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Wells Fargo Says It Will Fight SEC Fraud Charges

March 7, 2016, 9:16 PM UTC
A Wells Fargo bank branch on Madison Avenue in Midtown Manhattan,  New York, U.S., on Saturday, April 11, 2015.  Photographer: Craig Warga/Bloomberg *** Local Caption ***
Wells Fargo is one of the big U.S. banks that managed to grow in 2014.
Photograph by Getty Images

The U.S. Securities and Exchange Commission on Monday charged a Wells Fargo unit and Rhode Island Economic Development Corp with civil fraud stemming from a bond offering for 38 Studios, a now-bankrupt video game company.

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. The company was named after Schilling’s Major League jersey number.

The SEC‘s charge arose from a $75 million bond offering in 2010 that was part of a Rhode Island program intended to spur economic development and create jobs, the SEC said.

Wells Fargo disputes the SEC‘s allegations and will respond to them in court, a spokesman said.

A spokeswoman for the Rhode Island Economic Development Corp, now called the Rhode Island Commerce Corp, declined to immediately comment.

The Rhode Island agency did not tell investors that 38 Studios faced a funding shortfall to produce a particular video game, which it would be unable to develop without additional funding sources, the SEC said.

The state agency loaned $50 million in bond proceeds to 38 Studios, which needed an additional $25 million in funding to produce the game. The studio was unable to get additional financing and defaulted on the loan without producing the video game, the SEC said.

The video game was supposed to go on sale in 2011.

Wells Fargo’s lead banker in the offering, Peter Cannava, was also charged in the SEC case.

Wells and Cannava misled investors by not telling them that Wells Fargo Securities had a side deal with 38 Studios, through which it received nearly double the amount of compensation it had disclosed to investors in offering documents, the SEC said.

“We think all of the allegations lack merit and look forward to our day in court,” said Brian Kelly, Cannava’s Boston-based lawyer.

Two former Rhode Island Economic Development Corp executives, Keith Stokes and James Saul, settled the SEC‘s charges of abetting the fraud, the SEC said. Neither Stokes nor Saul admitted nor denied the allegations, the SEC said. Each will pay a $25,000 penalty and are prohibited from taking part in any future municipal securities offerings, the SEC said. Their lawyers could not be immediately reached for comment.

When it went under in 2012, 38 Studios said it owed more than $150 million and had less than $22 million in assets. Schilling said the company personally cost him $50 million.