Deconstruction of 38 Studios debacle intensifies

Efforts to understand how a mistake as large as Rhode Island’s loan to 38 Studios LLC could happen are intensifying in the courtroom and on Smith Hill nearly a year and a half after the video game company collapsed.
Gov. Lincoln D. Chafee’s controversial decision to sue former executives, state employees, lawyers and the global finance companies involved in the deal, seen by many as a long shot, has at least survived defendants’ numerous motions to dismiss.
The evidence and testimony presented in the case has gradually added new detail and context to the troubling chain of decisions that led the R.I. Economic Development Corporation to approve an investment in 38 Studios doomed from the start.
Now the federal bankruptcy trustee in the case wants to use $150,000 in assets seized from the remains of 38 Studios to investigate what appears to be a similar case against architects of the deal. (The EDC is negotiating protections for any current state employees.)
And before anything is decided in court, the post-mortem will resume in the General Assembly, where legislative oversight hearings into what went wrong began over the summer.
So far, the House Oversight Committee has mostly gone over old ground, with a roundup of emails between participants in the deal showing efforts to speed it through state approval with little analysis or underwriting scrutiny.
The question is whether, with the lawsuit still raging, lawmakers will be able to find anyone willing to provide live testimony to advance understanding of the issue in a meaningful way.
“The civil suit has put a damper on our ability to get witnesses,” said Rep. Michael J. Marcello, D-Scituate, chairman of the House Oversight Committee. “We will be asking for voluntary cooperation from key people, including past [EDC board] members. They were the ones that approved the program so it is important we hear from them.” Although no former EDC board members who voted for the 38 Studios loan were named in the lawsuit, they have been almost uniformly quiet about the issue since the bankruptcy.
Of course the most central board member in the 38 Studios loan was former chairman and Gov. Donald L. Carcieri, who came up with the idea of luring former Red Sox pitcher Curt Schilling’s company to Rhode Island and tasked then-EDC Executive Director Keith W. Stokes with making it happen.
Sen. James C. Sheehan, D-Narragansett, chairman of the Senate Oversight Committee, said if he holds 38 Studios hearings, Carcieri would “certainly be of interest in speaking to how the deal was first vetted by the EDC.”
Sheehan is still discussing whether he will launch his own 38 Studios hearings or whether the issue is better handled by Marcello’s committee or in the Senate Finance Committee. He said that decision would likely be made this month and, if hearings happen, would likely be scheduled for early October.
If he does hold hearings, Sheehan said, like House Oversight, they will be focused on uncovering ways in which state economic-development programs could be improved.
That means no investigation into what legislative leaders knew about 38 Studios before they approved the Job Creation Guaranty Program used by the EDC to finance the loan.
“The biggest thing for me is what did the [EDC] board of directors know vis-a-vis the staff discussing the merits and demerits of the deal,” Sheehan said.
Like the lawsuit, debate and argument in the General Assembly about 38 Studios has focused on the process leading up to the approval of the loan, but Marcello said he intends to move into the post-approval monitoring of the investment, or lack thereof.
“The next step is what was happening at the EDC when the money was released and monitoring was supposed to begin,” Marcello said.
Topics of post-approval 38 Studios will likely include why the state left third-party monitoring of the video-game company to firms, like IBM, being paid by 38 Studios. Even the firm hired to provide expert analysis of investing in the video game market, Strategy Analytics of Newton, Mass., was paid by 38 Studios for its advice.
According to the state’s lawsuit, Strategy Analytics privately warned EDC officials against the 38 Studios loan and said they would not be comfortable making a similar deal themselves.
But that information was never relayed to the EDC board of directors, who received a report from Strategy Analytics just before they approved the loan detailing the potential benefits of having a gaming-industry cluster.
“One issue that came up was who paid Strategy Analytics,” Marcello said. “Even though they issued a less-than-glowing report, the board still approved it and I wonder, would the board have looked another way if they had paid for it themselves.”
One possible option to help draw testimony out of reluctant witnesses would be subpoenas, which both House and Senate committees can issue with the permission of their respective chamber leaders.
Marcello said he would consider seeking subpoenas if he thought they would be useful, but they may not make a substantial difference in the quality of testimony.
On yet another front in the unwinding aftermath of 38 Studios, state Receiver Richard Land, who has been charged with liquidating 38 Studios’ commercial assets, said he intends to ask the bankruptcy judge to allow him to hire a firm to help market and auction off the defunct company’s intellectual property.
Art and digital work from the unfinished video game known as “Copernicus” is believed to be the most valuable asset recovered from 38 Studios. Land said he has received interest in the intellectual property.
“It is preliminary, but I am encouraged by the nature of the parties … interested in it,” Land said. •

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