WASHINGTON – The Rhode Island Commerce Corp. and Securities and Exchange Commission have reached a settlement in principle to resolve SEC fraud charges in connection with a private placement by the failed video game company 38 Studios.
The settlement still must get formal approval from the SEC and the commission is expected to take that step early this month, according to an RICC motion for extension of time to respond to the complaint filed in Rhode Island federal court.
The SEC assented to the RICC's motion and Judge John McConnell of the U.S. District Court for Rhode Island granted the motion, delaying the RICC's deadline to file a response until Jan. 30.
Max Wistow, a lawyer representing the RICC, declined to comment and Matt Sheaff, a spokesperson for the RICC, could not be reached for comment. The SEC does not comment on ongoing litigation.
The settlement would respond to charges the SEC brought in March against the RICC, its underwriter, and three individuals. The March complaint uses the RICC's former name, the Rhode Island Economic Development Corp.
In the complaint, the SEC said that the parties involved defrauded investors by not revealing 38 Studios' complete financial status or the extent of the compensation arrangement that existed between 38 Studios and the underwriter, Charlotte-based Wells Fargo Securities. First Southwest, the RICC's financial advisor at the time of the alleged fraud, had already settled with the SEC over charges that it failed to document its advisory relationship with the agency for seven months. The advisory firm settled without admitting or denying the findings and agreed to disgorge $120,000 of ill-gotten gains as well as pay prejudgment interest of $22,400.
The charges stem from $75 million of muni bonds that the RICC privately placed in November 2010 to help finance a project being developed by Massachusetts-based 38 Studios, whose board chair and majority shareholder was former baseball player Curt Schilling. The RICC loaned 38 Studios $50 million in bond proceeds and used the remaining funds to pay related bond offering expenses and establish a reserve fund as well as a capitalized interest fund.
The loan was meant to be repaid with revenues 38 Studios generated from a multi-player video game project code-named Project Copernicus. However, the bond placement memo failed to disclose to investors that 38 Studios needed at least $75 million to produce the game and even more money to relocate to Rhode Island. The video game company did not obtain the extra financing and eventually defaulted on its loan in 2012.
The SEC's complaint included evidence that the RICC either knew or should have known about 38 Studios' financing issues before moving forward with the private placement. The company had made clear throughout its negotiations with the RICC that it would require $75 million and it was clear from discussions and documents at the time that the company would only receive $50 million from the RICC loan, the SEC said.
Two individuals who had been employed with the RICC, former executive director Keith Stokes and former deputy director James Michael Saul, settled with the SEC, agreeing to each pay $25,000. They also are barred from participating in future muni offerings.
SEC litigation is ongoing against Wells Fargo and Peter Cannava, a Wells Fargo banker who the SEC alleges aided and abetted the defrauding of investors. Cannava had successfully gotten the SEC's charges dismissed, but the banker was brought back into the case after the SEC amended its complaint to add details about Cannava's actions.
The complaint details an undisclosed side agreement Wells Fargo had with 38 Studios that was a conflict of interest because it allowed the underwriter to receive almost twice the compensation disclosed in the offering documents after the firm failed with an equity private placement attempt.
