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Is Rhode Island's corporate welfare failing?

Former Boston Red Sox pitcher Curt Schilling, center,

Former Boston Red Sox pitcher Curt Schilling, center, is a principal in the failing video game company Studios 38 that received a $75 million loan guarantee from Rhode Island. (May 16, 2012) Credit: AP

PROVIDENCE -- A video gaming company famously owned by former Red Sox pitcher Curt Schilling can expect to be audited after it broke a deal with Rhode Island on a $75 million loan guarantee by firing more than 300 workers and closing late this past week.

Gov. Lincoln Chafee says Schilling's company is in violation of a loan guarantee agreement with Rhode Island after it failed to notify the state of mass layoffs. He said he will seek an audit of the company's finances.

Schilling's 38 Studios laid off its entire workforce Thursday -- including about 300 employees in Providence and more at a second Maryland location -- and did not notify the state, Chafee said Friday at a news conference.

The company was lured to Rhode Island from Massachusetts in 2010 after the state Economic Development Corp. agreed to a $75 million loan guarantee, which was supposed to bring hundreds of jobs and millions of dollars in tax revenue.

38 Studios' financial troubles came to light this month when it defaulted on the $1.1 million payment to the EDC that was due May 1. The company later paid.

But now it is in default again, Chafee said. Under federal law, employers who have at least 100 employees and plan to shed at least 50 jobs are required to give a 60-day notice to workers and state unemployment officials.

Chafee said Friday he would seek an audit of how the company used the $50 million it has received in loan funds, all of which is gone, state officials have said. The governor wants "everything documented" because, he predicted, there are going to be "so many lawsuits."

Chafee described himself as "quite pessimistic" that the company could secure the type of outside investment that may be the only way for it to stay afloat.

Schilling has not responded to repeated messages left for comment.

Meanwhile, the EDC was in disarray as questions mounted over whether the state exercised proper oversight of the loan guarantee.

Chafee was seeking the resignation of EDC board members who approved it, but the fate of some of them wasn't clear Friday. EDC executive director Keith Stokes, a vigorous backer of the guarantee, and board vice chairwoman Helena Foulkes have resigned.

EDC board member George Nee said Chafee asked him to step down and Nee refused.

"He felt it would be better to have a new start," Nee said of Chafee's request. "I disagreed with him. We had a pleasant conversation."

Chafee's office said Thursday that board member Stephen Lane had resigned but he hasn't submitted a resignation letter.

Chafee said he would not reappoint Nee and two other board members -- Timothy Babineau and Daniel Sullivan -- whose terms have already expired.

Chafee spokeswoman Christine Hunsinger said Friday she couldn't say for sure who was serving on the board. EDC spokeswoman Judy Chong said the same.

EDC board members are appointed by the governor, who acts as board chairman, and are subject to confirmation by the state Senate.

Treasurer Gina Raimondo and others have questioned whether state oversight of the 38 Studios deal was sufficient. Sullivan said he hadn't received any updates on it until recently, after the company's troubles surfaced.

The EDC and 38 Studios signed a monitoring agreement in November 2010 under which IBM would provide 38 Studios with an initial assessment of Project Copernicus -- the development of the company's second game -- and quarterly "milestone verification" reports, according to a copy of the agreement.

The initial assessment was to include a review of project plans, financials and financial management as well as an analysis of risks and recommendations on how to mitigate them. Subsequent reports would essentially be progress checks, which IBM suggested would include a review of the project's financial status and a list of results "relevant to Rhode Island's interests."

The agreement said 38 Studios would provide to the EDC copies of all materials prepared by IBM and invite EDC to attend all discussions between 38 Studios and IBM.

But in August, the EDC and 38 Studios signed a "modification and waiver" to the agreement saying that, instead of being provided with IBM's actual reports, the economic agency would agree to briefings from IBM on the findings. This came at the request of 38 Studios. The modification cited confidential and proprietary information contained in the findings -- which, if publicly disclosed, could cause "irreparable and significant harm" to 38 Studios and the "commercial prospects" of Copernicus, the document says.

Still, the agreement also noted that the EDC would be "entitled" to see IBM's assessments if it requested.

EDC spokeswoman Chong said "various staff" there received verbal briefings on IBM's initial assessment and two quarterly reports. She didn't say who received those briefings, whether additional ones were held or whether the EDC ever requested information from the company that it didn't receive.

Chafee said he wasn't aware of the modification.

"I did not know, and I assume the board did not know," he said.

Stokes did not return a message Friday.


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