One More Time with Feeling: 38 Studios Bonds Were an Investment Scam

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From a certain perspective, Katie Mulvaney’s article in today’s Providence Journal doesn’t tell us anything new (or at least that we didn’t strongly suspect), but it’s still worth remembering as elected officials in Rhode Island continue to behave as if there’s no route to economic development that doesn’t involve government making all of the key decisions:

An investment firm is trying to bolster its case against the Rhode Island Economic Development Corporation with federal court records revealing that investors in the $75-million bond deal cared little about the financial health of baseball great Curt Schilling’s 38 Studios video-game venture, since Rhode Island had pledged not to default on the bonds. …

The documents at issue include notes taken by SEC investigators showing that investors were focused not on the financial condition of 38 Studios, but on the fact that their investments were protected by moral obligation and bond insurance.

Put differently, they were not investing in the ability of 38 Studios to make money, but in the Rhode Island government’s ability to take money away from other people and give it to them.  There were only two real differences between this deal and general obligation bonds on which Rhode Islanders are supposed to get a vote:

  1. The state hoped that an unproven videogame company run by a baseball star would be able to cover its debt.
  2. Because that hope was (on paper only) an additional risk, investors got a lot more profit on their investment.

Investors knew there was no new risk, but the state let everybody pretend that there was in order, presumably, to avoid a ballot vote of the people.  Of course, in our corrupt little state, one could also speculate that giving investors a big, certain windfall wasn’t exactly an unintended side effect.



  • Albert Jay Nock

    As a long time member of USAA, a military-only organization who was the largest single investor in this debacle ($34 million), it distresses me to read that they admitted they did absolutely no background checks on 38Studios, and said that was because the State of RI would guarantee the bonds, so why bother? There is absolutely no excuse for that Wall Street accomplice Raimondo to have agreed to pay these people off.

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