WASHINGTON – Peter Cannava is fighting the Securities and Exchange Commission's attempt to put him back into its lawsuit over 38 Studios' private placement by trying to amend the complaint to include more details about his alleged aiding and abetting the defrauding of investors.
The request to deny the SEC's motion to amend the complaint was made to Judge Jack McConnell of the U.S. District Court for Rhode Island by Brian Kelly, a partner with Nixon Peabody who is representing Cannava, a banker with Wells Fargo. The SEC contends Cannava acted as the lead banker on the 38 Studios deal for the firm.
McConnell dismissed Cannava from the case on Aug. 5 when he found that the SEC had not provided enough facts to support its aiding and abetting claims against the banker. Kathleen Burdette Shields, the SEC lawyer handling the case, filed a motion on Aug. 30 to amend the complaint to include more specific dates and facts to tie Cannava to the alleged fraud. She also corrected the error the SEC made in the complaint of saying negligence was a prerequisite for the aiding and abetting claims against Cannava.
Wells Fargo, which was not successful in getting the charges against it dismissed, joined Cannava's objection to the SEC's recent motion to amend the complaint.
Kelly said in a memo of support attached to the motion to dismiss that the SEC's new facts still fail to show that his client had the required state of mind to justify aiding and abetting claims and that the amended complaint is "futile." The SEC must prove that Cannava knew or was reckless in not knowing about the alleged failure to state material facts in the private placement memo for the 38 Studios deal, Kelly added.
Even accepting the SEC's allegations as true, the SEC's claims amount to – at best – a charge that Cannava was careless or negligent, which is not enough for fraud, according to Kelly.
The commission must also prove that Cannava gave "substantial assistance" to the primary violator in order to meet the aiding and abetting charges, Kelly said. It would have to show Cannava "consciously assisted the commission of the specific violation in some active way," something the SEC cannot do, Kelly said.
"Even with a second bite at the apple, the SEC simply cannot state facts sufficient to reach the threshold for pleading fraud against Mr. Cannava," he wrote in his memo.
The SEC filed its original complaint against Cannava, Wells Fargo, and the Rhode Island Economic Development Corp., now called the Rhode Island Commerce Corp., on March 7, alleging the parties made fraudulent disclosures related to $75 million of muni bonds that the RIEDC privately placed in November 2010.
The SEC said they failed to disclose a funding gap with 38 Studios as well as a side agreement Wells Fargo had with the company that was a conflict of interest because it allowed Wells Fargo to receive almost double the amount of compensation as was disclosed in the offering documents after the firm failed with an equity private placement attempt.
The $75 million of bonds were issued to help finance a multi-player game being developed by 38 Studios, whose board chair and majority shareholder was former baseball player Curt Schilling. The RIEDC loaned 38 Studios $50 million of bond proceeds and used the remaining funds to pay related issuance costs and to establish a reserve fund and a capitalized interest fund.
The loan was meant to be repaid with revenues 38 Studios generated from the game. However, the bond placement memo failed to disclose to investors that Massachusetts-based 38 Studios needed at least $75 million to produce the game and even more money to relocate to Rhode Island, the SEC said. The video game company never got the extra financing and eventually defaulted on its loan in 2012.
Shields, in her amended complaint, pointed to instances between June 2010 and Oct. 28, 2010, the date Cannava signed the bond placement memo for the deal, to show that he was aware of the alleged fraudulent discrepancies in the memo. She also noted that Cannava was responsible for signing and reviewing all of the major agreements Wells Fargo made in relation to the offering and received emails and alerts about the equity deal Wells Fargo had with 38 Studios.
While arguing those examples are not valid to support the claims, Kelly also said that the motion to amend the complaint should be dismissed because the SEC cannot show a valid reason for why it delayed adding the additional facts when it knew about them before filing its original complaint. He said that his motion to dismiss the original complaint, which he filed on May 9, pointed to the flaws in the commission's argument, but the SEC did not make the changes until after McConnell ruled.
Kelly also argued that if McConnell allows the amended complaint, it would cause Cannava to face the "undue burden" of defending himself against the allegations, adding to the emotional toll the claims have already caused Cannava, his family, and his career.