"There can be no question our country is in the worst economic crisis of our lifetimes … It falls on us, the individuals, to find a way out of our own personal crisis." — Curt Schilling, February 2011
For all of the Johnny-come-lately types who are just now learning about the debacle of 38 Studios, LLC, the video gaming entity belonging to former MLB pitcher Curt Schilling, well, it is now official. Its ill-fated future now resides in Chapter 7 bankruptcy, as of May 24, 2012.
It is important to note that there were those journalists in the electronic media who covered the story when it broke, such as this reporter, back in September 2010.
And it was my article titled "Curt Schilling's Rhode Island Hoodwink," which actually riled many a fan of 38 Studios, as well as those MLB fans who admired Curt Schilling's baseball career and saw it as a hit piece.
But if you read the report, you will learn in great detail the machinations of the financing deal that took place and was finalized on July 26, 2010 by Mr. Schilling and the state of Rhode Island. It is not an article about personal aspersion, but rather a real-life story about what could potentially happen when a non-business person of celebrity joins forces with a state government that tries to morph itself into a Wall Street venture capital investment firm.
It was a bad plan from the beginning. The Rhode Island governor at the time, Donald L. Carcieri, even said it was a definite risk, but he was enamored with the idea of Rhode Island becoming involved in the video gaming industry.
This report, however, is more about the losers in this deal — which the Rhode Island Economic Development Corporation (EDC) made with Curt Schilling on behalf of the state — other than Governor Carcieri, present Rhode Island governor Lincoln Chafee, state lawmakers, and one Curt Schilling.
The real losers are the taxpayers of Rhode Island and the former employees of 38 Studios, located in Providence, Rhode Island and its subsidiary, Big Huge Games, located in Timonium, Maryland.
A couple of things have changed since 38 Studios moved from Maynard, Massachusetts to Providence, Rhode Island back in 2010.
Rhode Island now enjoys the second highest unemployment rate in the entire United States at 11%, while Nevada still carries the torch for the highest rate at 11.7%. In 2010, Rhode Island was fourth highest in unemployment.
And in 2010, there were only 70 employees at 38 Studios with less than 100 at Big Huge Games. By May 2012, 38 Studios had a total of 413 employees and was to have paid for many of them to relocate not only from Massachusetts, but localities from all over the country.
The original amount of the loan guarantee to 38 Studios, LLC was for $75 million, through Rhode Island's Job Creation Guarantee program, created in 2010, for small businesses to get a leg up with loans between $2-4 million in value.
In fact, after Schilling learned about this very new program, he approached Governor Carcieri at a fundraiser for his re-election campaign, after having been rejected by venture capitalists for funding for his company. Yet the program was not necessarily structured for the funding he needed.
Initially, the program called for a total of $60 million for distribution amongst many entities. But state lawmakers somehow came up with another $65 million, for a total of $125 million, in order to curry favor with Schilling, who promised 450 well-paying jobs for the state.
And based upon a wing and a prayer, the state of Rhode Island rushed this deal through so quickly that it did not even properly vet it, either intentionally by the governor and the state, or due to negligence.
And now that the state of Rhode Island is governed by a different administration, with the election of Lincoln Chaffee in November 2010, it presents even more confusion, anger and unaccountability amongst residents, investors and lawmakers, on both sides of the aisle.
This is a cautionary tale, and not about laying blame, but about accountability, as Schilling himself was quoted, and for all parties involved. To lay this at the feet of the politics-as-usual crowd, without resolution or preventive measures is a different kind of waste that begs for lessons learned.
But in fairness, Mr. Schilling has decided that he shares no blame in the bankruptcy of his company, but rather, like a politician, is blaming a politician; the current governor of Rhode Island, Lincoln Chafee.
So therefore we need to at least briefly shed light on the labor problems and families left at risk by the likes of Curt Schilling himself, specific to the day-to-day management of his company. For example, without notice to his employees in mid-May 2012, he simply stopped depositing paychecks into his employees' bank accounts. Little did they know that they were never to be paid again.
Employees were told they would be paid and to be patient, but it became too late, as the company folded with no notice to staff as of May 24th. And at such time all health insurance was also immediately terminated; unbeknownst to most of the families.
Schilling had hoped to make the initial $1.25 million repayment due to the state, but he issued a check in mid-May that bounced, and therefore could not make payroll at that time. He said that he ran out of time, but eventually made the payment with private funds that he raised by the third week of May.
