As a Red Sox fan, Curt Schilling is an iconic player to me, leading the team to break the curse of the Bambino. I don’t think that leads to him being a successful entrepreneur or video game developer. Nonetheless, he invested a great deal of his own wealth and raised a big pile of capital to create 38 Studios and start production of a massive multi-player video game. Despite his greatness as a pitcher, he was not able to close the deal and publish the game. The company folded and laid off its employees.
Now the Securities and Exchange Commission has brought charges of securities fraud in connection with the raising of capital.
Rhode Island was looking to bring jobs to the state and lured 38 Studios to relocate to the Ocean State. The Rhode Island Economic Development Corporation agreed to issue bonds and raise $50 million of capital for 38 Studios through a $75 million offering. The remaining $25 million was for offering expenses and a reserve fund.
The EDC hired Wells Fargo as the placement agent to sell the bonds. However, Wells Fargo had already been hired by 38 Studios to raise capital. According to the SEC complaint, the bond offering documents should have disclosed more about Wells Fargo’s role and how much it was getting paid.
The other problem was that the bond offering was not enough money to finish production of the video-game. The original projection was for the full $75 million to go to 38 Studios. By only getting $50 million, it had a capital shortfall. It would run out of money by the end of 2011. According to the SEC complaint, the offering documents should have disclosed this shortfall and did not.
38 Studios managed to last longer than projected. It did not default on the bond payments until the Spring of 2012. Then it filed for bankruptcy in June 2012.
The SEC does not spell it out, but clearly the myth of Curt Schilling was the selling point for the deal. Wells Fargo’s ability to sell the bonds was based on the myth of Curt Schilling.
The ability of 38 Studios to successfully produce a videogame was a myth. The job creation behind the bond offering was myth. According to the SEC suit and various other lawsuits it looks like a lot of people thought they could make money from the myth of Curt Schilling.
The first tenet of our securities laws is disclosure. Making money from the myth is not inherently illegal. Failing to disclose is.
Sources:
- SEC Charges Rhode Island Agency and Wells Fargo with Fraud in 38 Studios Bond Offering
- SEC Complaint
- Wells Fargo Sued For Being A (Shady) Shill For Curt Schilling by Bess Levin in Dealbreaker
- 38 Studios: Red flags seen early in bond plan by Paul Grimaldi
- Various Lowlights From Curt Schilling’s Failed 38 Studios [UPDATED] by Diana Moskovitz
- Documents reveal the secret beginnings of the 38 Studios deal