Did Hasbro’s Verrecchia Have a Conflict When He Voted to Fund $75M to 38 Studios
Monday, September 28, 2015
EA is the same company that had a major partnership and investment in 38 Studios. In a document released by Judge Michael Silverstein, a May 2010 memo was included that outlined the multi-million deal between EA and 38 Studios for the funding of $50 million and royalty structure that could exceed $100 million. The EA agreement was material to the state of Rhode Island’s financing. Of course, the state’s financing of $75 million to 38 Studios was a de facto a stabilizing force to EA.
EA in Focus
A press release issued by EA in May 2010 said, "We are thrilled to be working with 38 Studios. The world of RPG gaming is so rich and it is a perfect complement to our partners and title portfolio in EAP," said David DeMartini, Senior VP and General Manager of EA Partners. "Project Mercury is bursting with first-rate talent, with passion that spans across the board.” Project Mercury was the name of 38 Studios’ project.
The relationship between EA and 38 Studios was core to the viability of Curt Schilling's company. It would be difficult if not impossible for 38 Studios or any gaming company to bring a game to market without EA's distribution structure.
A confidential memo between top entertainment law firm and 38 Studios’ CEO Jen MacLean outlined a complex agreement that provided for EA to provide funding in exchange for full repayment and significant portions of the royalties generated — 70% to EA under $100 million in sales revenue. As GoLocal has previously reported, in the time period of May of 2010, as the $75 million bond statute and EDC staff was developing the strategy, 38 Studios had limited cash and was straining to make payroll.
For Verrecchia, at the time of the 38 Studios vote he was the Chairman of a major public company who had a material and strategic relationship with EA. He was serving on a public board voting for $75 million in funding for a company that had a $50 million investment from the same company with which Hasbro was partnering.
But, why Verrecchia voted at all is on 38 Studios funding is unknown. With the complexity of the business relationships between Hasbro and EA, why he did not recuse himself from particapating in the 38 Studios matter is unclear.
Verrecchia had trained as an accountant at URI and had joined Hasbro in 1965. He had helped both Stephen and Alan Hassenfeld grow the Pawtucket-based company to the second largest toy company in the world with a value of over $4.8 billion.
How Important was Verrecchia’s EA Deal to Hasbro’s Viability and Growth
The agreement with EA was negotiated under the leadership of Verrecchia, the same man who who served as Vice Chairman of the RI Economic Development Corporation Board. The Chair of the EDC Board was fellow RI-businessman turned politician Don Carcieri.
The EA agreement for Hasbro was one major step in transforming the company from toy manufacturing company and selling their products in Walmart, Kmart and Toys "R" Us to transforming Hasbro to higher margin electronic and interactive games. Just one year after the Hasbro and EA agreement was signed, Hasbro was realizing the benefits of the deal.
In Hasbro’s Annual Report in 2009, the company was trumpeting the financial impact of the EA deal, “Since our first digital games from EA hit the market in 2008, EA has sold at retail eight million units of Hasbro branded digital games. In 2009, EA successfully launched games for brands from LITTLEST PET SHOP to TRIVIAL PURSUIT to NERF to FAMILY GAME NIGHT. For mobile users, Hasbro brands, including BATTLESHIP, MONOPOLY and SCRABBLE, were top-grossing titles on the iPhone App Store during the 2009 holiday season and both MONOPOLY and SCRABBLE have remained in the top 50 consistently since launch. With great family and casual brands such as these, EA and Hasbro are well positioned to leverage the evolution underway in the digital gaming market place, as mobile and online games grow to represent a larger portion of the total digital gaming opportunity.”
Was Voting for 38 Studios Funding a Conflict
Efforts to reach Verrecchia directly and through Hasbro were unsuccessful. However, in the documents released and in Verrecchia’s two days of depositions, the former Vice Chair of the EDC board outlined how he had connected key Hasbro staff to assist EDC staff with the review.
In part, Verrecchia defended his vote for 38 Studios because “The RPG (role playing game), from a financial perspective, was funded by EA, and we knew that. And we knew most of the revenue coming in initially would have to pay off the EA loan. So I was more concerned with the market success of the RPG to support the MMOG (massively multi-player online game).”
Verrecchia helped to support EDC staff by introducing top staff to key people at Hasbro who worked with EA. According to one Saul email identified in Verrecchia’s deposition, “You (Verrecchia) agreed to introduce us to Mark Blecher (VP of Digital media and gaming) as part of the 38 Studio’s due diligence.”
In one exchange between one of the attorneys and Verrechia during his deposition, he was asked, “So was it reasonable for you to assume when you voted in favor of the 38 Studios transaction that 38 Studios would be able to reach a distribution agreement with EA for Copernicus?”
Verrecchia said, “Yes…They has a distribution agreement on the RPG where EA was pre funding $50 million. So they weren’t just another guy off the street. EA had already an arrangement…as I though it was quite reasonable if we got the game to completion that EA would distribute…”
Hasbro and EA Extend Agreement
In 2012, 38 Studios ran out of money despite Rhode Island's investment of $75 million, ran out of money and could not find additional investors.
By 2013, Hasbro and EA announced that they were extending and expanding their partnership. "Over the past six years, Hasbro and EA have collaborated to develop some of the most popular digital games based on Hasbro's best-selling global game brands, including MONOPOLY, SCRABBLE and THE GAME OF LIFE," said Mark Blecher, Hasbro Senior Vice President and General Manager, Digital Gaming and Corporate Development. "The next phase of our relationship will build on this tremendous success and is specifically focused on leveraging Hasbro's rich game brands with EA's leadership in the mobile space. Our relationship with EA for mobile is an integral component of our digital strategy for developing Hasbro brands across gaming platforms."