Is Schilling not making payroll someone else's fault, too? By that point, the state had already loaned Schilling $55 million according to the terms of the initial agreement. But all of it was gone by May 2012.
And Schilling now claims, after changing his story from just months ago, that he invested $55 million of his personal savings into the company since 2006; not his previously quoted amount of $30 million. And Schilling also claims that he and his family are now completely broke, too.
Having earned $114 million over the course of his MLB career means he blew through $114 million. And whose fault is that?
Additionally, relocation moving expenses for many employees were to have been covered and paid for by 38 Studios months before, but 38 Studios never paid Atlas Van Lines, as promised, and therefore left those employees who re-located via Atlas holding the bag for thousands of dollars in moving costs.
The fine print apparently read that should 38 Studios fail to pay the Atlas bill, over a set period of time, the employees would be liable for moving costs. That was the deal Schilling had made with Atlas.
Most of the employees thought the moving costs had been handled upon their moves months earlier and now most will need to move again in addition to the original costs.
The health insurance plans for employees were immediately terminated on May 24, 2012. Unlike a Chapter 11 corporate bankruptcy, whereby it calls for a reorganization of corporate assets, Chapter 7 is a done deal. No more paychecks, health insurance, or retirement plans investment.
The employees are not entitled to a Consolidated Omnibus Budget Reconciliation Act (COBRA) plan, which extends employee health insurance benefits, even if they can afford its extremely high premium rates, since the company no longer is in business.
So families with expectant mothers or cancer patients have been left high and dry by 38 Studios. With regard to back wages which were unpaid for the month of May, 2012, each employee must file claims with the U.S. Bankruptcy court to have any hope of being fairly compensated; as the state labor department only recoups unpaid wages of those companies still in business. Schilling owes close to $3 million in back wages alone for May 2012.
And any required notice to the employees of the company's fate will be determined most likely in a court of law as to whether Mr. Schilling's company violated federal law by not giving at least a 60-day notice of an impending bankruptcy or a mass layoff of employees. At first glance, it would appear that 38 Studios would fall under the Worker Adjustment and Retraining Notification Act (WARN), a federal statute.
While details in this report are not nearly as captivating as Massively Multi-Player Online Role-Playing Games (MMORPG) for game enthusiasts, which was to be 38 Studios specialty, or about the potential for Curt Schilling's enshrinement into the National Baseball Hall of Fame, they remain important.
Schilling did indeed release 38 Studios initial game, ironically in February 2012, albeit months later than its initial release date. And 90 days later upon its release it was in Chapter 7. The game's title, Kingdom of Amalur: Reckoning, was distributed by Electronic Arts, Inc. There has even been controversy about the accuracy of its sales figures and even its supposed popularity.
While the taxpayers' loan-guarantee to 38 Studios was in the amount of $75 million, it has now risen to over $115 million to date with accrued interest and fees. Looking on the bright side, however, even though the arrangement made with Rhode Island was that the state would be on the hook should the company fail, the bonds that were floated for the loan were "moral obligation" bonds versus "general obligation" bonds.
That means there is no legally binding obligation for the state to make good on payment of them, but the determination of what exactly is owed by the state is being investigated by no less than the Rhode Island Office of the Attorney General, the Rhode Island State Police, the FBI, the U.S. Office of the Attorney General and the U.S. Department of Labor in order to sort out where the money went, and the possibility of violations of federal and state law.
One could say that the moral of the story is that once again it is the "little people" that are potentially hurt when it comes to arrogance, extravagance, irresponsibility, unaccountability, and possible violations of state and federal law. Or simply that in the business world Curt Schilling never had the command he had on the pitcher's mound.
If Schilling was a victim, as he has been saying for the past couple of weeks, as a state film tax credit fund was denied him by Governor Chafee — which would not have kept his company afloat anyway — it was not from being unfairly treated.
Schilling was perhaps a victim of his own hubris, which may have worked in the major leagues, but in business, he was clearly out of his league.
And Governor Carcieri also deserves no slack, either. His actions mirrored that of a reckless, impulsive frat boy; let alone the negligence in overseeing the best interests of over one million state residents left in his charge.
Curt Schilling's out-pitch this time not only failed himself and his family, but now has had a profound impact on hundreds of families and business associates, who may never fully recover.
Let us hope that at least his day of reckoning is on deck.
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