38 Studios insider’s email urged execs not to disclose

PROVIDENCE, R.I. (WPRI) – 38 Studios’ top board member urged other company insiders not to highlight its precarious finances when it was negotiating with Rhode Island leaders, a court document shows.

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 Curt Schilling’s game 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, who played a central role in the company’s financial decisions, sent the email to 38 Studios CEO Jen MacLean; 38 Studios Chief Financial Officer Rick Wester; and Michael Corso, a tax-credit broker and associate of former House Speaker Gordon Fox who was closely involved in crafting the deal.

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 among hundreds of documents filed as part of the state’s lawsuit against the deal’s architects.

Zaccagnino sent the email in response to a message from CEO MacLean in which she expressed concern that the EDC was not planning to give the company the entire $75 million in proceeds from the loan. Both were 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 also wrote 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 game, Project Copernicus.

“Defendants MacLean, Zaccagnino and Wester reviewed the Term Sheet carefully and knew or should have known that it contained the false representation that the net proceeds would be sufficient and omitted to state the converse that the net proceeds would not be sufficient,” the state’s lawyers argued in their legal complaint, which does not mention that Corso was also part of the email chain.

The EDC agreed to guarantee the $75-million loan to 38 Studios later that month, only to see the company collapse into bankruptcy in June 2012. The Chafee administration quickly sued 14 individuals and firms involved in crafting the deal in a bid to recoup some of the money taxpayers owe the 38 Studios bondholders.

At the heart of the state’s lawsuit is the question of whether former Gov. Don Carcieri and EDC board members were misled about 38 Studios’ finances when they agreed to the deal. A trial date has yet to be set, though lawyers on both sides met again Monday for a pre-trial hearing.

Prior to the July 1 email exchange, Zaccagnino had already expressed concerns to EDC officials about how much 38 Studios would actually receive from the loan proceeds.

“We have been open book about our risks and requirements,” he wrote in a June 15 email to Michael Saul, then the EDC’s deputy director and now another defendant in the lawsuit, disclosed by the state. “Specifically, we were upfront about the requirement to be fully capitalized with the 75MM at closing.”

Zaccagnino also wrote that “providing full funding of the 75MM at closing” was a “clearly articulated and understood requirement from day one.” Saul wrote in an email the same day to Robert Stolzman, then the EDC’s general counsel and another defendant in the lawsuit, that “EDC understood this, was committed to work toward it but never promised it.”

The lawsuit alleges the under-funding problem was also discussed at a June 22, 2010, meeting at the EDC’s offices where various ways for 38 Studios to make up the shortfall were discussed by a number of the defendants.

In a sworn affidavit dated Oct. 14, 2012, 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 separate affidavits, three other 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 that she reviewed showed the company would have positive cash flow of $13.3 million in 2012, but was later informed by state lawyers the company was actually on track to have negative cash flow of $3.8 million that year if accurate information was used.

“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.

However, a lawyer for Keith Stokes, the former EDC executive director who oversaw the 38 Studios deal and is another defendant in the lawsuit, argued in a court filing last year: “The [EDC] Board was acutely aware that the capital needs of 38 Studios where [sic] in excess of $125MM as acknowledged in the 2010 EDC Inducement Resolution[.] The Board also knew that the net proceeds of the EDC Loan would be less than $75MM.”

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

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