Exclusive: Carcieri breaks his silence on 38 Studios

PROVIDENCE, R.I. (WPRI) - Former Gov. Donald Carcieri says he accepts responsibility for pushing through a $75 million taxpayer-guaranteed loan to 38 Studios but he still has serious questions about whether there was adequate oversight of Curt Schilling's game company once he left office.

Carcieri broke his silence about the Schilling deal on Thursday in an exclusive interview for Sunday's edition of WPRI 12's Newsmakers, after otherwise declining to discuss the matter since 38 Studios' problems burst into public view on May 14. The company filed for bankruptcy three weeks later.

"I will take responsibility for approving the deal," Carcieri said. "When I left office ... it was just beginning, so all I'm saying is look, I had no knowledge and no input and no involvement after that, and it looks to me from the outside that there were a lot of things that might have been able to be done along the way here to salvage 300 jobs."

He continued: "Three-hundred people are out of work and part of that blame - and a big part of that blame - has to go to Schilling and his management team. There's no doubt about it. But the question is, the state was heavily committed to this - at least when I was in office, we were - so you want to help."

Carcieri called it "shocking" that his successor Gov. Lincoln Chafee and other state leaders were in the dark about 38 Studios' problems. "It looks like all of a sudden in April of this year, [the R.I. Economic Development Corporation] and the governor and the speaker find out they're out of money. There is no excuse for that - none whatsoever," he said, adding later he was "surprised that this was a surprise."

Schiling: Ex-gov mostly 'spot on'

Schilling reacted to Carcieri's WPRI interview on Twitter Thursday evening as part of a lengthy exchange with a group of Rhode Island journalists. "For the most part he's spot on," the former pitcher wrote of Carcieri, arguing once again that Chafee never "lifted a finger to help" 38 Studios.

Chafee dismissed his predecessor's comments, saying it was "insanity" for him to agree to provide backing for an untested company with an inexperienced leader.

Carcieri, a Republican, repeatedly defended the four months of due diligence done on 38 Studios by the EDC's 12-member board, which he chaired, as extensive and comprehensive. He also suggested the state should consider defaulting on the $75 million in 38 Studios bonds rather than have taxpayers pay off investors.

Carcieri stopped short of apologizing to Rhode Islanders for championing the controversial deal, which grew out of a conversation between the then-governor and the former Red Sox ace at a fundraiser in March 2010, where Schilling expressed his desire to relocate the company from Massachusetts. Carcieri encouraged Schilling to contact the EDC.

"I'll take responsibility for having it approved on my watch - there's no doubt about that - and I'll say I was a supporter," he said, noting that only one of the 12 business leaders on the EDC board voted against the deal. "Everybody had high hopes that this could be the nucleus of something for a whole new industry in our state."

"You know, regret what happened? Sure," Carcieri said. "Nobody wanted this." But he still doesn't regret championing the deal two years ago: "You make the best decision you can at the time."

Carcieri questions Chafee moves

Carcieri declined to echo Schilling's sharp criticism of Chafee, who vehemently opposed the deal as a candidate. But the former governor suggested his successor could have done more to monitor 38 Studios and perhaps salvage it using tax credits, which he said he would have considered if he was still in charge.

"There was a lot of time," Carcieri said. "Nobody should have been surprised in April that they were running out of money. That's something that could have been seen six, eight months before."

"I have the same questions most people have," he said. "What was going on? What was the state or EDC doing trying to help if they needed more financing, which clearly they did, to complete the game?"

Carcieri hasn't spoken with Schilling since 38 Studios collapsed, and he dismissed suggestions that he overlooked red flags because he was star-struck by the All-Star pitcher, noting many former pro-athletes have been successful in business. "None of that factored into the equation at all," he said.

"When a company fails, it's the leadership that's responsible," Carcieri said of Schilling and 38 Studios' executives. "What I don't know, and the question is, did it fail because it just needed some more money or did it fail because they didn't know what they were doing and couldn't produce a game? That doesn't look like what happened."

Schilling needed 'other plans'

38 Studios sold 1.3 million copies of its first game released in February, which Carcieri said demonstrated the company's potential, though executives there had expected to sell more than 2 million copies. The release of its second game, which was being developed with money from the Rhode Island loan, had been pushed back until June 2013.

"This doesn't appear to be a failure of a company that didn't know what they were doing; it's a failure in that it wasn't financed adequately to get to completion of the big game, which was really where the money was," Carcieri said. The company "should have had other plans in the works ... to raise additional capital to get the second game done."

Carcieri was also surprised to learn during the interview that 38 Studios' overhead costs topped $4 million a month before it collapsed, at first dismissing the number as implausible before learning it had been corroborated by internal financial documents. He said he hasn't been contacted by law enforcement agencies, which are probing the company's finances.

Carcieri largely absolved state lawmakers from blame for the 38 Studios loan, reiterating comments by House Speaker Gordon Fox and others that they only approved the loan program. But he did say they should have been aware the Schilling deal was being discussed.

Disagrees with Raimondo on bonds

More surprisingly, Carcieri said Chafee and Treasurer Gina Raimondo are wrong to promise that Rhode Island taxpayers will pick up the estimated $100 million tab to pay investors back for the 38 Studios loan. He said the transaction involved high-interest moral obligation bonds, not traditional general obligation bonds, and therefore a default should be considered.

"I think the state needs to look at it," Carcieri said. "This was not an unequivocal obligation of the taxpayers. ... The investors in those bonds knew that there was a risk here that the state was not completely obligated - that's why it's called a moral obligation. ... All I'm saying is this is not an absolute, slam-dunk obligation of the state."

Chafee and others have warned the state could be frozen out of the bond markets if it defaults on the 38 Studios bonds. "I don't believe that's necessarily true at all," Carcieri said. "You have to leave the door open, and I think there's a lot of work that's got be done before that's concluded."

Carcieri said it's been tough to sit on the sidelines as critics pounded him over the deal. Asked why he decided to break his silence now, he said: "I felt like it's time to try and put perspective on this and begin to bring [to light] some facts and some of the misinformation. ... Part of me just believes, in my heart of hearts, that more could have been done to save this company."

"But I don't know that," he said. "Maybe everyone was working their guts out to do that."

Carcieri, who served as governor from 2003 to 2011, said he spent "eight years on umpteen fronts" trying to improve Rhode Island's economy, which was in a slump throughout his second term. Asked whether he fears his tenure will be remembered most for 38 Studios, Carcieri replied: "I hope not."

Tim White ( twhite@wpri.com ) is the Target 12 investigative reporter for WPRI 12 and Fox Providence. Follow him on Twitter: @white_tim

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