Carmel, Milazzo & DiChiara LLP (CMD) is investigating potential claims against Wells Fargo and the Rhode Island Economic Development Corporation (RIEDC, now called the Rhode Island Commerce Corporation).
The Securities and Exchange Commission has charged a Rhode Island agency and its bond underwriter Wells Fargo Securities with defrauding investors in a municipal bond offering to finance a startup video game company 38 Studios.
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.
The SEC’s complaint further alleges that Wells Fargo 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.
- Peter M. Cannava was responsible for Wells Fargo’s failure to disclose its additional fees.
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 Keith W. Stokes, James Michael Saul, and Peter M. 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). Peter Cannava is charged with aiding and abetting those violations.
If you or someone you know lost money investing in Rhode Island Economic Development Corporation bonds, you may be able to recover your losses through securities arbitration or litigation. The attorneys at CMD are experienced in representing investors in bond, fraud and failure to supervise actions against underwriters, issuers, brokers and brokerage firms. CMD accepts cases on a contingency fee basis, which means we only get paid if you get paid. Your time to file a claim may be limited, so contact us today at (212) 658-0458 or firstname.lastname@example.org for a free and confidential case evaluation.