Thursday, July 5, 2012
38 Studios slow to allow audits
PROVIDENCE, R.I. -- Auditors for Rhode Island tried unsuccessfully for days to examine the financial records of former Boston Red Sox pitcher Curt Schilling's video gaming company as it teetered on the edge of bankruptcy, documents show.
Emails obtained by The Associated Press under a public records request show that David Gilden, an attorney for the state Economic Development Corp., made a series of frustrated attempts in May to get its auditors access to 38 Studios' general ledger, email and file servers.
Schilling's firm -- which was lured to Rhode Island from Massachusetts in 2010 with a $75 million loan guarantee approved by the development agency's board -- laid off its entire staff May 24. Earlier in the month, 38 Studios' board approved filing for bankruptcy protection.
As the company's troubles spilled into public view, Gov. Lincoln Chafee accused 38 Studios of "stonewalling" -- even as the firm sought frantically to secure state film tax credits that it apparently hoped to sell to raise money to stay afloat.
"It was so hard to get information from them," Chafee told The Associated Press this week. "Nothing was forthcoming. There were so many mixed messages. Everything kept changing."
Chafee was a vocal opponent of the loan guarantee on the campaign trail in 2010, but said he became the company's "biggest cheerleader" once the deal was done.
Schilling has accused the governor of having an "agenda" and making comments that contributed to his firm's demise, even though the 38 Studios board had taken the first step toward bankruptcy by the time Chafee said anything publicly about the company's troubles.
38 Studios filed for bankruptcy protection June 7. The company and an affiliate, 38 Studios Baltimore, together owe creditors about $272 million and had combined assets of about $22 million, according to bankruptcy filings. Rhode Island is by far the largest creditor.
State and federal authorities have opened investigations into the firm's finances, but have declined to comment on the details.
A series of emails flew back and forth between Gilden and top 38 Studios officials as Deloitte tried to begin the audit, which he said was provided for under the loan agreement. Gilden requested on May 25 that the auditors be allowed access that day or the next.
Gilden wrote to Chief Operating Officer William Thomas and Director Thomas Zaccagnino on May 26, saying he hadn't heard back about access.
Thomas replied he was working with very limited staff and needed to arrange to hire back some employees to give the auditors access; he said he was hampered by the long Memorial Day weekend.
In a May 27 email, Gilden said EDC required "access immediately" and wanted to know who was providing security at the company's Providence headquarters -- where the servers and documents were kept -- and what the "status" of the servers was.
Thomas said he believed the company had taken appropriate security steps. He said someone from the state could inspect the premises that day for "security effectiveness" but that he didn't expect to have the "necessary technical staff" to make the financial records available for several days.
On May 28, Memorial Day, a security official hired by the state toured the facility and viewed the servers, according to copies of the emails.
On May 29, Gilden again wrote to Thomas and Zaccagnino, saying the auditors were "standing by." Thomas replied that he wanted more specifics on what they wished to access.
"We will cooperate with your request once we totally understand the specifics of your request, have the appropriate technical/administrative/financial capabilities available to meet your needs," Thomas said.
Gilden on May 30 outlined what the state wanted and reiterated that auditors were prepared to begin their work that morning.
Thomas replied that the company was trying to secure funds for the audit -- the 2010 financing deal required 38 Studios to pay for it -- and was seeking an opinion from its legal counsel.
The next day, Gilden laid down a deadline.
"Again, while I understand the unusual circumstances with respect to your staffing issues, it has been several days now since we requested access for our auditors," he said. "Another day's delay, notwithstanding your staffing issues, will in our view constitute a denial of our right to audit, particularly when our auditors can make a copy of the general ledger in a matter of hours and continue their work off site."
He added: "We need to be able to report today that we are proceeding with the auditing."
That afternoon, apparently after a conference call on the matter, Gilden sent Thomas another email, saying an auditor was standing outside 38 Studios.
EDC spokeswoman Judy Chong didn't comment on when auditors got access and declined to discuss the May standoff. Thomas said he had no comment.
Christine Hunsinger, a Chafee spokeswoman, said the governor's top priority has always been to protect the taxpayers' interest.
In this case, she said, "There were steps taken to ensure that stuff didn't walk out the door."