All of 38 Studios' finances probed

Updated: June 8, 2012, 5:08 PM ET
Associated Press

PROVIDENCE, R.I. -- The state of Rhode Island is working to determine how much it stands to lose in a $75 million loan guarantee deal for former Red Sox pitcher Curt Schilling's video gaming company after its bankruptcy filing this week.

Officials believe that the state will be first in the line of creditors to 38 Studios, and that the company's assets could be worth a substantial amount. But they don't yet know how much taxpayers might have to pay to make good on a guarantee economic development officials once described as being well worth the risk.

Federal and state authorities have launched probes into "all financial transactions" of 38 Studios, the head of the Rhode Island state police said Friday.

Col. Steven O'Donnell said that state police, the state attorney general, the U.S. attorney in Rhode Island and the FBI are investigating, but he didn't elaborate. The U.S. attorney's office confirmed the investigation but would not provide details.

The Providence-based company filed for bankruptcy Thursday in Delaware. It owes $150.7 million and has assets of $21.7 million, according to court filings. In a separate bankruptcy filing, 38 Studios Baltimore, a sister operation, reported owing more than $121.4 million and having assets of more than $335,000.

38 Studios' biggest creditor is Rhode Island, to which it owes $115.9 million in debt from state-backed bonds, interest on the bonds and fees.

Schilling, who also pitched for Baltimore, Houston, Philadelphia and Arizona and won the World Series three times, moved 38 Studios from Massachusetts to Providence in 2010 after the state's economic development agency approved the $75 million loan guarantee. The company was supposed to bring hundreds of jobs and mean millions of dollars in tax revenue.

But now officials are trying to determine the state's liability. Jonathan Savage, an attorney for the economic development agency, said Thursday that the company's assets could have a "substantial" value.

State Revenue Director Rosemary Booth Gallogly also said the state might consider refinancing the 38 Studios bonds to save money. The state has some of the bond sale proceeds set aside in a reserve account to pay interest and fees for about a year.

In the meantime, the state will work to recoup whatever it can during 38 Studios' bankruptcy proceedings, according to Christine Hunsinger, a spokeswoman for Gov. Lincoln Chafee.

"I don't think anybody can question the governor's commitment to protecting the taxpayer's dollar," she said Friday. "You'll see the governor be a very strong champion."

Schilling did not respond to a message left for comment Friday.

The bankruptcy filings show that former 38 Studios employees are also owed millions, and that several whose homes in Massachusetts never sold under a relocation program appear to be on the hook for the mortgages.

38 Studios contracted with MoveTrek Relocation of Massachusetts to manage the relocation program. MoveTrek made mortgage payments on the employees' behalf and offered help selling the homes, according to the filings. But seven of the homes never sold, a list of the employees and properties shows.

Doug Mohns, CEO of MoveTrek, said Friday that his firm continued to make the mortgage payments through June 1, even though 38 Studios was behind in providing the funds.

"We were asked to continue making mortgage payments even though they had not paid invoices for a few months," he said.

MoveTrek believed 38 Studios was owed money from the state, including millions in tax credits it had been seeking.

Mohns said his firm is no longer making the mortgage payments, and that some of 38 Studios' former employees have assumed double payments on homes in Rhode Island and Massachusetts.

He said there were offers on "two or three" of the properties but that 38 Studios could not pay the real estate commissions and fees; his firm is now trying to salvage some of those sales, he said.

In total, the outstanding amount owed on the mortgages is $1.94 million, while the estimated sales price of the properties is $1.77 million, according to the bankruptcy filings. With commission and fees, 38 Studios estimates its liability to be around $304,000.

38 Studios said in the filings it doesn't own any of the properties but has "certain contractual obligations" to purchase them under the relocation agreement. The filings note that MoveTrek has cited "potential credit and title issues for the participating employees."

MoveTrek is itself owed $223,000, including for mortgage payments already made and the work of suppliers it contracts with to manage the properties.

One former 38 Studios employee listed as having an outstanding mortgage balance on a property in Maynard, Mass., of $508,000 -- and whose home is expected to sell for $415,000 -- declined to comment.

An employee whose mortgage balance on a Marlborough, Mass., property is listed as being $261,000 -- with an expected sales price of $140,000 -- also declined to comment.

Some employees were given a relocation stipend, and arranged moving services on their own. Others used Atlas Van Lines, which was to be paid by 38 Studios.

Atlas is owed more than $116,000, according to the filings, and the moving company has been contacting employees by letter demanding payment.


Copyright 2012 by The Associated Press

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