WASHINGTON – The Securities and Exchange Commission is asking a federal judge to allow it to submit an amended complaint that includes much more detailed charges against banker Peter Cannava in connection with an ill-fated private placement for startup video game company 38 Studios.
The request was made to Judge Jack McConnell, who sits on the U.S. District Court for Rhode Island and on Aug. 5 dismissed the charges against Cannava, a former banker with Wells Fargo, because they lacked specificity.
McConnell found there were not enough facts in the SEC's original complaint to support claims that Cannava aided and abetted his firm's defrauding of investors. The SEC claims Cannava was the lead banker on the deal for Wells Fargo, which underwrote the deal.
Kathleen Burdette Shields, the SEC lawyer handling the case, said in her motion that the amended complaint supports the commission's claims against Cannava with specific dates and facts. It also fixes an erroneous inclusion of negligence in the standard for the aiding and abetting claims against Cannava.
Shields drew on past federal precedent in arguing for the judge to allow the filing and also downplayed the effect that it would have both on the additional work both sides would need to put into the case and the timing of the proceedings. All of the details that would be included were drawn from documents that Cannava and Wells Fargo have already received, she said.
Brian Kelly, a partner with Nixon Peabody who is representing Cannava, said Shield's motion is a "waste of taxpayer resources" and that he intends to oppose it vigorously.
"It's more bureaucratic overreaching by the SEC and based on the same flawed legal and factual theories which have already been rejected by the federal court," Kelly said.
The SEC filed its original complaint against Cannava, Wells Fargo, and the Rhode Island Economic Development Corp., now called the Rhode Island Commerce Corp., on March 7, alleging the parties made fraudulent disclosures related to $75 million of muni bonds that the RIEDC privately placed in November 2010.
The SEC said they failed to disclose a funding gap with 38 Studios as well as a side agreement Wells Fargo had with the company that was a conflict of interest because it allowed Wells Fargo to receive almost double the amount of compensation as was disclosed in the offering documents after a previous, failed equity private placement attempt.
The $75 million of bonds were issued to help finance a multi-player game being developed by 38 Studios, whose board chair and majority shareholder was former baseball player Curt Schilling. The RIEDC loaned 38 Studios $50 million of bond proceeds and used the remaining funds to pay related issuance costs and to establish a reserve fund and a capitalized interest fund.
The loan was meant to be repaid with revenues 38 Studios generated from the game. However, the bond placement memo failed to disclose to investors that Massachusetts-based 38 Studios needed at least $75 million to produce the game and even more money to relocate to Rhode Island, the SEC said. The video game company never got the extra financing and eventually defaulted on its loan in 2012.
The SEC's original complaint was intended to show that each of the defendants either knew or should have known about the company's financing issues before moving forward with the private placement.
The amended complaint, which specifically tries to bolster the evidence against Cannava in response to McConnell's concerns, points to instances between June 2010 and Oct. 28, 2010, the date Cannava signed the bond placement memo for the deal, that show he was aware of the actionable discrepancies in the memo. Cannava was responsible for signing and reviewing all of the major agreements Wells Fargo made in relation to the offering, the SEC said.
For example, the SEC said Cannava prepared the bond cash flow projects for the deal in August 2010 that showed the deal was expected to yield 38 Studios $50 million. The SEC said that in prior negotiations with the RIEDC in June and July, Cannava was made aware of the fact that 38 Studios would need $75 million to complete its game. He also recommended on July 21, 2010 that RIEDC agree to make continuing disclosures with regard to 38 Studios' financial position because he realized that information was material to investors, the SEC said.
Additionally, the SEC lists dated examples where Cannava received emails or alerts about the equity deal Wells Fargo had with 38 Studios before he signed the bond placement memo. The commission also pointed to testimony Cannava gave as part of the investigation where he admitted to knowing about the funding gap and that there was some equity agreement that existed.
