38 Studios Files Chapter 7 Bankruptcy After $75 Million Rhode Island Loan Guarantee, Leaving Taxpayers with $38.6 Million Loss

On June 7, 2012, 38 Studios LLC—the video game development company founded by former baseball star Curt Schilling—files for Chapter 7 bankruptcy with $151 million in debt and just $22 million in assets, leaving Rhode Island taxpayers to absorb $38.6 million in losses from a $75 million state loan guarantee. The bankruptcy filing follows 38 Studios’ May 2012 default on its loan payment and failure to make payroll, culminating in the mass email termination of its entire 379-person workforce. Many employees had relocated to Rhode Island at significant personal expense based on the company’s promises, only to lose their jobs without warning and without receiving final paychecks that wouldn’t arrive until 2021—nine years later—after protracted bankruptcy proceedings.

The 38 Studios collapse represents one of the most spectacular failures of state economic development policy and corporate welfare in modern U.S. history. In 2010, Rhode Island’s Economic Development Corporation offered the $75 million loan guarantee to lure Schilling’s company from Massachusetts to Providence, despite significant red flags about the company’s finances and business model. The loan was financed through bonds offered to investors, with Rhode Island taxpayers ultimately responsible if 38 Studios defaulted. Internal communications and subsequent investigations revealed that both the EDC and Wells Fargo—the bank that approved the loan—knew the $75 million was insufficient to fund development of the company’s primary project, a massively multiplayer online game called Project Copernicus. In March 2016, the SEC brought bank fraud charges against both the EDC and Wells Fargo, alleging both parties knowingly misrepresented the deal’s viability to bondholders.

The final taxpayer cost reaches $38.6 million in direct losses, plus an additional $12.5 million to cover the final bond payment, for a total public cost exceeding $50 million. Rhode Island eventually sues virtually all parties involved and recovers $61 million through settlements, but $11 million of that recovery goes to legal fees. Schilling, who claimed he was “tapped out” after investing $50 million of his own money, eventually agrees to pay just $2.5 million to settle his portion of the state lawsuit—a fraction of the public losses. The state’s attorney general announces that despite a yearslong investigation, no criminal charges will be filed against anyone involved in the deal, demonstrating how economic development incentives operate in a legal gray area where even spectacular failures and alleged fraud rarely result in criminal accountability.

The 38 Studios debacle exposes the structural corruption inherent in state economic development subsidy programs. Rhode Island offered the massive loan guarantee based on celebrity status, optimistic projections, and desperation to create jobs and compete with other states offering corporate incentives. Standard due diligence was bypassed or ignored, conflicts of interest went unaddressed, and the fundamental business risk was socialized to taxpayers while any potential profits would have remained private. Governor Lincoln Chafee later argues that he inherited the deal and that his refusal to provide additional tax credits and his disclosure of the company’s financial troubles were appropriate transparency measures, but Schilling blames Chafee for “sabotaging” the company by spooking potential investors. The failure becomes a cautionary tale cited in debates over corporate welfare, economic development incentives, and the use of public funds to subsidize private companies—yet similar deals continue nationwide, demonstrating that the lessons remain unlearned as states compete to attract businesses through ever-larger taxpayer-funded inducements.