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38 Studios

From Invertopedia, the encyclopedia of how things fail

Entry 035. An analysis built from the public record, not an insider account. Spot an error? Tell us.

38 Studios was a video game company founded by former Red Sox pitcher Curt Schilling[1][2]. In 2010 a Rhode Island state agency issued $75 million in bonds and lent $50 million of it to the studio[3][8], on the condition that it move from Massachusetts to Rhode Island[2]. Its only game, Kingdoms of Amalur: Reckoning, sold over 1.2 million copies[2], and the company filed for Chapter 7 bankruptcy on June 7, 2012, owing $150.7 million[6]. The SEC later charged the state agency and its underwriter with fraud in the bond offering[3].

Contents
  1. 1The bet
  2. 2What happened
  3. 3The kill shot
  4. 4Red flags ignored
  5. 5The cost
  6. 6The inversion
  7. 7What survived
  8. 8References

The bet

Schilling wanted to build a big online role-playing game, code-named Project Copernicus[1][2]. Under a state economic development program, the state agency would sell bonds, lend the money to 38 Studios, and be repaid from the revenue of the games the company planned to make[4].

A game set in the same world, Kingdoms of Amalur: Reckoning, would come first, published by Electronic Arts[1]. The bet was that it would sell well enough, and bring in enough private money, to carry the studio until the big game was done.

What happened

Nov 2010The Rhode Island Economic Development Corporation places about $75 million in bonds for 38 Studios and lends $50 million of the proceeds to the company.[3][8]
2011Schilling moves the company from Massachusetts to Providence, as the loan required.[1][2]
Feb 7, 2012Kingdoms of Amalur: Reckoning comes out through Electronic Arts. It goes on to sell over 1.2 million copies.[1][2][5]
May 2012A $1.125 million check to the state agency bounces, then clears on May 18 after the studio reportedly suspends payroll. Governor Lincoln Chafee says, "There's not going to be any money from the state."[1][9]
Jun 7, 201238 Studios files for Chapter 7, owing $150.7 million to 1,079 creditors, $115.9 million of it to the state agency. Nearly 400 developers are out of work.[1][2][6]
Nov 2012Rhode Island sues Schilling and others over the deal.[10][11]
Dec 2013The studio's intellectual property is auctioned for $320,000. The Amalur rights find no buyer.[5]
Mar 7, 2016The SEC charges the state agency, Wells Fargo Securities and others with fraud in the bond offering. Two former agency executives settle without admitting or denying the allegations.[3]
Jul 29, 2016The attorney general and state police say there will be no criminal charges.[12]
Feb 1, 2017A proposed $16 million settlement with Hilltop Securities brings the state's civil settlements to about $61 million.[7][8]
2017 – 2019The state agency settles with the SEC for $50,000. A court orders Wells Fargo Securities to pay $812,500, and the SEC's claims against its banker are dismissed.[8][13][14]

The kill shot

It spent like a big studio before its first game earned like one, on money that was short of what its own plan needed.

The SEC alleged that 38 Studios had said it needed at least $75 million to make its game, but the bond documents did not tell investors that the $50 million loan left it short[3][4]. "We allege that the RIEDC and Wells Fargo knew that 38 Studios needed an additional $25 million to fund the project," said SEC enforcement director Andrew Ceresney[3].

The rest had to come from somewhere else, and it didn't. Schilling said a publisher had been close to putting $35 million into an Amalur sequel before it pulled out, and the studio saw little of the first game's sales because they went to pay back EA's advance[15]. When the money ran out, the staff got no warning. "I bombed on that one in epic fashion," Schilling said.[15]

Red flags ignored

  • Short before it started. According to the SEC, the studio had said it needed at least $75 million for its game; it got a $50 million loan.[3]
  • Repaid from games that didn't exist. The bonds were to be paid back from revenue of games the company had yet to make.[4]
  • The move was the price. The loan required the studio to relocate from Massachusetts to Rhode Island.[2]
  • Hidden fees on the deal. The SEC said Wells Fargo got about $400,000 from bond proceeds through a side arrangement that investors were not told about.[3]
  • Late on the first payment. The first payment to the state was 17 days late.[1]

The cost

38 Studios owed $150.7 million to 1,079 creditors when it filed[6], and nearly 400 developers lost their jobs[2]. Schilling said he had put more than $50 million of his own money into the company[15].

Rhode Island carried a moral obligation of about $88 million on the bonds, past and future payments included[7]. Its lawsuits recovered about $61 million, nearly 70 percent of that[7], and the 2013 auction of the studio's games and trademarks raised $320,000[5].

