Rhode Island Quasi-Public Agency and Wells Fargo Charged with Fraud by SEC
The Securities and Exchange Commission has charged Wells Fargo Securities and Rhode Island Economic Development Corporation (RIEDC; now Rhode Island Commerce Corporation) for fraud. They allegedly defrauded investors regarding a municipal bond that would help finance 38 Studios, a startup video game company.
According to the allegations, the RIEDC is a quasi-public Rhode Island corporation created by the State of Rhode Island to promote the expansion and development of new and existing businesses in Rhode Island and to encourage the State’s economic development. The SEC alleges that the RIEDC issued roughly $75 million in bonds to help with the 38 studios project, citing a state government program designed to increase development of the economy and employment rates. The SEC claims that the RIEDC allegedly loaned 38 studios $50 million in proceeds earned by the bonds and the rest were used to pay offering expenses and placed in a reserve fund and capitalized interest fund. This loan would be repaid based on the amount of revenue earned by the video games the company made. According to the SEC, Wells Fargo acted as the lead placement agent for the bonds.
The documents regarding the bond offerings made by RIEDC and Wells Fargo allegedly did not inform investors that the video company made it clear they needed at minimum $75 million to develop a particular game. This means that investors allegedly did not know when they made purchased the bonds that the funds were not enough and the company could not create the game without additional funding. When 38 Studios was unable to obtain the money they needed to make the game, they defaulted on the loan.
The SEC accuses RIEDC and Wells Fargo of knowing that 38 Studios needed additional funds but did not inform the investors of this detail. The SEC charged Wells Fargo’s lead banker on this transaction, Peter Cannava, and Keith Stokes and James Saul, two executives with RIEDC at the time with aiding and abetting fraud.
If you purchased bonds with Rhode Island Economic Development Corporation and Wells Fargo to help fund 38 Studios and lost money, contact our security fraud attorneys at Meyer Wilson for a free consultation today.