Results of the Criminal Investigation of 38 Studios, LLC Issued by the Rhode Island State Police and the Rhode Island Office of Attorney General

RI – This document outlines the scope of the investigation by the Rhode Island State Police and Rhode Island Attorney General of the failure of 38 Studios, LLC (“38 Studios”), as well as the results of this investigation.

 

At the outset, it is important to stress that the sole focus of this investigation was to determine if there was sufficient probable cause to charge any individual with a criminal violation of the Rhode Island General Laws.  Unlike many criminal investigations which focus upon a single incident, this investigation focused upon events taking place over a period of approximately two years, from 2010 through 2012.

 

Let it be clear, this investigation is independent and wholly separate from the civil litigation pending, and takes no position on the civil case.   Results from the criminal investigation should not be imparted on the civil case in any aspect.

 

As in the case of most investigations of alleged white collar crime or political corruption, this investigation consisted of numerous incidents in which information was discovered; documents were sought, generally through a subpoena or search warrant; and witness interviews occurred both independent of the grand jury and sometimes preceding it prior to a witness being called to the grand jury.  For any witness, this sequence of events could take weeks or even months.

In pursuing this investigative goal, we were mindful of civil litigation filed by the Rhode Island Economic Development Corporation (“RI-EDC”) in Providence County Superior Court, as well as an action filed by the Securities and Exchange Commission.  Although the criminal investigation of this matter was largely completed at the time, investigators had access to the publicly released depositions of numerous witnesses in the Superior Court civil litigation, which were released on approximately September 24, 2015.  Following the release of those documents, investigators reviewed all publicly available depositions to ensure that none contained evidence of criminal conduct not previously known to law enforcement.  After a time consuming and extensive review, it was determined that no criminal conduct was disclosed through those documents.

 

The business entity known as 38 Studios was founded in Massachusetts in 2006 for the purpose of developing and marketing video games.  The company was founded and headed by former Boston Red Sox pitcher Curt Schilling.

 

On May 19, 2010 legislation was introduced in the Rhode Island House of Representatives by Representative Steven Costantino and others to authorize the RI-EDC, “to create the corporation’s Job Creation Guaranty Program” through the issuance of up to $125,000,000 of bonds or other obligations.  The bill stated that, “Rhode Island continues to suffer from continuing high unemployment and other ill effects from the most recent national recession” and that the bonds were intended to “induce lending to companies growing their employment in Rhode Island.”  The bill simply authorized the creation of the program, and did not identify the company or companies that would benefit by the issuance of these bonds.  Six days later, the bill was passed by the House of Representatives, and transferred to the Senate, where it was passed on June 11, 2010.

 

On May 20, 2010, one day after introduction of the legislation in the House of Representatives, identical legislation was introduced into the Rhode Island Senate by Senator Daniel DaPonte and others.  The bill was passed by the Senate on June 9, 2010, and transferred to the House, which passed the bill the following day.

 

Both bills were signed by Governor Donald Carcieri on June 11, 2010.

 

This investigation revealed no evidence of criminal wrongdoing in connection with the legislative passage of the “Job Creation Guaranty Program.”

 

Five days after signing the legislation establishing the Job Creation Guaranty Program, Governor Carcieri presided over a public meeting of the RI-EDC Board of Directors.  The Board was presented with three presentations concerning 38 Studios and the video gaming industry.  One presentation was made by Mr. Mark Lamarre of Wells Fargo, who explained the 20-year history of Wells Fargo providing financial assistance to the interactive entertainment market.

During  his presentation, Mr. Lamarre “described 38 Studios as having a complete and experienced board of directors and management team, with an ability to hire and retain the right people.”  The other two presenters were Mr. Harvey Cohen and Mr. Barry Gilbert, the President and Vice President, respectively, of Strategy Analytics.

 

At the same meeting, Curt Schilling was introduced to the RI-EDC Board of Directors, and he discussed the history of his company.

