State, Wells Fargo charged with fraud for 38 Studios deal

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The U.S. Securities and Exchange Commission on Monday charged a Wells Fargo & Co unit and a Rhode Island agency with civil fraud stemming from a bond deal for a now-bankrupt video-game company founded by former Boston Red Sox pitcher Curt Schilling.

The Rhode Island Economic Development Corporation (RIEDC, now called the Rhode Island Commerce Corporation) issued $75 million in bonds for the 38 Studios project as part of a state government program meant to spur economic development and increase employment opportunities by loaning bond proceeds to private companies. However, they really only loaned $50 million to the studio, and the rest was used to pay offering expenses and set up both a reserve fund and a capitalized interest fund. 38 Studios was supposed to repay the loan from the state with game sales, and then Kingdoms of Amalur: Reckoning was a bit of a bust, which in turn crashed the company.
According to the suit, the. You have now viewed your allowance of free articles.
The loan and, in turn, bond investors would be repaid from revenues generated by video games that 38 Studios planned to develop.
Schilling and others, including Wells Fargo, are also being sued by the agency in state court, and the case has so far netted almost $17 million in settlements.
The SEC alleged that a bond offering document produced by Wells Fargo and RIEDC failed to disclose that 38 Studios had conveyed that it needed at least $75 million in funding to produce a particular video game. No other fees or compensation to Wells Fargo were disclosed, and the bond placement agreement stated that no other money was anticipated.
“We allege that the RIEDC and Wells Fargo knew that 38 Studios needed an additional $25 million to fund the project yet failed to pass that material information along to bond investors, who were denied a complete financial picture”, said Andrew Ceresney, head of the SEC’s enforcement division.
The former pitcher has said he has lost the bulk of his $50 million fortune, largely on the 38 Studios deal, and has endured post-retirement cancer treatments as a result of his 30-year chewing tobacco habit.
While Wells Fargo is planning to fight the allegations in court, Governor Gina Raimondo is anxious to put the 38 Studios drama in the past.
Cannava’s lawyer, Brian Kelly in Boston, denied wrongdoing by his client. “The SEC is trying to scapegoat a mid-level banker instead of focusing on the mistakes of Rhode Island politicians”.
“He is pleased that this matter is resolved and looks forward to putting all of this behind him and moving on with his life and career”, he said.
The agency’s financial adviser in the deal, First Southwest Company LLC, settled separate allegations that it violated rules by not properly documenting services it was providing. That is also consistent with the allegations in the Commerce Corporation’s lawsuit against First Southwest Company. “It can only make us stronger as a state”. She said her committee will continue to analyze current legislation and seal any potential loopholes to prevent a similar situation in the future.