Wells Fargo and a Rhode Island government agency were sued by a U.S. regulator for allegedly misleading investors about how much money a company led by former Boston Red Sox pitcher Curt Schilling needed to develop a video game.
After being hired to find financing for Schilling's 38 Studios, Wells Fargo failed to disclose that the $50 million raised from a bond offering was at least $25 million short of what the company needed to bring the game to market, the Securities and Exchange Commission said in a statement Monday. The Rhode Island Economic Development Corp. also knew that the bond sale wouldn't raise enough money for Schilling's company, the SEC said.
"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," Andrew Ceresney, head of the SEC's enforcement division, said in the statement.
In 2010, Schilling's company was developing a multiplayer online game that it estimated it would need at least $75 million to complete, according to the SEC. When 38 Studios couldn't obtain additional financing following the bond sale it failed to produce the game and defaulted on the loan.
Rhode Island Commerce Corp., formerly known as the Rhode Island Economic Development Corp., sold the federally taxable municipal bonds to induce the former Boston Red Sox pitcher to move his startup video game company from Massachusetts to Providence. The state expected it would create hundreds of jobs.
Spokesmen for Wells Fargo and the Rhode Island agency didn't immediately return phone calls seeking comment.
While the commerce corporation raised $75 million from the sale, $25 million of that was used to pay offering expenses, and to set up a reserve fund and capitalized interest fund, the SEC said. 38 Studios declared bankruptcy in 2012, with taxpayers responsible for repaying the money. The majority of the securities don't come due until 2020, meaning the state is on the hook to pay interest until then.
Keith Stokes, who was previously the Rhode Island agency's highest-ranking employee, agreed to pay a $25,000 fine for allegedly aiding and abetting the fraud. James Saul, the former deputy director of the state agency, also agreed to pay a $25,000 fine. In settling the SEC's claims, neither Stokes nor Saul admitted wrongdoing.
The SEC also sued Wells Fargo banker Peter Cannava. The case against him is continuing, the agency said.
"Contrary to what the SEC is trying to suggest, Mr. Cannava was not the lead banker on this matter," said Brian Kelly, his attorney. "The SEC is trying to scapegoat a mid-level banker instead of focusing on the mistakes of Rhode Island politicians. We will fight this vigorously."
About $51 million of the debt raised remains outstanding after a portion matured in November. 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.