 

On July 26, 2010, the RI-EDC met once again, and formally approved financing for 38 Studios.  Mr. Keith Stokes, Executive Director of the RI-EDC, told the Board that, “the EDC has been deliberating this matter and performing its due diligence for the last several months.”  Mr. J. Michael Saul, the Deputy Director of the RI-EDC, presented to the Board, and told the Board that, “The company plans to bring in 450 direct jobs with an average annual wage of $67,500 within three years.  In addition, it is anticipated that an additional 1,113 indirect jobs will result from this venture.”

 

Saul further explained that the company would be required to relocate to Rhode Island.  He also noted some of the risks inherent in this proposal, including “investment in a pre-revenue company, a binary revenue stream, the fact that the company is focused on a hit driven product, and the concentration of 60% of the State’s Job Creation Guaranty Program to one company.”

 

By a vote of 8 – 1, the RI-EDC Board of Directors approved the proposal to fund 38 Studios by adopting the Authorizing Resolution presented to the Board, which authorized the RI-EDC staff to issue $75 million in bonds, borrow an identical sum from the purchasers of those bonds, and using those proceeds, enter into a loan with 38 Studios.

 

According to the Term Sheet prepared at the time, the purpose of the loan was to provide the necessary financing to relocate 38 Studios to Rhode Island, complete production of a video game then under development known as “Copernicus”, and capitalize the company’s growth and expansion in Rhode Island.

 

Over the next several months, documentation concerning this bond issue was prepared.

 

Under the terms of the loan agreement, 38 Studios received; $49.5 million in incremental payouts over a one-year period from November 2010 through November 2011; approximately $12.7 million was put in a reserve account held by the RI-EDC to be used toward possible loan default payments in the future; approximately $10.6 million was placed in an interest bearing account held by the RI-EDC; the remaining approximate $2.2 million was used to pay for closing fees and municipal bond insurance.

As a result of the default by 38 Studios, it is estimated that the total amount due in principal and interest is $89 million.

 

In May, 2012, 38 Studios defaulted on a $1.1 million interest payment that was due to RI-EDC. Unable to meet payroll, 38 Studios closed its doors and on June 7, 2012, filed for bankruptcy in Delaware.

 

A criminal investigation into various aspects of the failure of 38 Studios was initiated by the Rhode Island State Police and by the Federal Bureau of Investigation.

 

The federal aspect of the investigation was narrowly focused upon potential violations of federal law, including criminal bank fraud.  During the course of this phase of the investigation, 15 federal subpoenas were issued to public or private entities and five individuals were interviewed.

 

On September 24, 2012, the United States Attorney and the Federal Bureau of Investigation concluded their portion of the investigation after determining that the process to obtain related loans did not violate federal criminal laws.

 

Materials generated by this initial phase of the investigation were turned over to the Rhode Island State Police, which continued to review transactions related to 38 Studios to determine if state criminal laws had been violated. A civil investigation and subsequent lawsuit was and is independent of the criminal investigation.

 

At that time, the Rhode Island State Police and the Rhode Island Attorney General considered the various investigative tools available through which to pursue this investigation.  The most critical issue was whether or not to utilize the grand jury.  It was determined to continue with the path initially utilized in the investigation by the United States Attorney which was to pursue the investigation through the grand jury.

 

The State of Rhode Island has a grand jury system consisting of county grand juries as well as a Statewide Grand Jury.  The grand jury must be utilized to indict a defendant who is charged with an offense for which the maximum punishment is life in prison, but it may be utilized to investigate other types of cases as well. The Statewide Grand Jury is typically used to investigate cases requiring presentation of many witnesses.

 

Although most widely known for its power to bring a formal criminal charge, a grand jury also possesses investigative powers, the most significant of which are to compel witnesses to appear before the grand jury, to compel the production of evidence through the issuance of a subpoena, and to obtain sworn testimony from witnesses.   This power, however, is not without limitation as witnesses may assert legal privileges when called to testify.

Although use of the grand jury is an effective and powerful investigative tool, it is not, by design, a transparent institution.  There are a number of statutes and rules regulating the grand jury process generally, and the secrecy of that process specifically.  In addition, the United States Supreme Court, as well as lower courts, have affirmed the principle of grand jury secrecy.