Related Slideshow: Seven 38 Studios Facts You Would Not Believe
Here are the seven facts that you would not (want to) beleive about the 38 Studios deal.
Meetings Started a Year Before When We Were Told
The first story was that Governor Carcieri went to a fundraiser for a WWII Veteran’s event at Curt Schilling’s home and that served as the spark to a meeting between Keith Stokes and the 38 Studios officials to try and lure the company from Massachusetts to Rhode Island.
Then, it was disclosed that meeting Speaker Fox had had meetings earlier in the spring through his relationship with his close friend Mike Corso.
In the documents released Thursday, Bill Murphy attested to how he sat in on a meeting with Corso, Fox and Curt Schilling while he was still Speaker.
But now, emails starting in July of 2009 between Corso and 38 Studios’ Tom Zaccagnino show the wheels were put in motion even earlier than we thought.
If Not for RI, 38 Studios Would Have Closed Within 1 Month
If RIEDC had turned down the deal in July 2010, documents released showed that 38 Studios would likely have missed making payroll the next month.
In a July 7 email from Rick Wester to Tom Zaccagnino, he wrote, “The latest would be the August 15th payroll at this point. I’m having doubts we can get through the 30th."
The RIEDC board approved the $75 million in bonds on July 26.
The Original 38 Studios Deal Was Small and Inexpensive
An internal email at 38 Studios dated February 18, 2010 outlines a Rhode Island staffing plan starting at 10 employees in 2010 and increasing to 40 in the future.
However, RIEDC mandated a high staffing level and thus a high burn rate.
For 38 Studios to receive its last payment the RIEDC agreement required staffing to elevate to 450 headcount.
38 Studios Knew RI Money Was Not Enough to Fund the Company
An email exchange between top 38 Studio leadership and Mike Corso, confidant to Speaker Gordon Fox, in preparation to meeting with the RIEDC Board led by Governor Don Carcieri showed that 38 Studios wanted to keep certain financial realities under wraps.
Tom Zaccagnino wrote to CEO Jen MacLEan, CFO Rick Webster, and Corso, “I really don’t think we should highlight the fact we might be undercapitalized…won’t go over well with staff or board."
Two and a half weeks earlier EDC Board gave preliminary approval and on July 26, the RIEDC Board gives final approval to the $75 million.
Style Over Substance
In October of 2010, RIEDC was preparing a public relations strategy because “the Gubernatorial candidates have politicized the 38 Studios deal.”
The Strategy document outlined the key messages, and the need to “accelerate development of an in-depth Providence Journal story, including offer of access to Board members. The Providence Journal team will be Andy Smith, Paul Grimaldi and Business Editor John Kostrzewa — we will push for Neil Dowling’s inclusion.”
At the same time as EDC was rolling out its PR strategy to sell to the public value of the 38 Studios deal, 38 Studios internal documents showed that the company was tittering on financial collapse. In fact, a demand for payment from Speaker Fox’s confidant for a $500,000 payment could not be met because it would cripple payroll.
An October 27 internal memo from CEO Jen MacLean to Schilling, Zaccagnino, CFO Rick Wester, and COO Bill Thomas said, “After running payroll, we have less than $500K in our Maynard accounts. We simply can’t pay Mike before the bonds close, no matter how much he might wish otherwise.”
The Deal Was Done Before Anyone Could Imagine
How deep were top EDC staff in on the deal to fund 38 Studios?
In an April 12 (2010) memo from RIEDC’s Michael Saul to Mike Corso and RIEDC’s attorney Rob Stolzman, he proposes “Determine whether any local institutions (RISD endowment, RI Foundation, Hasbro, Brown endowment, State Pension fund, etc) would commit to purchase a share of bond issue.” This is just one of ten “to do’s.”
EDC’s top staff were strategizing on how to sell the bonds, months before the bill ever hit the House floor for consideration.
This April 12 strategy session was supposedly just a little over a month after Governor Don Carcieri and Curt Schilling met and two months before the loan guarantee program is signed into law.
Did Rhode Island Pay for Improvements at Corso's Bar
In one email in May 2011, Mike Corso alerted top 38 Studio officials of over $600,000 in change orders to the build out of the Empire Street 38 Studios’ offices.
The change orders Corso pushed for increased the cost of contractor Nappa Constructions’ project cost from $10.9 million to $11.6 million. As GoLocal reported in 2014:
A former subcontractor for 38 Studios is alleging that his firm was ordered to work on former Speaker of the House Gordon Fox's business colleague Michael Corso's bar as part of their contract - and has produced what he says is documentation to prove it.
Project manager Michael Rossi with SyNet, Inc. has revealed a budget for work which he says shows at $25,000 line item for work to be done at Corso's Tazza Cafe in 2011 -- under a job order for the failed 38 Studios.
Warwick-based SyNet bills itself as "the premier design-build low voltage contractor of structured cabling, access control, surveillance and audio visual systems in the Northeast."
"I'm changing everything on job -- these were all no bids. Nappa construction picked Rossi Electric. I realize the job can't be done the way it's designed," said Rossi. "The money was getting kicked back in the form of goods and services to Corso and Fox. I said I'm not doing this. I knew I was getting set up for jail with this. I went out on sick leave, I was done."
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