State, Wells Fargo charged with fraud for 38 Studios deal

March 7, 2016 11:25 am

By Rebecca Turco

rturco@abc6.com

New developments in the ongoing 38 Studios saga as the feds are now charging a Rhode Island agency and Wells Fargo with fraud in the state’s disastrous 75 million dollar deal.

The United States Securities and Exchange Commission claim that Wells Fargo and the agency misled investors into a 75 million dollar deal for the video game company in 2010.

In a civil complaint filed Monday, SEC charges the Rhode Island Economic Development Corporation and its bond underwriter, Wells Fargo, with fraud, claiming they failed to tell investors that even with the hefty state-backed loan, the company still faced a funding shortfall, ultimately leaving taxpayers on the hook.

The complaint also targeted Wells Fargo’s lead banker in the deal, Peter Cannava, and two then-EDC executives, Keith Stokes and James Michael Saul. With the hope of putting this all behind them, Stokes and Saul agreed to settle to the tune of 25 thousand dollars each without admitting guilt.

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."

Stokes’ lawyer, Scott Morvillo, said the settlement represents what his client hopes is the final chapter in the matter, saying Stokes "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."

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.

"We need to get to the bottom of it and this is part of that process. But beyond that, we’ve got to move on," she says. "I want to make sure we get back every penny of taxpayer dollars that we can, so it’s all in the mix."

The state’s lawsuit against 38 Studios is ongoing. The case has been assigned to a judge, but no word yet on any court dates.

House Speaker Nick Mattiello also sent a statement saying, “I would note that the SEC complaint has nothing to do with the General Assembly’s passage of legislation. The focus is clearly on the flawed implementation and execution of the 38 Studios’ bond offering. It is very troubling that the SEC alleges that Wells Fargo was working on both sides of the transactions and did not disclose this information to bond holders. It is also disturbing that the EDC failed to protect the best interests of the state’s taxpayers in this transaction.”

A spokesperson for the Rhode Island Commerce Corporation released a statement Monday night, saying, in full:

“The Commerce Corporation is still reviewing today’s filing, which concerns events that occurred under a previous administration. The Commerce Corporation, in its own lawsuit, has alleged that Wells Fargo, Keith Stokes, and Michael Saul failed to disclose material information about the 38 Studios deal to the former Economic Development Corporation’s board of directors and to investors. Today’s filing makes consistent allegations. In addition the SEC issued an order against First Southwest Company today for its conduct in acting as the financial adviser to the former Economic Development Corporation in connection with the 38 Studios transaction. That order concludes that First Southwest committed willful violations of fair dealing requirements of certain federal securities rules. That is also consistent with the allegations in the Commerce Corporation’s lawsuit against First Southwest Company. 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.”