 

The United States Supreme Court considered the necessity of grand jury secrecy in the case of United States v. Sells Engineering, Inc. in 1983, stating:

 

“The grand jury has always occupied a high place as an instrument of justice in our system of criminal law—so much so that it is enshrined in the Constitution. It serves the ‘dual function of determining if there is probable cause to believe that a crime has been committed and of protecting citizens against unfounded criminal prosecutions.’  It has always been extended extraordinary powers of investigation and great responsibility for directing its own efforts:

‘Traditionally the grand jury has been accorded wide latitude to inquire into violations of criminal law. No judge presides to monitor its proceedings. It deliberates in secret and may determine alone the course of its inquiry. The grand jury may compel the production of evidence or the testimony of witnesses as  it considers appropriate, and its operation generally is unrestrained by the technical procedural and evidentiary rules governing the conduct of criminal trials. ‘It is a grand inquest, a body with powers of investigation and inquisition, the scope of whose inquiries is not to be limited narrowly by questions of propriety or forecasts of the probable result of the investigation, or by doubts whether any particular individual will be found properly subject to an accusation of crime.’

These broad powers are necessary to permit the grand jury to carry out both parts of its dual function. Without thorough and effective investigation, the grand jury would be unable either to ferret out crimes deserving of prosecution, or to screen out charges not warranting prosecution..

The same concern for the grand jury’s dual function underlies the ‘long-established policy that maintains the secrecy of the grand jury proceedings in the federal courts.’

We consistently have recognized that the proper functioning of our grand jury system depends upon the secrecy of grand jury proceedings. In particular, we have noted several distinct interests served by safeguarding the confidentiality of grand jury proceedings. First, if preindictment proceedings were made public, many prospective witnesses would be hesitant to come forward voluntarily, knowing that those against whom they testify would be aware of that testimony. Moreover, witnesses who appeared before the grand jury would be less likely to testify fully and frankly, as they would be open to retribution as well as to inducements. There also would be the risk that those about to be indicted would flee, or would try to influence individual grand jurors to vote against indictment. Finally, by preserving the secrecy of the proceedings, we assure that persons who are accused but exonerated by the grand jury will not be held up to public ridicule.

Grand jury secrecy, then, is ‘as important for the protection of the innocent as for the pursuit of the guilty.’ (Footnotes and citations eliminated.)”

The general rule of secrecy covering matters occurring before the grand jury in Rhode Island is found in Rule 6(e) of the Superior Court Rules of Criminal Procedure, which states, “A grand juror, an interpreter, a stenographer, an operator of a recording device, a typist who transcribes recorded testimony, an attorney for the state, or any person to whom disclosure is made under paragraph (e)(3)(A)(ii) shall not disclose matters occurring before the grand jury except as otherwise provided for in these rules.  A knowing violation of Rule 6 may be punished as a contempt of court.”

 

In addition, “Unlawful grand jury disclosure” is a felony pursuant to Section 12-11.1-5.1, which states:

  • 12-11.1-5.1  Unlawful grand jury disclosure. – (a) Any person who, when being a grand juror, a public prosecutor, a grand jury stenographer, a grand jury interpreter, a police officer or a peace officer guarding a witness in a grand jury proceeding, or a clerk, attendant, warden or other public servant having official duties in or about a grand jury room or proceeding, or a public officer or public employee, obtains information in his or her official capacity and intentionally discloses, prior to the report of the grand jury on the matter, to another the nature or substance of any grand jury testimony, or any decision, result, or other matter attending a grand jury proceeding which is required by law to be kept secret, except in the proper discharge of his or her official duties or upon written order of the court shall be guilty of grand jury disclosure. Nothing in this section shall be construed to prohibit a witness from disclosing his or her own testimony.

   (b) Any person who violates any provision of this section shall be punishable by a fine not exceeding five thousand dollars ($5,000) or imprisonment not exceeding one year, or both.

Although it was recognized that the principles of grand jury secrecy would viewed by some as limiting the public’s access to the results of this criminal investigation, it was determined that the investigative benefits of utilizing the grand jury to compel the production of evidence outweighed that potential criticism.

