- The Washington Times - Thursday, August 23, 2012

PROVIDENCE, R.I. — The government deal that guaranteed a $75 million loan for baseball star Curt Schilling’s video-game company focused almost exclusively on how quickly the firm would bring jobs to Rhode Island and overlooked requirements for attracting outside investment or other steps that could have helped protect the public’s money.

The state’s agreement with 38 Studios in 2010 demanded job creation — and virtually nothing else — at a pace described as aggressive by former employees and those familiar with the video-game industry. And Mr. Schilling’s firm hired even more quickly than the state required, draining its resources faster than if it had grown at a pace more typical of startups.

Though Rhode Island was by far the company’s biggest investor, officials did not demand a seat on its board or require that 38 Studios raise outside capital according to any timetable, even though the firm’s success hinged on its ability to bring in the tens of millions of dollars needed to finish its game.

Gaming industry and other analysts agreed in interviews with the Associated Press that, in short, the state Economic Development Corp. crafted an agreement under which 38 Studios could fail despite, and in some ways because of, its attainment of every milestone Rhode Island set down.

“I think it’s kind of stupid for anybody who isn’t familiar with the industry to invest in it,” said gaming industry analyst Michael Pachter of Wedbush Securities. “You want to believe that the state did their homework and they’re sophisticated investors and understood the risks, but clearly they didn’t. Obviously they thought they were buying jobs.”

38 Studios laid off its nearly 300 employees in Rhode Island in May and filed for bankruptcy protection in June. The state, which has the country’s second-highest unemployment rate, is likely on the hook for more than $100 million, including the $75 million in bonds it floated as part of the deal, plus interest.

Judy Chong, an EDC spokeswoman, said the agency is doing an “extensive review” of the 38 Studios transaction and could not answer questions until it was complete.

Keith Stokes, who resigned as executive director of the EDC in May, and Michael Saul, the EDC’s former managing director of finances, did not return calls seeking comment.

Known for his grit and gusto, Mr. Schilling became a Boston Red Sox hero in 2004, pitching on an injured ankle in Game 6 of the American League Championship Series. The team went on to win the World Series.

He founded 38 Studios — initially Green Monster Games — in Massachusetts two years later, naming it for his jersey number. He reportedly met Rhode Island’s governor at the time, Donald L. Carcieri, during a film fundraiser at Mr. Schilling’s home in March 2010, and the loan guarantee deal that lured him to Rhode Island took shape quickly over the next few months.

Mr. Schilling has not responded to the AP’s requests for comment.

38 Studios planned to hire aggressively on the way to meeting the launch date for its “massively multiplayer online game” — a type of game that is incredibly expensive and time-consuming to create. The state offered an incentive for the fast-paced hiring.

The EDC built into the deal a $7,500 per-job penalty if 38 Studios fell short of its hiring requirements. The company brought on workers even faster than estimated, according to the EDC, and some at 38 Studios worried the growth was too fast for the company’s good — and ultimately not sustainable, given its difficulty attracting investment.

Employees had no indication the company was in financial trouble until they didn’t get paid; within weeks, all of them would be let go. In retrospect, some employees wondered “had we been burning slower, with a smaller team and released a smaller game, we could have at least got to the point to where we were bringing in revenue and then ramped up accordingly,” said a laid-off employee who spoke on the condition of anonymity because he feared for his prospects of future employment.



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