SEC files fraud charges over 38 Studios deal


PROVIDENCE, R.I. (WPRI) – The U.S. Securities and Exchange Commission on Monday announced civil fraud charges against Rhode Island’s economic-development agency and Wells Fargo Securities over their roles in the failed 38 Studios video-game deal.

The SEC, which regulates the investment world, filed a complaint in federal court in Providence alleging the former R.I. Economic Development Corporation (EDC) and Wells Fargo defrauded investors when they sold $75 million in bonds in November 2010 to fund 38 Studios, the game company founded by former Red Sox ace Curt Schilling. Wells Fargo was the lead underwriter on the bond transaction.

The document provided to 38 Studios bond investors was “a misleading half-truth,” SEC lawyers wrote in the complaint, caused by the “recklessness or negligence” of EDC and Wells Fargo employees, who failed to make clear the company was not going to net enough money from Rhode Island to finish its game project.

“38 Studios’ funding gap was known at the time the Bond Placement Memo was sent to investors” in 2010, the SEC lawyers wrote. “It was not speculative. It was an existing risk that should have been disclosed to potential investors in the offering.”

The SEC said it is seeking “disgorgement of ill-gotten gains and prejudgment interest thereon” from the EDC and Wells Fargo, as well as “injunctions against future violations, and civil penalties.” The case has been assigned to U.S. District Court Chief Judge William Smith.

38 Studios collapsed into bankruptcy in June 2012 and has been the subject of harsh political recriminations in Rhode Island ever since. State officials filed a civil suit against some of the architects of the deal in November 2012, and that case is scheduled to go to trial this September. first broke the news of the SEC’s 38 Studios investigation back in September 2013.

“Municipal issuers and underwriters must provide investors with a clear-eyed view of the risks involved in an economic development project being financed through bond offerings,” Andrew Ceresney, director of the SEC Enforcement Division, said in a statement.

“We allege that the RIEDC and Wells Fargo knew that 38 Studios needed an additional $25 million to fund the project yet failed to pass that material information along to bond investors, who were denied a complete financial picture,” he said.

The SEC also charged Keith Stokes and J. Michael Saul, the EDC’s executive director and deputy director at the time, with “aiding and abetting” the alleged fraud; Stokes and Saul have agreed to pay $25,000 each to settle without admitting or denying the allegations, according to the SEC. They have also been barred from participating in future municipal securities transactions.

“The settlement between Mr. Stokes and the SEC represents what Mr. Stokes hopes to be the final chapter in the matter,” E. Scott Morvillo, the lawyer who represents Stokes, told in an email. “He is pleased that this matter is resolved and looks forward to putting all of this behind him and moving on with his life and career.”

The SEC has also charged a third individual, Wells Fargo banker Peter Cannava, with aiding and abetting the alleged fraud; he has not agreed to settle. In addition, the SEC alleges Wells Fargo and Cannava failed to disclose a separate “side deal” they had with 38 Studios to receive additional compensation from the company.

“An underwriter’s ‘skin in the game’ is material information to investors,” LeeAnn Ghazil Gaunt, chief of the enforcement division’s Municipal Securities and Public Pensions Unit, said in a statement. “We allege that Wells Fargo failed to fully disclose its own economic interest in this bond transaction.”

Cannava, 36, is a New York City resident and vice-president at Wells Fargo. His Boston-based lawyer, Brian Kelly, said Cannava would fight the federal fraud allegations “vigorously.”

“Contrary to what the SEC is trying to suggest, Mr. Cannava was not the lead banker on this matter,” Kelly told in an email. The SEC “is trying to scapegoat a mid-level banker instead of focusing on the mistakes of Rhode Island politicians,” he said.

Wells Fargo spokesman Kevin Friedlander said in an email: “Wells Fargo disputes the SEC’s allegations in connection with the placement of these municipal bonds. We will respond to the specific allegations in the complaint in court.”

Cannava was previously in the news after the disclosure of an August 2010 email written by a top 38 Studios board member who claimed Wells Fargo had “cut a deal” with then-Treasurer Frank Caprio to bring a second lender, Barclays, into the transaction in exchange for Caprio downplaying his concerns about the deal.

