It seems so long ago that video games were considered the newest, hottest industry in entertainment. Of course, anyone who pays even remote attention to the industry knows that’s not the case: It’s hard out here for a dev. However, for a brief period in the early aughts, video games were seen as a surefire way to double and triple investment capital. This misconception was the ruin of countless video game companies including Curt Schilling’s 38 Studios, one of the largest disasters in recent gaming history. Where gamers may have thought the studio long dead, it seems that the SEC still has a bone to pick with its financiers.

Okay, let’s back up to the end of the halcyon days of gaming, when millionaire pitcher (and anti-Muslim activist) Curt Schilling decided it was time to make some bank off video games. He kicked things off by picking up Green Monster Games, a small studio with a promising action RPG in development. It wasn’t long before the Rhode Island government got in on the fun. Through the Rhode Island Economic Development Corporation (RIEDC), the state issued an unprecedented $75 million loan — which was underwritten by Wells Fargo — to the newly renamed 38 Studios, on the condition that the studio move its offices to their state. It seemed like a great deal.

According to Wikipedia, Schilling made his fortune handling balls.

38 Studios’ first and only game, Kingdoms of Amalur: Reckoning released to both positive reviews and great sales for a brand new IP. Unfortunately, after the game’s release, it quickly became apparent that company mismanagement had screwed the game from the very beginning. Because of inflated costs and unforeseen budget issues, Amalur needed to sell a whopping 3 million copies just to break even. That kind of sales is unheard of for a new title, let alone a company that was totally unproven and unable to drop the serious marketing dough required.

Ultimately, 38 Studios laid off all its employees and shut down not long after Amalur’s release. Schilling himself reportedly lost $50 million of his own money on the deal. Yesterday, though, the Securities and Exchange Commission declared that they were more interested in the losses endured by Rhode Island citizens, aka the investors who initially backed the game.

Here’s what happened: When the RIEDC decided to lure 38 Studios into the fold — in an attempt to stimulate job growth in the state’s tech sector — they gave the company the aforementioned $75 million loan. In order to cover that, the state issued a shitload of bonds, underwritten by Wells Fargo, that potential investors could purchase on the front end in return for a solid ROI on the back end. Of course, the RIEDC somehow found a way to pocket $25 million of that loan, ultimately giving 38 Studios $50 million of the proceeds.

The catch here is that 38 Studios began its deal with the RIEDC on the understanding that they’d need a full $75 million to launch the game. Having only received two-thirds of that amount, the game developer would need to secure an additional $25 million in funding, a fact that was never disclosed to investors, according to the SEC:

Investors weren’t fully informed when deciding to purchase the bonds that 38 Studios faced a funding shortfall even with the loan proceeds and could not develop the video game without additional sources of financing.

In other words, the SEC thinks that the RIEDC is guilty of fraud. Even further, the SEC accused Wells Fargo of playing up the supposed safety of the bond sale to its customers while failing to disclose that, “Wells Fargo had a side deal with 38 Studios that enabled the firm to receive nearly double the amount of compensation disclosed in offering documents.” Finance people call that a conflict of interest.

Ultimately, the SEC will require both Rhode Island and Wells Fargo to pony up some cash, but the odds are good it’ll be nowhere near the amount that investors actually lost in the original undertaking.

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