Wells Fargo Securities and the economic development agency defrauded investors in order to finance the video game startup founded by former Boston Red Sox pitcher Curt Schilling, the SEC said.
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SEC lawyers allege in the complaint (PDF) that the parties engaged in half-truths, recklessness and negligence in pushing the deal to investors. Rhode Island lawmakers have occasionally floated the notion of failing to pay on the bonds, causing Moody’s Investors Service and Standard & Poor’s to threaten downgrades to the state’s credit.
UPDATE: “The Commerce Corporation is still reviewing today’s filing, which concerns events that occurred under a previous administration”, a spokeswoman for the Rhode Island Economic Development Corp., which renamed itself The Commerce Corporation, said in an e-mailed statement.
Schilling is a former pitcher for the Boston Red Sox. But under the deal with the state, the company would receive only $50 million of proceeds from the bond offering.
In addition, the SEC has charged Wells Fargo’s lead banker on the deal, Peter M. Cannava, and two then-RIEDC executives, Keith W. Stokes and James Michael Saul, with “aiding and abetting the fraud”. Schilling said the company personally cost him US$50 million.
The bond offering document produced by the RIEDC and Wells Fargo failed to disclose to investors that 38 Studios had conveyed it needed at least $75 million in funding to produce a particular video game.
Bond investors were to be repaid by revenue generated by video game sales.
38 Studios declared bankruptcy in 2012 following the release of RPG Kingdoms of Amalur: Reckoning.
Stokes and Saul have agreed to settle these charges without admitting or denying the allegations.
Schilling isn’t 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.
“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”, Ceresney added.
Cannava’s lawyer, Brian Kelly, responded to the claims, disputing the SEC’s contention that Cannava was the lead banker on the matter, saying, “The SEC is trying to scapegoat a mid-level banker instead of focusing on the mistakes of Rhode Island politicians”.
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The regulator also charged that Wells Fargo failed to inform investors that it had entered into a side deal with the video game studio so that it received almost double the compensation that was disclosed to investors. “That immediate need for more funding was a material risk, particularly in light of 38 Studios’ failure to attract any equity investors when it sought, through Wells Fargo, to raise equity investments earlier in 2010”, the SEC says. “The Corporation will continue to work toward its goals of recouping money for Rhode Island and holding the defendants in the Commerce Corporation’s lawsuit accountable”. “I am committed to working with the General Assembly to reform Rhode Island’s system of debt management and oversight, to minimize the chance of a future public debt debacle”.
