Various Lowlights From Curt Schilling's Failed 38 Studios [UPDATED]

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Documents from the lawsuit over Curt Schilling’s failed attempt to launch his own video game company—dubbed 38 Studios—have been released today in Rhode Island. If you don’t recall 38 Studios, it’s because the company laid off its entire staff and went bankrupt in 2012, despite getting a $75 million loan from the state’s development group. And that MMORPG video game it was supposed to produce in the vein of World of Warcraft? It never was released.

Formally known as Rhode Island Economic Development Corporation versus Well Fargo Securities, et al., hundreds of pages of previously sealed documents were released today by state’s judiciary. These are selections of those documents, like the report from IBM outlining all the problems 38 Studios had before getting all that state cash.


We’ll be updating this post as we get through the documents.

First, this email, a reminder all the way back from Sept. 8, 2010, for people to not talk to the media about the loan:

Not talking to the press is easier said than done. When reporters had questions a year later about when the rumored MMORPG game would be released, here’s how the PR people handled it. First, the email from WPRI’s Ted Nesi to the state’s Economic Development Corporation:


This email is then sent to higher ups with Rhode Island’s EDC.


Saul reaches out to 38 Studios, and this is the response he gets.


38 Studios was in a financial tailspin a year later.

Update (5:58 p.m.): This report from IBM, sent an email on Jan. 3, 2012, warns the “level of excellence appears to be suffering.”


The same report goes on to add that “38 Studios seems to be going down a path that would limit the market of the game. This is a well understood path to failure. Very similar to Auto Assault—which limited themselves to small or non-existing markets.”


Update (6:05 p.m.): Here’s the reconciliation of cash flow for 38 Studios by the end of 2012. This document shows the company owed more than $3.8 million.


Update (6:52 p.m.): How hard is it to develop an MMOG game? A memo from the then-executive director of the EDC, Keith W. Stokes, to the board of directors explains that’s why “a commercially viable performance bond for an MMOG game does not exist in the marketplace.”


Update (7:12 p.m.): Another email, this one among bankers, about how people are doubtful about the 38 Studios project:


Update (7:21 p.m.): More emails about how to say no comment to the press and public. In this set, 38 Studios’s chief marketing officer asked for thoughts on how to answer questions like “are we strapped for cash?” This is the answer she got, a few months before 38 Studios will get millions via the state’s EDC.


Update (7:31 p.m.): One person with Wells Fargo responded to an email about the 38 Studios bond by calling it “crap.” Wells Fargo was one of the the bond placement agents:


Update (10:04 p.m.): An ongoing issue in all the filings is how many warnings signs there were that the loan wouldn’t work because, even with as much money as was involved, it didn’t provide enough upfront for 38 Studios to cover all its costs, including the move. From one filing (emphasis added is mine:

On May 31, 2010, the EDC analyst gave [EDC Deputy Director J. Michael] Saul his current thoughts on the 38 Studios’ credit analysis and transaction as follows:


The preliminary list of needed items is attached. I am in the process of organizing my thoughts on this, here is where I am currently:

The ‘worst case scenario’ as presented by the company involves a new, commercially successful RPG [role playing game] title every two years. Is this realistic? Big Huge Games had their last release (that I can find) in 2006, at least two games have been cancelled since then. The plan does not include anything addressing cancelled games and the associated expenses nor any possibility of delays or that a game is not successful. The plan shows each game being more successful than its predecessor. No one bats 1000, especially not in this industry. Without the RPG release every two years, the cash flow does not work to support the debt. The more I look at this, the less comfortable I become with the credit.

This credit aside, I believe there is an opportunity to create an industry cluster around the assets we have in place (RISD, etc.), however I don’t think I can support a $75 million guarantee to any single company in this industry due to the wide volatility in commercial success of game releases. One success does not guarantee another, however the repayment of debt relies upon continued success. Perhaps we should develop a toolbox of incentives (including loan guarantees) to attract companies into a cluster and not rely on a single company to build the cluster around.

Let me know your thoughts.

[emphasis supplied].

On June 4, 2010, 38 Studios received the analyst’s list of risks presented by the proposed loan and his list of information needed from 38 Studios in order to evaluate the loan, with copy to Stolzman.

After 38 Studios received these two lists, Saul told the analyst not to prepare an internal credit memorandum. Saul then excluded the analyst from further analysis of the 38 Studios transaction. The analyst was never told the amount of net proceeds that 38 Studios would receive from the EDC. No internal credit memorandum was prepared or submitted to the EDC Board. Stolzman knew that no internal credit


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