The utilization of the Grand Jury in this process had two distinct phases. Initial subpoenas were issued by a sitting Statewide Grand Jury.

The presentation of matters related to the investigation of 38 Studios to the Statewide Grand Jury began on October 15, 2012, with the Statewide Grand Jury issuing subpoenas to various  entities at the request of an investigator from the Rhode Island State Police Financial Crimes Unit.

Typically, subpoenas from the Grand Jury are issued for documents and other business records.  A person or business in receipt of a Grand Jury subpoena has the opportunity to contest production of records through the timely filing of a “motion to quash” the subpoena.  In the absence of the granting of such a motion, records are generally returned to the Grand Jury in approximately 30 days.  A total of 21 subpoenas were issued by the Statewide Grand Jury.

In December, 2013, the State Police and Office of Attorney General were prepared to bring testimony by witnesses to the grand jury.

 

The Statewide Grand Jury sits for an initial term of six months, which may be extended for two additional six month terms.   A Statewide Grand Jury, by rule, can only sit for a maximum term of 18 months.

 

The Grand Jury in this investigation that heard substantive testimony was sat in December, 2013, served the initial six months plus two extensions, sitting for a total of 18 months, ending in July, 2015.

In total, 146 persons were interviewed in connection with this investigation, many whom were interviewed more than once.

Between November 20, 2012 and December 2, 2015, approximately 34 witnesses were interviewed by the Rhode Island State Police, the Attorney General’s office, or both, including the five witnesses who were originally interviewed by the FBI, members of the Board of Directors of the RI-EDC, former Governor Donald Carcieri, RI-EDC staff, executives with 38 Studios, and others.

Of those 34 individuals, 11 were called before the Statewide Grand Jury for testimony.  In addition, the State Police lead investigator assigned to the matter testified before the Grand Jury at length on multiple occasions.

Multiple and prolonged meetings occurred during the period between detectives from the State Police, prosecutors from the Attorney General’s Office, and attorneys representing various witnesses.

Over the course of the investigation, every member of the 2010 General Assembly, which had passed the legislation authorizing the Job Creation Guaranty Program, was contacted either individually or through counsel by the Rhode Island State Police[1].

[1] Former State Representative John McCauley was not contacted due to his federal prison sentence on an unrelated matter.

In addition to the interviews and grand jury testimony, tens of thousands of pages of documentary evidence and depositions were reviewed by the investigator and prosecutor assigned to this investigation.

The goal of the Rhode Island State Police and Rhode Island Office of Attorney General’s investigation into the funding and failure of 38 Studios was not to create the definitive history of how the legislation to fund 38 Studios came to be, why that business failed, who made poor business or political decisions along the way, or who, if anyone, should be civilly liable for their action or inaction.  Those questions are for the civil litigation.

Rather, the very narrow focus was to determine whether the actions of any person or persons violated any criminal provisions of the Rhode Island General Laws.

Because there remains the possibility that civil litigation arising from this matter or other means will disclose additional facts, those facts may, at some point in the future, need to be evaluated.  The possibility of additional facts, however, does not justify keeping this investigation active when balanced against the public interest in resolving the issue of whether criminal conduct occurred.

If subsequent facts are made known that justify reactivation of this investigation, the Rhode Island State Police and Office of Attorney General are prepared to do so.

Although we are prohibited by law from disclosing the content of the matters which occurred before the Statewide Grand Jury, we are confident that based upon those proceedings, and supported by the witness interviews and the documentary evidence gathered and reviewed by the investigator and the prosecutor, there were no provable criminal violations of the Rhode Island General laws in connection with the funding of 38 Studios, the disbursement of funds to 38 Studios, and by 38 Studios to vendors.

In other words, the quantity and quality of the evidence of any criminal activity fell short of what would be necessary to prove any allegation beyond a reasonable doubt and as such the Rules of Professional Conduct precluded even offering a criminal charge for grand jury consideration.

Finally, although we have previously mentioned the narrow and specific focus of this investigation, the conclusion of this criminal investigation should be considered completely independent from any and all civil litigation related to this subject matter. -end-