The 38 Studios Company Faces Serious Financial Problems

The video game company issues a bad check and faces financial ruin

It has been reported that a check worth $1.125 million issued by the 38 Studios video game company has been returned unpaid.  The reason given by the bank was that there were insufficient funds to cover the payment which was accumulated as a result of a fee owed to the state of Rhode Island. The news has seriously damaged the credibility of the company in question.

The company officials had made inquiries about the possibility of sending the money electronically but instead a check was hand-delivered. Governor Lincoln Chafee of the state said that the company had defaulted on the payment the month before. Curt Schilling (a former Red Sox pitcher) owns the troubled company. The state is demanding settlement of the debt with costs.

Early warning signs that the video game company was failing

In June 2011, it became clear that the company was in trouble. At the time the company had moved from Massachusetts to Rhode Island. It was offered $75 million in loans as an incentive. In return it was expected that 38 Studios would bring hundreds of jobs to the state struggling with unemployment and the national recession. A regulatory filing made in March indicated that the video game company was still compliant.

By the 24^th of June the company had issued a warning to the effect that they required more funding in order to implement future operations. According to the report “the company will require additional financing to fund future operations… [there is] substantial doubt about the company’s ability to continue as a going concern.” [1]Critics argue that this should have sent warning signs to the Governor and his team.

The loan scheme was controversial and on the 17^th of May Keith Stocks (the Rhode Island State Economic Development Corporation Executive Director) resigned. A payment of $1.1 million on the loans was due in May 2012 but the company defaulted. They asked for more emergency assistance. Governor Chafee did not support the loan in the first place indicated that there was an emergency meeting to determine a way forward.

Corporate indiscipline and state regulation is on trial

The issue for the state at the moment is to save the situation and the governor summarized the concerns: “How do we avoid throwing good money after bad — that’s the crux of the question”. Taxpayer funds are at stake and many people remember the Wall Street Crash which virtually debilitated the American economy. How could a private company get over $100 from the state without sufficient guarantees?

There are some people who argue that regulation kills business and that the state has no role to play. This is the result of such a paradigm. If a company is getting a ‘bailout fund’ then they need to be answerable to the state. Moreover there have to be guarantees of the payment.

Companies that are unable to raise sufficient capital should not be in business and they should certainly not be relying on the state to prop them up. The 450 jobs promised to Rhode Island are probably going up in smoke. It is ironic that Curt Shilling is a famous Republican who does not support state bailouts. Hopefully the company will follow that philosophy in the future.

Resources:

1. G.J. Remal and F. Quaratiello ,” Schilling’s company didn’t have money to pay the check”, 17^th May 2012, Boston Herald, 
2. A. Groberman,” Republican Curt Schilling Needs a Bailout for His Failing 38 Studios Company”, 18^th May 2012, Opposing Views
3. The author recommends articles about used cars and prescription medicine.