The EDC, now known as the R.I. Commerce Corporation, issued a statement through spokeswoman Kayla Rosen saying the agency is still reviewing the SEC civil complaint but sees the allegations as “consistent” with the lawsuit brought by the state in November 2012.

“The corporation will continue to work toward its goals of recouping money for Rhode Island and holding the defendants in the Commerce Corporation’s lawsuit accountable,” Rosen said.

Gov. Gina Raimondo said Monday afternoon it was “disappointing” to see the SEC bring charges, and reiterated that she opposed the 38 Studios deal from the start. “It was a terrible mistake – we never should have done it,” she said. “Let’s get to the bottom of it, but let’s move on and get Rhode Island ready for the future.”

Raimondo acknowledged it’s possible taxpayers could face fines if the SEC charges against the EDC stick. “Potentially,” she said. “I just heard about it myself, so I need to look into it. At the same time, we are pursuing our lawsuit vigorously. I want to make sure we get back every penny of taxpayer dollars that we can.”

In one sense, the SEC’s allegation does appear to mirror one made by lawyers for the state in their civil suit: that Wells Fargo, top EDC staff and others involved in the deal failed to fully disclose that 38 Studios needed all $75 million from the bond proceeds to finish its video game, not the roughly $50 million it wound up receiving. (The rest of the bond money went toward a reserve fund for future payments to investors and financing costs.)

At the same time, however, the SEC’s version of events also appears to complicate the state lawyers’ argument, since it lumps in the EDC as one of the individuals and entities that failed to fully disclose the financing shortfall, rather than suggesting the EDC was among those duped by others.

Another company involved in the 38 Studios deal and sued by the state, First Southwest, has separately agreed to pay $192,400 to settle charges that it failed to properly document its involvement in writing but is not admitting or denying wrongdoing, the SEC announced. First Southwest was the state’s financial adviser at the time.

Patti Doyle, a First Southwest spokeswoman, emphasized that the company had not admitted “any fault or liability” and said the settlement “deals only with a technical rule violation.” She added: “That settlement should have no impact on the separate 38 Studios civil litigation.” (First Southwest is now known as HilltopSecurities.)

Separately from the SEC probe, a years-long state-level criminal investigation into 38 Studios is “still pending,” R.I. State Police Col. Steven O’Donnell confirmed Monday afternoon. O’Donnell recently said that probe was close to concluding.

General Treasurer Seth Magaziner, who took office last year, argued he is taking steps to rectify the problems highlighted by the 38 Studios “debacle,” notably by replacing First Southwest and by asking lawmakers to create a new Office of Debt Management that would oversee state borrowing.

House Speaker Nicholas Mattiello, whose now-incarcerated predecessor Gordon Fox played a central role in the 38 Studios deal, issued a statement Monday emphasizing that the SEC complaint has “nothing to do” with lawmakers’ 2010 passage of the law that authorized the transaction.

“The focus is clearly on the flawed implementation and execution of the 38 Studios bond offering,” Mattiello said. “It is very troubling that the SEC alleges that Wells Fargo was working on both sides of the transactions and did not disclose this information to bondholders. It is also disturbing that the EDC failed to protect the best interests of the state’s taxpayers in this transaction.”

Here is the full statement from the SEC:

SEC Charges Rhode Island Agency and Wells Fargo With Fraud in 38 Studios Bond Offering


Washington D.C., March 7, 2016 — The Securities and Exchange Commission today charged a Rhode Island agency and its bond underwriter Wells Fargo Securities with defrauding investors in a municipal bond offering to finance startup video game company 38 Studios.

The Rhode Island Economic Development Corporation (RIEDC, now called the Rhode Island Commerce Corporation) issued $75 million in bonds for the 38 Studios project as part of a state government program intended to spur economic development and increase employment opportunities by loaning bond proceeds to private companies.

According to the SEC’s complaint filed in federal district court in Providence:

• The RIEDC loaned $50 million in bond proceeds to 38 Studios. Remaining proceeds were used to pay related bond offering expenses and establish a reserve fund and a capitalized interest fund.