The inversion

Don't spend on the sequel before the first one pays. Fund the whole plan before you start, and if the money only covers part of it, cut the plan, not the disclosure.

What survived

The settlements. The state agency settled with Hilltop Securities, formerly First Southwest, for $16 million; Wells Fargo Securities and Barclays for $25.625 million; Adler Pollock and Sheehan and others for $12.5 million; Antonio Afonso Jr. and Moses Afonso Ryan for $4.4 million; and Schilling, Thomas Zaccagnino, Richard Wester, Jennifer MacLean and their insurer for $2.5 million[7].

The games. The Big Huge Games trademark and the Rise of Nations and Rise of Legends properties sold at the 2013 auction[5]. The SEC case ended with a $50,000 settlement from the state agency[8], an $812,500 penalty from Wells Fargo Securities that went to bondholders[13], and summary judgment for the banker, Peter Cannava, in June 2019[14].

References

  1. ^ “38 Studios files for Chapter 7; owes creditors at least $100 million”. Bloomberg via The Boston Globe, June 7, 2012. The Chapter 7 filing, the $75 million bonds and about $49.5 million received, the move from Massachusetts to Providence, the May 18 payment 17 days late, Amalur through EA and Copernicus.
  2. ^ “38 Studios announces bankruptcy”. MCV/Develop, June 7, 2012. Founded by Schilling, the relocation condition, nearly 400 developers out of work, Amalur sales over 1.2 million, Copernicus.
  3. ^ “SEC Charges Rhode Island Agency and Wells Fargo With Fraud in 38 Studios Bond Offering”. U.S. Securities and Exchange Commission, press release 2016-37, March 7, 2016. The $75 million bonds and $50 million loan, the undisclosed funding shortfall, Ceresney's quote, Wells Fargo's undisclosed $400,000, the Stokes and Saul settlements.
  4. ^ “SEC Charges Rhode Island Agency and Wells Fargo with Fraud in 38 Studios Bond Offering”. U.S. Securities and Exchange Commission, Litigation Release 23480, March 7, 2016. Loan and bond repayments to come from revenue of games the company planned to make; the $50 million loan.
  5. ^ “Amalur IP remains unsold after 38 Studios auction”. IGN (Mike Mahardy), December 13, 2013. The $320,000 auction, the unsold Amalur rights, the sold Big Huge Games and Rise of Nations properties, Amalur's February 7, 2012 release.
  6. ^ “38 Studios files for bankruptcy”. GamesIndustry.biz (David Radd), June 7, 2012. $150.7 million owed to 1,079 creditors, $115.9 million to the state agency.
  7. ^ “Rhode Island Commerce Corporation Reaches $16 Million Dollar Settlement with First Southwest Company in 38 Studios Lawsuit”. State of Rhode Island, press release, February 1, 2017. The $16 million Hilltop settlement, about $61 million in total, the $88 million moral obligation, and each earlier settlement.
  8. ^ “RICC Agrees to Settle SEC Fraud Charges in 38 Studios Case”. The Bond Buyer (Jack Casey), March 29, 2017. The November 2010 placement, the state agency's $50,000 SEC settlement without admitting or denying.
  9. ^ “Kingdoms of Amalur studio saved, for now”. Eurogamer (Fred Dutton), May 18, 2012. The $1.125 million check that bounced and then cleared, suspended payroll, Chafee's quote.
  10. ^ “Prosecutor closes 38 Studios investigation, blames police”. The Boston Globe, February 3, 2017. The state's lawsuit filed in 2012.
  11. ^ “38 Studios”. Wikipedia. Supplementary: the November 2012 lawsuit date.
  12. ^ “No Criminal Charges In 38 Studios Gaming Debacle”. GBH News (Isaiah Thompson), July 29, 2016. No criminal charges after the attorney general and state police investigation.
  13. ^ “Court Penalizes Wells Fargo Securities for Disclosure Failures in 38 Studios Bond Offering”. U.S. Securities and Exchange Commission, Litigation Release 24428, March 20, 2019. The $812,500 penalty against Wells Fargo Securities, paid to the bond trustee for bondholders.
  14. ^ “Banker Cannava claims victory over SEC in 38 Studios case”. The Bond Buyer (Kyle Glazier), June 12, 2019. Summary judgment dismissing all SEC claims against Peter Cannava.
  15. ^ “38 Studios head Curt Schilling owns up to his mistakes”. Eurogamer (Jeffrey Matulef), June 22, 2012, citing The Boston Globe. Schilling's more than $50 million, the lost $35 million sequel deal, EA's advance, no warning to staff and his quote.
Categories: Games · Studio · Bankrupt in 2012 · Cause of death: underfunded · From the public record