Rhode Island Commerce Corp., whose predecessor agency is facing Securities and Exchange Commission charges of defrauding investors in the 38 Studios bond financing fiasco, sees parallels to its own efforts to recoup money lost on the deal.
RI Commerce filed its own clawback lawsuit against parties related to a $75 million loan in 2010 to 38 Studios, former baseball pitcher Curt Schilling's video-game company that shut down and filed for Chapter 7 bankruptcy two years later.
"Today's filing makes consistent allegations," RI Commerce Corp. spokeswoman Kayla Rosen said in a statement late Monday.
Earlier Monday, the SEC charged the Rhode Island Economic Development Corp., which has been rebranded as RI Commerce; its underwriter, Wells Fargo Securities; and three individuals associated with $75 million of bonds with defrauding investors by not revealing the complete financial status of the company or the extent of the compensation arrangement with the underwriter.
The three are Peter Cannava, who the SEC said was Wells Fargo's lead banker on the deal; former RIEDC executive director Keith Stokes; and former RIEDC deputy director James Michael Saul. The latter two already settled charges and agreed to each pay $25,000 without admitting or denying the allegations.
The RIEDC provided a $75 million loan to the company, funded by the legislature and backed by the state's moral obligation, to entice Schilling’s company to relocate to downtown Providence from Maynard, Mass. State officials at the time envisioned 38 Studios as a cornerstone of a tech industry buildout.
“The corporation will continue to work toward its goals of recouping money for Rhode Island and holding the defendants in the Commerce Corp.’s lawsuit accountable,” said Rosen, whose agency is also suing former financial advisor First Southwest.
The SEC also settled related charges against First Southwest for failing to document its advisory relationship with the agency for seven months. First Southwest, without admitting or denying the findings, agreed to disgorge $120,000 of ill-gotten gains plus pay prejudgment interest of $22,400 as part of the settlement.
Wells Fargo said in a statement Monday that it disputes the SEC's allegations in connection with the placement of the bonds, and that it will respond in court.
State officials sued 14 parties overall.
The controversy has been politically volatile in Rhode Island, where the unemployment rate was one of the nation’s highest in the wake of the 2008-era recession.
State officials admit that the fiasco has many skittish about supporting new economic development proposals. When state lawmakers held hearings in 2014 on 38 Studios, Rep. Karen MacBeth, D-Cumberland, and Rep. Michael Chippendale, R-Foster, said they received threatening letters telling them to “back off” from investigating.
Last fall, Rhode Island selected Public Resources Advisory Group to replace First Southwest as its financial advisor. State General Treasurer Seth Magaziner has called for an overhaul of debt management practices within Rhode Island.
Regulators’ pursuit of Wells Fargo is a new twist, according to Mineola, N.Y., attorney and white-collar legal expert Anthony Sabino.
“The introduction of this outside banking entity means that the commission thinks it has a pocket deeper than Rhode Island, and there is corporate wrongdoing that the SEC thinks is worth pursuing,” said Sabino, a St. John’s University law professor.
“In all likelihood, the charges will be settled via some kind of a deal long before a trial, but the parameters of that deal should prove interesting.
“Where does the 38 Studios drama end? Clearly, it’s not over.”
