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38 Studios declares bankruptcy as formal investigation begins

BLOOMBERG FILE PHOTO/SCOTT EELLS
FORMER RED SOX pitcher Curt Schilling’s beleaguered video game company, 38 Studios LLC, has declared bankruptcy as a formal investigation of the company begins, according to WPRI.com.
Posted 6/7/12

(Updated, 6:00 p.m.)

PROVIDENCE – Former Boston Red Sox pitcher Curt Schilling’s beleaguered video game company 38 Studios LLC filed for Chapter 7 bankruptcy protection Thursday as state and federal law enforcement agencies revealed they are investigating the firm, which received a $75 million taxpayer-backed loan from Rhode Island.

38 Studios spokesperson Larry Solters told Providence Business News that the action comes after several weeks of contemplation and review by company officials.

“After ongoing negotiations with the state of Rhode Island and potential investors and other interested parties, the company has been unable to find a solution to the current stalemate,” said Solters via email.

At a late-afternoon news conference, Gov. Lincoln D. Chafee said he was not surprised by the bankruptcy filing and considering the position the company was in, the court’s involvement “is not all bad,” because it provides “some protection for taxpayers” to reclaim assets in a liquidation.

Chafee declined to discuss the investigation into 38 Studios, which reportedly involves an $8.5 million Bank Rhode Island loan secured by film tax credits that were never issued.

Jim Martin, spokesman for U.S. Attorney Peter F. Neronha, said his office has been in contact with the R.I. State Police and the FBI regarding an investigation of 38 Studios.

Martin would not elaborate at all on the nature of the investigation or which law enforcement agency initiated it. He said Neronha’s office, state police and the FBI has been discussing 38 Studios “for some time.”

Both 38 Studios and 38 Studios Baltimore LLC – formerly Big Huge Games - filed for bankruptcy on Thursday in Delaware.

John Savage, the lawyer who has represented Rhode Island in its dealings with 38 Studios since it first defaulted on the terms of its loan guarantee, said despite the bankruptcy filing, the state was still speaking with potential investors interested in the company’s assets.

“We have had discussions in recent days with investors that are discussing significant numbers that suggest there is value” in 38 Studios’ assets,” Savage said, adding that the numbers being discussed were in the “tens of millions.”

In exchange for issuing the 2010 loan guarantee, the state received 38 Studios’ intellectually property as collateral. Savage said he believed 38 Studios had other secured creditors, but that Rhode Island was “first in line” for the defunct company’s assets.

Court documents said 38 Studios owes between $100 million and $500 million to at least 1,000 creditors, many of which are in Rhode Island, reported WPRI.com.

According to the news source, the company estimated its assets at between $10 million and $50 million.

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