The Securities and Exchange Commission has charged Wells Fargo Securities and a Rhode Island agency with defrauding investors in a municipal bond offering to finance a startup video game company.
The case concerns the Rhode Island Economic Development Corp.'s issuance of $75 million in bonds for 38 Studios, the video game company started by former Red Sox pitcher Curt Schilling that closed in 2012, as part of a state program that aimed to boost economic development and jobs by loaning bond proceeds to private companies.
"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, 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," Ceresney added.
In addition, the SEC has 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 have agreed to settle these charges without admitting or denying the allegations. Each will pay a $25,000 penalty and is prohibited from participating in any future municipal securities offerings.
According to the SEC's complaint, which was filed in the federal district court in Providence, the Rhode Island agency loaned $50 million in bond proceeds to 38 Studios. It used the remaining proceeds to pay bond offering expenses and to set up a reserve fund and a capitalized interest fund.
"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," the company said in a statement.
As part of the loan program, the agency told bond investors they would be repaid from revenues generated by video games being developed by 38 Studios.
