Chafee, Schilling trade barbs on blame

PROVIDENCE, R.I. (WPRI) - Governor Chafee defended his handling of the 38 Studios crisis on Tuesday against accusations by Curt Schilling that Rhode Island's leader scared off investors who were ready to help his struggling game firm.

"Of course I wanted to return the investment of the taxpayers of Rhode Island," Chafee told reporters at the State House. "But I have to be honest." He argued private investors make decisions based on a company's fundamental health, not the comments of a public figure.

Schilling charged over the weekend that Chafee exacerbated his company's problems by revealing details about its business plans. "The governor is not operating in the best interest of the company by any stretch, or the taxpayers, or the state," the former Red Sox pitcher told The Providence Journal.

• Nesi's Notes: Full coverage of 38 Studios
• PDF: EDC fact sheet on 38 Studios
• Timeline: How the 38 Studios deal unfolded

Chafee and Schilling traded barbs as turmoil continued at the R.I. Economic Development Corporation, the quasi-public state agency which granted 38 Studios the $75 million taxpayer-guaranteed loan in 2010. Chafee confirmed Tuesday the resignation of EDC board member J.L. “Lynn” Singleton, president of the Providence Performing Arts Center.

Singleton voted in favor of the 38 Studios deal in 2010. His resignation follows those of Keith Stokes, the EDC's executive director, and Helena Foulkes, its vice chair, who was placed on the board by Chafee last year.

Chafee acknowledged there was little new to say about the situation at 38 Studios, which laid off all its employees Thursday and defaulted on its loan deal for a second time by failing to warn the state. EDC lawyer David Gilden said the state could send in a second team of auditors to review the company's records as soon as Wednesday.

Auditors from Braver PC are already reviewing whether 38 Studios has spent all $49.5 million of the proceeds it received from the $75 million EDC loan. "The company has been cooperative so far," Gilden said. There has also been discussion about the Rhode Island State Police investigating what happened with 38 Studios.

Chafee rejected accusations by Treasurer Gina Raimondo and others that his administration failed to monitor 38 Studios, saying its mandatory monthly financial reports showed nothing amiss. "We're going to see that the red flags just were not there - they were making their benchmarks," the governor said.

While the governor admitted 38 Studios' future looks "bleak," he reiterated that Rhode Island is willing to change its status in line for repayment from the company if that's the price to lure a new investor. Gilden refused to say whether the two sides considered a prepackaged bankruptcy filing prior to last week's mass layoffs.

Tax Administrator David Sullivan disputed Schilling's contention that the state reversed course on 38 Studios' application for more than $8 million in tax credits, saying the state never finished verifying whether the company was eligible for tax credits. WPRI 12 reported the company may be ineligible because it's incorporated out of state.

Richard Licht, Chafee's director of administration, confirmed in a short interview with WPRI.com that representatives from 38 Studios met with him late last year to notify the state they would be seeking the tax credits. Licht said they did not give any indication that the firm was facing a potential cash-flow crunch.

Investors are getting more skittish about the situation. The yield on EDC bonds backed by 38 Studios jumped from 3% on April 10 to 4.852% on May 23, a sign of rising risk, according to data compiled by Bloomberg.

Separately, Fortune magazine reported that half a dozen Boston venture capitalists who spurned Schilling in years past have not been approached by him since the current crisis began. The gaming news site Joystiq reported a sequel to 38 Studios' first game, "Kingdoms of Amalur: Reckoning," was in the works as of last week but that Electronic Arts was not planning to publish it.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi