Former Red Sox and Phillies pitcher Curt Schilling plummeted from riches to rags when his video-game outfit, 38 Studios, filed for Chapter 7 bankruptcy on June 7. The company's failure to raise funds from external investors crushed its cash flow, costing about 400 jobs and $75 million from taxpayers thanks to a loan guarantee from Rhode Island last year.

The company's eleventh-hour shortfalls, which arose from a liquidity crunch, came to a head when it used projected future sales to pay off prior purchases at a time when its money outflows far exceeded its cash inflows from financing, irate investors say. As a result, the Major League Baseball star now faces charges from investors that he was running a Ponzi scheme.

According to industry analysts, 38 Studios was found to have an asset base of $21.7 million and a liability pool of $150 million in payment obligations, mostly to the Rhode Island state government and 1,078 other angry creditors.

On the same day the company went bust, one of its lenders, Citizens Bank, filed a suit against Schilling, making a claim for $2.4 million in loans it said Schilling had personally guaranteed. The downfall of 38 Studios became clear when it defaulted on a payment of $1.125 million to Rhode Island's Economic Development Corporation on May 1.

Schilling, whose personal investments in the six-year-old business totaled more than $50 million, dropped the bombshell on his family last month, the Games Industry International reported on June 22. The money I saved and earned playing baseball is probably all gone. Life is going to be different, Schilling told family members, according to the website.  

Even as state and federal investigations ramp up, a growing body of evidence shows that the videogame company mishandled its tax credits. Pledging anticipated tax credits of $14.3 million as collateral, 38 Studios' Rhode Island film tax-credit broker, Michael Corso, arranged for $8.5 million in loans for the cash-starved enterprise during January and February this year, according to state filings.

In a desperate bid to stay afloat, Schilling also tried to rake up some reserves from gold bullion he owned in the range of $2.5 million to $5.5 million - a move that many investors heckled at.

According to emails obtained from public records, the tax credits were withheld because the state Film and Television Office questioned 38 Studios' eligibility to tap into the program.

According to 38 Studios and my understanding, 38 could not access the tax credit program based on the funds that were guaranteed by the state, Film and Television Office Director Steve Feinberg wrote in an email to EDC Executive Director Keith Stokes.

An investor nearly wrote a check for about $15 million, to be raised to $20 million if Rhode Island offered 38 Studios $6 million in tax credits and renegotiated its loan guarantee so that the investor would be among the first to be repaid. The state rebuffed the deal.

Gov. Lincoln Chafee publicly announced the company's near-insolvency, a move which Schilling said scared investors away and caused the collapse of a $35 million deal for a Kingdoms of Amalur: Reckoning sequel with major video game publisher Electronic Arts. Sales from the action-packed sequel couldn't be tapped for dividend payouts because 38 Studios had to repay Electronic Arts, which had issued the company an advance in March 2010.

Meanwhile, the tax-credit broker, Corso, intent on garnering a profit, sold the film tax credits, which he had bought from a frantic Schilling in January, to Blue Cross and Blue Shield for an unspecified amount in January. The tax credit purchase would help the health insurer minimize its state tax liabilities, Blue Cross and Blue Shield officials have indicated.  

Schilling was hoping to complete a flagship multimedia role-paying project, codenamed Copernicus, which was slated for release in June 2013.

The company's creditors are scheduled to meet July 10 in a courthouse in Delaware.