Wells Fargo, state agency charged with fraud for 38 Studios deal
The United States Securities and Exchange Commission (SEC) on Monday charged Rhode Island's economic development agency and Wells Fargo with defrauding investors in the state's disastrous US$75 million deal with 38 Studios, the failed video game company started by former Red Sox pitcher Curt Schilling.
The civil complaint, filed in US District Court in Providence, accuses the Rhode Island Commerce Corp and Wells Fargo Securities of making materially misleading statements when they sold the bonds used to fund the deal.
Schilling moved his company from Massachusetts to Rhode Island in 2010, after the agency agreed to give it a US$75 million loan guarantee. The deal was financed through bonds offered to investors. Less than two years later, 38 Studios ran out of money and closed its doors, filing for bankruptcy.
Schilling is not accused of wrongdoing in the SEC action, but he and others, including Wells Fargo, are being sued by the economic development agency in state court. That case has so far netted nearly US$17 million in settlements. Schilling has blamed state officials for failing to support his business venture.
Also named in the SEC complaint are former agency officials Keith Stokes and Michael Saul, and Peter Cannava, a Wells Fargo banker on the transaction. Stokes and Saul agreed to settle the SEC charges without admitting or denying the allegations and must each pay a US$25,000 penalty.
The SEC complaint says the officials knew that 38 Studios needed at least US$75 million to bring its game, code-named 'Project Copernicus', to completion. But under the deal with the state, the company would receive only US$50 million of proceeds from the bond offering. Despite that, the bond offering documents failed to disclose the funding gap, the complaint alleges.
"38 Studios' funding gap was known at the time the Bond Placement Memo was sent to investors. It was not speculative. It was an existing risk that should have been disclosed to potential investors in the offering," the complaint says.
Wells Fargo also had a "dual role" in the offering, the SEC alleged, representing both the state agency and 38 Studios, a potential conflict of interest it didn't disclose to investors.
Cannava's lawyer, Brian Kelly, disputed the SEC's contention that Cannava was the lead banker on the matter and said he would fight the action vigorously.
"The SEC is trying to scapegoat a mid-level banker instead of focusing on the mistakes of Rhode Island politicians," he said.
Stokes' lawyer, Scott Morvillo, said the settlement represents what his client hopes is the final chapter in the matter.
Other representatives for those named in the action didn't immediately comment.
In a separate but related action Monday, the SEC announced it settled charges with the bond offering's financial adviser, First Southwest Company, which agreed to pay US$192,400 and didn't admit or deny wrongdoing. First Southwest is among those being sued in the state court lawsuit. The company's spokeswoman, Patti Doyle, characterised the SEC case as a "very minor administrative matter" and said it shouldn't affect the state lawsuit.