jack and the Bean stalk. Yes Jack/Curt was dumb enough to trade his cow for beans. But the guy with the beans is at fault. In this story Jack lost the loot he found.

Jeremy Alessi
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This is starting to look like a feud between the governor and someone involved with 38...

Michael Rooney
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It's only just now starting to look that way?

Dirk Collins
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Anyone willing to wager if RI also sued it's own employees who provided this loan in the first place? I would wager not. It's always easy for the politicians to point the finger and place the blame. Who in the government of RI has real world experience in building or even running a gaming company?

IMO Rhode Island Lender failed in Due Diligence. They shouldn't even get an opportunity to kick around anyone from 38 Studios. Also my opinion, 38 Studios failed at looking at the all the costs with growing too quickly. As a gaming co. you always need the steady income first (from your games) to support upping the staffing levels to make new games.

Peter Kozlowski
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I think people are missing the fact that the most important defendants in this suits are actually the banks since they are the only ones who have any real money to pay out any judgements.