Wells Fargo agrees to $813K settlement to SEC over 38 Studios complaint

PROVIDENCE – Wells Fargo Securities LLC has agreed to a $812,500 settlement with the Securities and Exchange Commission over its role in the 38 Studios LLC debacle, according to filings in U.S. District Court in Rhode Island Monday.

The federal agency previously charged R.I. Economic Development Corp. (now the R.I. Commerce Corp.), Wells Fargo Securities and its lead banker, Peter M. Cannava, and two EDC executives with fraud.

The activity in the complaint stems from 2010, when the state facilitated $75 million in bond sales for 38 Studios, categorizing them as moral-obligation bonds. Of the $75 million total, $50 million went to the company and the remaining proceeds were to pay related-bond offering expenses and to establish a reserve fund and a capitalized interest fund. Bond investors, who expected to be repaid from revenue generated from the video game, were not told, however, that 38 Studios needed at least $75 million to produce a video game. The SEC alleges investors were not fully informed through the offering and purchased bonds that weren’t sufficient for the full development of the video game.

Two years later, 38 Studios filed for bankruptcy, leaving Rhode Island taxpayers on the hook to pay back the bondholders based on the state’s guarantee.

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As part of the agreement, Wells Fargo will not have to admit or deny the allegations of the complaint but would be permanently restrained and enjoined from violating rules related to dealing in municipal securities activities, including by not “engaging in any deceptive, dishonest or unfair practice,” according to court filings.

The SEC also filed to dismiss counts related to Wells Fargo in the complaint. The deal will still have to be approved by a federal judge. Cannava was not included in the proposed settlement filings.

Commerce RI settled with the SEC in 2017 for $50,000 for its alleged actions in the complaint. As part of its deal, the agency did not have to admit any wrongdoing in the role it played when issuing $75 million in bonds to invest in the 38 Studios, which went bankrupt in 2012.

The EDC executives originally named by the SEC, Keith W. Stokes and James Michael Saul also settled.

Wells Fargo, along with Barclays Capital Inc., another financial adviser to the state on the deal, settled for a combined $25.6 million with the state in 2016, in essence for the same activities that the SEC just settled with Wells Fargo for.

Chris Bergenheim is the PBN web editor. Email him at Bergenheim@PBN.com.