Target 12: EDC ignored 38 Studios signs

PROVIDENCE, R.I. (WPRI) -- Rhode Island officials say they did extensive due diligence before awarding a $75 million taxpayer-guaranteed loan to Curt Schilling's doomed video game company, but documents obtained by Target 12 suggest the process was rushed and shortcuts were taken.

Officials began drafting the terms of the 38 Studios deal as early as March 26, 2010, more than two months before state lawmakers even created the new $125 million loan-guarantee program that was used to lure Schilling's company to Rhode Island in July, according to more than 2,500 pages of emails, financial documents and internal memos the R.I. Economic Development Corporation provided in response to Target 12's public records request.

House Speaker Gordon Fox and other lawmakers now say they didn't know 38 Studios would get $75 million from the loan-guarantee program when they approved it in early June. But an April 10 email from J. Michael Saul, then-deputy director of the EDC, shows the agency was already planning to provide $75 million to the company at that point.

The emails show Saul played a hands-on role throughout the process, encouraging his staff to move quickly to get the deal done. Saul tried to get a job at 38 Studios just six weeks after the $75 million transaction closed, though it appears he was never hired.

• PDF: Read Chafee's letter to Carcieri
• PDF: Read Carcieri's reply to Chafee

Saul and other key players were unavailable to comment for this story because of pending litigation.

Agency hired cheaper firm

Saul tasked Timothy Cole, who was the EDC's senior strategy and research manager until two months ago, with finding an independent firm to assess the prospects for 38 Studios and the video game industry. In an April 9 email, Cole acknowledged the firm the EDC wound up using - Strategy Analytics of Boston - wasn't as strong a choice as an alternative, Monitor Group of Cambridge.

Monitor Group is "clearly the best fit from an analytical and prestige standpoint, but their price range is prohibitive," Cole told Saul.

"Perhaps some negotiating could bring the price down, but I do not [know] what 38 studios' priorities are," he wrote. "If our [loan guarantee] offer is worth it, they may be willing to pay in the six figures, since Monitor would likely provide the most compelling analysis."

In another email, Saul said he "felt we should stay away from any statements about financial projections" when briefing the EDC board.

Memo: 'I did not check the math'

Angus Davis, a veteran tech entrepreneur who is now the CEO of Providence-based Swipely, was a vocal opponent of the wisdom of the 38 Studios deal in 2010. He told Target 12 the new revelations validated the concerns he had at the time.

"I have had that sense from the outside, and now seeing the emails from the inside it reinforces that view: that this deal was being pushed," Davis said. "It seems to be politically motivated, or at least was being pushed by folks largely on the political side."

"Can you imagine if you were talking over with your spouse about getting a new mortgage or buying a new car and not talking about what the monthly payment would be?" he added. "I mean, of course the financial projections are an important part of that consideration."

Documents show there was a tension between the need for speed and the need for scrutiny. A July 23 memo to the House of Representatives' fiscal advisor marked confidential reported that 38 Studios' internal projections forecast the company would book $1.15 billion in gross revenue and $570 million in net revenue from 2010 through 2015.

"I did not check the math...but these appear accurate," the House Fiscal memo said.

'We do not have any analysis' 

In an email to Strategy Analytics on May 28, Cole wrote that agency employees "are still in the stage in the deal where we want to overturn every stone that could trip up in the short and long runs. We shouldnt [sic] progress until we have weighted all of the major risks."

"With that said," Cole continued, "circumstances dictate that we do so in an aggressive timeframe, as you already know."

In an email on June 12, the day after Carcieri signed the loan-guarantee program into law, Cole expressed some reservations.

"As I sit watching tv and tweaking a graphic on the public revenue upside of the 38 project, I began wondering what a similar graphic might look like on the downside, assuming various failures for 38 studios," he wrote to Saul and Robert Stolzman, the EDC's legal counsel at the time.

"[I]t occurred to me that we do not have any analysis of the likelihood that an unsuccessful 38 Studios would be acquired versus going bankrupt (worst case)," Cole wrote. "How often do 450 person studios go Babkrupt [sic] in this industry? My assumption is that it is a fairly low percentage, given the 'all in' perspective that [Strategy Analytics] expressed in their report. ... Do you two see this as an important bit of information for the board, if we can find valid data?"

Saul appeared to brush aside Cole's concerns. "Always good to know your downside, but frankly, there are too many scenarios to speculate on to make this meaningful analysis," he replied.

'I am still not comfortable'

Concerns were also raised by Sean Esten, the EDC's financial portfolio manager, in a May 28 email to Saul and Cole complaining that he'd received almost no financial data from 38 Studios. "To be honest, I have more information on the typical $10k micro loan than I have on a $75 million request," Esten wrote. "This is a problem. ... I am still not comfortable the opportunity is as strong as they'd like us to believe."

Esten argued 38 Studios was unlikely to be able to self-publish its major game, Project Copernicus, "as they have never done this in the past. ... The company's back up plan if we cannot do the deal is to raise $25 [million] equity and then get a publishing deal. A suggestion: we guarantee the $25MM in a bond and they get a publishing deal with EA, Sony or another player in the market to publish and fund some of the development and publishing expense."

Saul acknowledged Esten's concerns, asking him to draft a list of what he needed. On May 31, Esten suggested the EDC consider creating a package of incentives to attract a variety of video game companies "and not rely on a single company to build the cluster around."

Since the company filed for bankruptcy in June, 38 Studios executives have said part of the problem was that the state withheld a portion of the $75 million in loan money as a reserve in case they went belly up, leaving them with an unfinished game and starved for cash.

It appears state officials were aware of that concern even before the EDC granted the loan guarantee. In a June 17 email describing a revised term sheet, EDC lawyer Stolzman told agency officials and their advisers: "I make one observation that mitigates their complaining about the $75M not being net. All along they represented that they needed $75M to complete the MMO," a reference to the Copernicus game.

Ted Nesi  (  tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the  Nesi's Notes blog. Follow him on Twitter:  @tednesi

Tim White  (  twhite@wpri.com ) is the  Target 12 investigative reporter for WPRI 12 and Fox Providence. Follow him on Twitter:  @white_tim