38 Studios defaults again; RI worried

PROVIDENCE, R.I. (WPRI) - 38 Studios defaulted on its agreement with Rhode Island for a second time this week when it laid off its entire work force without notifying the state government, Governor Chafee said Friday.

38 Studios has 30 days to fix the default and is ineligible for state tax credits until it does so. The news came less than 24 hours after layoffs hit Curt Schilling's embattled video-game company, which moved from Massachusetts to Rhode Island last year in exchange for a $75 million taxpayer-guaranteed loan.

Communication between 38 Studios and the state continued to be spotty, officials said. Jonathan Savage, a local bankruptcy lawyer advising Chafee, spoke with 38 Studios executives on Thursday night and Friday morning. "I'm not optimistic," the governor said. "In fact, I'm very pessimistic."

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

A handmade “We love Curt” sign could be seen on the door outside 38 Studios as employees entered and exited Friday. The Verge reported some employees are now receiving mortgage notices after the company failed to sell their former homes. Attracta Pryor, a recruiter for Atrion Networking, was standing outside 38 Studios.

“We operate on the same sort of technology space that 38 Studios does, but we’re a networking company," she said. "So I’m looking to hopefully take some of their top talent and bring them over to Atrion so that they don’t leave the state." Pryor added that she's "had a lot of luck so far."

R.A. Salvatore, a fantasy writer hired by Schilling to consult on 38 Studios' games, wrote on Daily Kos that the game the company was developing "would blow you away" and said it's "much further along than is being reported." Chafee said earlier this week the game was not going to be ready until June 2013.

Chafee called the situation at the video game company “dire" but continued to say the state will do everything possible to salvage whatever money it can. “We’ll have to sort through how we recoup any of the losses that we might have, and certainly pursue that very, very aggressively," he said.

The governor was cagey about whether Schilling was having success luring outside investors in recent weeks, though he said he was open to changing the structure of 38 Studios' debt payments if it would have saved the firm. He said Ketih Stokes, who resigned as the EDC's executive director last week, did not inform him last August when he signed a revised, less stringent monitoring agreement between the agency and 38 Studios.

In response to critics who say Chafee didn't monitor the deal closely enough, spokeswoman Christine Hunsinger said: "Governors often rely on their staffs to do what they're tasked with." Rhode Island taxpayers could spend nearly $90 million on principal and interest payments if 38 Studios can't pay off its loan.

Chafee suggested he wants a forensic audit of 38 Studios' finances to get a better sense of what went wrong. He refused to say what the state is doing to secure documents but said he has "confidence" nothing will happen to the paperwork. He also said he doesn't have any evidence that laws were broken.

38 Studios and Schilling have not responded to requests for comment since its financial crunch burst into public view earlier this month. The former Red Sox ace limited his public comments to a Facebook post saying: "Thank you to everyone sending prayers and well wishes to the team and families of 38 Studios.”

“I’ve tried to be diplomatic in the frustration that I’ve had with 38 Studios," Chafee said. "I don’t know when my ability to be diplomatic ceases. But I’d like straight answers, and it’s been difficult getting straight answers."

Meanwhile, turmoil continued to roil the EDC after the resignations of Stokes and Helena Foulkes, who stepped down Thursday as vice chair of its board of directors due to differences with Chafee, who'd appointed her just last year.

The governor said he will not reappoint three board members whose terms expired in February: Rhode Island Hospital CEO Timothy Babineau, Rhode Island AFL-CIO President George Nee and Collette Vacations' Dan Sullivan Jr. He offered no specifics about other members of the board.

A rapid response team from the R.I. Department of Labor and Training was also at 38 Studios on Friday. DLT Director Charles Fogarty said only a small number of 38 Studios employees have applied for jobless benefits so far and he expects most will quickly find other employment because of their advanced skills.

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

Courtney Caligiuri, Sean Daly and Nneka Nwosu contributed to this report.