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SEC sues Wells Fargo and Rhode Island for game loan disaster

The pair misled investors over 38 Studios deal, commission alleges.
Artwork from 'Kingdoms of Amalur: Reckoning.' 38 Studios

Wells Fargo and Rhode Island state have been charged with fraud by the U.S. Securities and Exchange Commission (SEC) for their part in the 38 Studios debacle. The SEC alleges that both parties defrauded investors to the tune of $50 million in an attempt to finance the MMO Project Copernicus.

You can be forgiven for forgetting about 38 Studios -- it's been defunct for years now -- but let's bring you up to speed. The game maker was founded in Massachusetts by baseball star Curt Schilling, but moved to Rhode Island as part of the state's economic development plan, securing a $75 million loan guarantee from to build the action-RPG Kingdoms of Amalur: Reckoning and an MMO codenamed Project Copernicus.

It managed to borrow $50 million from a state agency, but couldn't secure the additional $25 million it needed. Although it released Kingdoms of Amalur, and sold over a million copies, it faced a massive shortfall and unable to pay back the money it had already borrowed. The studio was forced to close without completing Project Copernicus. When it finally filed for bankruptcy in 2012, it owed over $150 million, with less than $22 million in assets.

The SEC asserts that the Rhode Island Commerce Corp (formerly the Rhode Island Economic Development Corporation, RIEDC) and Wells Fargo failed to tell investors that 38 Studios was $25 million short of the total funding it needed to make its game."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 said.

Additionally, Wells Fargo is accused of failing to disclose a side deal with 38 Studios that "nearly doubled" the compensation it received when the deal went sour. "This additional compensation," said the SEC, "... created a conflict of interest that Wells Fargo should have disclosed to bond investors." Wells Fargo's lead banker on the deal, Peter Cannava, has been charged with aiding and abetting the fraud, along with two former RIEDC executives, Keith Stokes and James Saul. Although neither has admitted guilt, both Stokes and Saul have already settled the suit, paying a $25,000 fine.

Wells Fargo says it disputes the allegations, and will argue its case in court, suggesting that Cannava is unlikely to settle. RIEDC is still reviewing the SEC's complaint, and as such is not commenting on specifics. It did note that it previously filed suit against Wells, alleging that the bank didn't inform it of its side deal with 38 Studios.

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