It's been almost four years since 38 Studios shut down, but the fallout from its collapse--and the subsequent defaulting on a massive loan from the taxpayers of Rhode Island--continues. The Securities and Exchange Commission today charged Wells Fargo Securities and the Rhode Island Commerce Corporation (formerly the Rhode Island Economic Development Corporation) with defrauding investors in the issuing of $75 million in bonds to loan the studio money.
After setting aside money for bond-offering expenses, a reserve fund and a capitalized interest fund, the RIEDC loaned the remaining $50 million to 38 Studios for the development of its Project Copernicus massively multiplayer online game, with the money to be repaid from the game's revenues. However, the SEC alleges that 38 Studios had told both the RIEDC and Wells Fargo that it would need $75 million to finish the game, but that information wasn't passed on.
"Municipal issuers and underwriters must provide investors with a clear-eyed view of the risks involved in an economic development project being financed through bond offerings," said SEC Enforcement Division director Andrew Ceresney. "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."
Three individuals--Wells Fargo's lead banker Peter M. Cannava and former RIEDC executives Keith W. Stokes and James Michael Saul--were charged with aiding and abetting the fraud. Stokes and Saul have already settled the charges, paying $25,000 each but not admitting to the allegations.
The RIEDC's financial advisor First Southwest Company LLC settled separate charges that it failed to document the services it was providing for the seven months it advised the RIEDC regarding the bond, paying a total of $192,400 but not admitting to wrongdoing.
The SEC is also accusing Wells Fargo and Cannava of failing to fully disclose their financial interests in the bond-offering materials, neglecting to inform investors that they had a side deal with 38 Studios that almost doubled the compensation they would have received in the deal and creating a conflict of interest.