A top board member of 38 Studios urged company executives in 2010 not to highlight its shaky financial condition when it was negotiating with Rhode Island leaders for a $75 million loan guarantee, according to newly released court documents in the ongoing lawsuit between the state of Rhode Island and various individuals related to the deal.
Thomas Zaccagnino, at the time 38 Studios’ vice chairman and the lead director on its board, made the comment in an email he sent July 1, 2010, as officials at the company reviewed the proposed terms of a $75-million loan guarantee from the R.I. Economic Development Corporation.
"I really do not think we should highlight the fact that we might be under capitalized…wont go over well with the staff or board," Zaccagnino wrote in the email.
Zaccagnino sent the email to former CEO Jen MacLean; 38 Studios Chief Financial Officer Rick Wester; and Michael Corso (who was lobbying government officials within the state), a tax-credit broker, lawyer, and associate of former House Speaker Gordon Fox who was deeply involved in helping to put the deal together. Of those four, all but Corso have been sued by the Chafee administration for helping to put together the 38 Studios loan guarantee. The email was part of a cache of documents filed as part of the state’s lawsuit against the principals in the loan deal.
The email was in response to MacLean after she expressed concern that the EDC was not planning to give the company the entire $75 million in proceeds from the loan. Both were apparently reacting to a revised term sheet they’d just gotten from the EDC laying out the proposed structure of the taxpayer-backed transaction.
MacLean told Zaccagnino, Wester and Corso that the company was "not expecting to lose as much as $10MM net," and that she was not comfortable telling Rhode Island leaders that the net proceeds from the loan would be enough cash for 38 Studios to finish its MMO game, Project Copernicus. The EDC agreed to the $75 million loan to 38 Studios later that month, only to see the company collapse into bankruptcy nearly a year later.
The lawsuit filed by the EDC asserts that former Gov. Don Carcieri and EDC board members were misled about 38 Studios’ finances when they agreed to the deal. Affidavits from the former Republican Governor and EDC board members backs up the claim that no one in the Rhode Island government knew of 38 Studios' financial situation prior to approving the loan deal.
In a sworn affidavit dated Oct. 14, 2012, former Gov. Carcieri stated he was under the impression that the proceeds from the $75 million loan guarantee, “together with other cash available or to become available to 38 Studios … would be sufficient to fund the so-called MMOG game (Project Copernicus) to completion.”
In three separate affidavits, EDC board members at the time – Cheryl Snead, Donna Cupelo and George Nee – also said they were led to believe 38 Studios would have enough money to finish its game if the deal went through. Cupelo said financial projections from 38 Studios showed the company would have positive cash flow of $13.3 million in 2012, but was later told by state lawyers the company would have negative cash flow of $3.8 million that year.
“At no time prior to the closing and initial funding of the loan was I informed by anyone that the net proceeds of the bond issue would be insufficient, in combination with the revenue from other sources that 38 Studios projected, to relocate 38 Studios to Rhode Island, complete production of Copernicus, and capitalize the company’s growth and expansion in Rhode Island,” Cupelo said in the affidavit.
We will continue to follow this story as it develops. The lawsuit has not been given a trial start date, mostly due to legal wrangling over documents and affidavits from other principles in the deal. Another hearing in the case is set for next Monday.