• The loan and, in turn, bond investors would be repaid from revenues generated by video games that 38 Studios planned to develop.

• The bond offering document produced by the RIEDC and Wells Fargo failed to disclose to investors that 38 Studios had conveyed it needed at least $75 million in funding to produce a particular video game.

• Therefore, investors weren’t fully informed when deciding to purchase the bonds that 38 Studios faced a funding shortfall even with the loan proceeds and could not develop the video game without additional sources of financing.

• When 38 Studios was later unable to obtain additional financing, the video game didn’t materialize and the company defaulted on the loan.

“Municipal issuers and underwriters must provide investors with a clear-eyed view of the risks involved in an economic development project being financed through bond offerings,” said Andrew Ceresney, Director of the SEC Enforcement Division. “We allege that the RIEDC and Wells Fargo knew that 38 Studios needed an additional $25 million to fund the project yet failed to pass that material information along to bond investors, who were denied a complete financial picture.”

The SEC also charged Wells Fargo’s lead banker on the deal, Peter M. Cannava, and two then-RIEDC executives Keith W. Stokes and James Michael Saul with aiding and abetting the fraud. Stokes and Saul agreed to settle the charges without admitting or denying the allegations and must each pay a $25,000 penalty. They are prohibited from participating in any future municipal securities offerings. The SEC’s litigation continues against Cannava, Wells Fargo, and RIEDC.

The SEC’s complaint further alleges that Wells Fargo and Cannava misled investors in an additional way in bond offering materials:

• Wells Fargo disclosed its bond offering compensation as a share of the placement agent fee plus a $50,000 payment from 38 Studios. No other fees or compensation to Wells Fargo were disclosed, and the bond placement agreement stated that no other money was anticipated.

• Investors weren’t informed that Wells Fargo had a side deal with 38 Studios that enabled the firm to receive nearly double the amount of compensation disclosed in offering documents.

• This additional compensation, totaling $400,000 and paid from bond proceeds, created a conflict of interest that Wells Fargo should have disclosed to bond investors.

• Cannava was responsible for Wells Fargo’s failure to disclose its additional fees.

“An underwriter’s ‘skin in the game’ is material information to investors,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. “We allege that Wells Fargo failed to fully disclose its own economic interest in this bond transaction.”

The SEC’s complaint charges the RIEDC and Wells Fargo with violations of Sections 17(a)(2) and (a)(3) of the Securities Act of 1933, and charges Stokes, Saul, and Cannava with aiding and abetting those violations. Wells Fargo also is charged with violations of Section 15B(c)(1) of the Securities Exchange Act of 1934 and Rules G-17 and G-32 of the Municipal Securities Rulemaking Board (MSRB). Cannava is charged with aiding and abetting those violations.

In a separate administrative proceeding, the RIEDC’s financial advisor for the bond offering – First Southwest Company LLC – agreed to settle charges that it violated MSRB rules by failing to document in writing the scope of the services the firm was providing in the bond offering until seven months after the financial advisory relationship began. Without admitting or denying the findings, First Southwest agreed to pay disgorgement of $120,000, prejudgment interest of $22,400, and a penalty of $50,000.

The SEC’s investigation was conducted by its Municipal Securities and Public Pensions Unit, including Louis Randazzo, Joseph Chimienti, Jonathan Wilcox, Kevin B. Currid, and Deputy Chief Mark Zehner. The SEC’s litigation is being led by Kathleen B. Shields of the Boston Regional Office and Mr. Randazzo.

Ted Nesi ( covers politics and the economy for He hosts Executive Suite and writes The Saturday Morning Post. Follow him on Twitter: @tednesi Tim White ( is the Target 12 investigative reporter for WPRI 12 and Fox Providence. Follow him on Twitter: @TimWhiteRISteve Nielsen contributed to this report.This story has been amended to clarify that First Southwest’s settlement involves its alleged failure to document its involvement in writing, rather than its failure to offer disclosures.

Copyright 2022 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.



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