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SEC Files Charges Against Rhode Island, Wells Fargo Over 38 Studios Collapse

by Mike Futter on Mar 07, 2016 at 09:21 AM

The Rhode Island Economic Development Corporation, which issued $75 million in bonds for Curt Schilling’s 38 Studios, is now facing federal charges. The organization and underwriter Wells Fargo have been accused by the Securities and Exchange Commission of defrauding investors.

$50 million of those bonds was given directly to 38 Studios in the form of a loan, with the remainder held to pay expenses and create an emergency reserve fund. The issue, according to the SEC, is that investors were not provided with key information, namely that 38 Studios required a minimum of $75 million to complete its first game.

The SEC also alleges fraud, claiming that a key banker on the deal, Peter Cannava, failed to disclose a side arrangement with 38 Studios. This created what the SEC deems to be a conflict of interest that should have been disclosed to investors. Also named are former REIDC executives Keith Stokes and James Michael Saul.

Kingdoms of Amalur: Reckoning, the first and only game from 38 Studios, was released in February 2012. The company began to fall apart shortly thereafter as Rhode Island governor Lincoln Chafee’s administration disclosed that the developer failed to make anticipated payments on its loan.

A settlement was signed in 2014 paying out $2.4 million to investors. These funds were paid out of the reserve contingency created during the initial bond offering. The SEC investigation has been ongoing since September 2013

[Source: SEC via VentureBeat]

 

Our Take
The SEC investigation clearly gave the agency enough to allege wrongdoing. The possible conflict of interest, failure to disclose material details, and ultimate accusation of fraud are hefty charges. Penalties could be disgorgement (repayment of ill-gotten gains) and additional civil monetary compensation. 

Intent to commit fraud is not necessary under the section of the securities law cited in the SEC document (sections 17(a)(2) and 17(a)(3)). In other words, the penalties here will likely be monetary and not result in jail time.