Rhode Island, Wells Fargo charged with fraud for 38 Studios deal

PROVIDENCE, R.I. – The U.S. Securities and Exchange Commission on Monday charged Rhode Island’s economic development agency and Wells Fargo with defrauding investors for the state’s disastrous $75 million deal with 38 Studios, the failed video game company started by former Red Sox pitcher Curt Schilling.

The civil complaint, filed in U.S. District Court in Providence, accuses the Rhode Island Commerce Corp. and Wells Fargo Securities of making materially misleading statements when they sold the bonds used to fund the deal.

Also named are former agency officials Keith Stokes and Michael Saul, and Peter Cannava, Wells Fargo’s lead banker on the transaction. Stokes and Saul agreed to settle the SEC charges without admitting or denying the allegations and must each pay a $25,000 penalty.

Representatives for those named in the action either did not immediately comment or did not immediately return calls for comment.

38 Studios ran out of money in 2012, less than two years after the state agreed to give it a $75 million loan guarantee in exchange for moving from Massachusetts.

The deal was financed through bonds offered to investors in 2010.

The SEC complaint says the officials knew that 38 Studios needed at least $75 million to bring its game, code-named “Project Copernicus,” to completion. But under the deal with the state, the company would receive only $50 million of proceeds from the bond offering. Despite that, the bond offering documents failed to disclose the funding gap, the complaint alleges.

“38 Studios’ funding gap was known at the time the Bond Placement Memo was sent to investors. It was not speculative. It was an existing risk that should have been disclosed to potential investors in the offering,” the complaint says.

A state lawmaker who has led oversight hearings to discover what went wrong leading up to the 38 Studios deal said she was pleased to hear about the charges.

“I’m glad that they did their due diligence in investigating,” said state Rep. Karen MacBeth, a Cumberland Democrat and chairwoman of the House Oversight Committee. “It can only make us stronger as a state.”

She said that in the future, “people that may consider doing something like this may think twice.