Dealers Agree to Pay $25.6M to R.I. Issuer in 38 Studios Settlement

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WASHINGTON – Wells Fargo Securities and Barclays Capital have agreed to pay the Rhode Island Commerce Corp. $25.6 million in a proposed settlement of a lawsuit involving a loan to former videogame company 38 Studios, the state announced Tuesday.

The parties filed the settlement with the Rhode Island Superior Court, which must give its approval before the settlement can take effect. If the court approves it, the RICC, formerly known as the Rhode Island Economic Development Corp. (RIEDC), will have recouped more than $42 million of the roughly $88 million state moral obligation on the 38 Studios bonds for both past and future appropriations, according to the corporation.

Gabriel Boehmer, a spokesman for Wells Fargo said the firm is pleased to have reached an agreement in this case.

"We are not admitting liability, nor did we do anything improper," he said. "It is simply in our shareholders’ best interest to minimize the risk that accompanies lengthy litigation."

Representatives from Barclays could not be reached for comment. Wells Fargo and Barclays served as placement agents for the RIEDC on the deal.

The lawsuit stems from $75 million of municipal bonds that the RIEDC privately placed with institutional investors in November 2010 to help finance a project being developed by 38 Studios, whose board chair and majority shareholder was former baseball player Curt Schilling.

The funding for the project was part of a Rhode Island program intended to spur economic development and promote job growth in the state. The bonds were backed by the state's moral obligation and were also insured.

The RIEDC loaned 38 Studios $50 million from the issuance and used the remaining $25 million to pay issuance costs and to establish both a reserve fund and a capitalized interest fund. The state expected that the loan would be repaid from revenues 38 Studios generated from a new multi-player game it was developing. However, 38 Studios needed at least $75 million to produce the game and never received additional funding, leading it to default on its loan and fold completely in 2012.

Rhode Island Gov. Gina Raimondo said in a statement following the proposed settlement announcement that the state "is committed to keep going" to recover more money from other settlements related to the deal.

"Rhode Islanders understandably feel hurt by this deal – and I do too – but I want everyone to know that we are demanding accountability, getting money back, and moving the state forward," she said.

The state has previously settled with the law firm Adler, Pollock & Sheehan PC, as well as Robert Stoltzman, Michael Saul, and Keith Stokes for $12.5 million in August 2015. It settled with Antonio Afonso, Jr. and Moses Afonso Ryan Ltd. for $4.37 million in June 2014.

RICC is still litigating with other defendants involved with the deal, including First Southwest Company, its financial advisor at the time, and Schilling. First Southwest is now part of Hilltop Securities after it merged with Southwest Securities.

A trial is scheduled to begin in October if the corporation and the remaining parties cannot reach settlements.

Several of the parties named in the state-level litigation are also involved in a civil case brought by the Securities and Exchange Commission in March of this year.

The SEC charged the RIEDC, Wells Fargo, and three individuals with defrauding investors by not revealing the complete financial status of 38 Studios or the extent of a compensation arrangement with Wells Fargo at the time of the issuance.

First Southwest, which also faced SEC charges for failing to document its advisory relationship with RIEDC for seven months, settled with the SEC without admitting or denying the commission's findings. The company agreed to disgorge $120,000 of ill-gotten gains plus pay prejudgment interest of $22,400 as part of the settlement.

Stokes, the RIEDC's former executive director, and Saul, its former deputy director, also settled with the SEC, paying $25,000 each without admitting or denying the charges.

Wells Fargo and Peter Cannava, who the SEC said was firm's lead banker on the deal, disputed the SEC's allegations. A federal judge agreed to dismiss Cannava from the case on Aug. 5, citing a lack of specificity in the SEC's complaint, but denied Wells Fargo's motion to dismiss.

The SEC's lawyer handling the case has said the commission intends to revise and refile its complaint against Cannava to include the required specificity.

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