Brian Kelly
“It’s obviously disappointing to my client, but we look forward to moving to dismiss the case when the Court has had the opportunity to review the actual facts,” said Brian Kelly, Cannava’s lawyer.

WASHINGTON – A judge agreed to put Peter Cannava back into a Securities and Exchange Commission lawsuit that alleges the Wells Fargo banker aided and abetted the defrauding of investors in connection with a private placement by 38 Studios.

Judge Jack McConnell of the U.S. District Court for Rhode Island issued his decision on Tuesday. He had dismissed Cannava from the lawsuit on Aug. 5, because he found that the original complaint didn't have enough facts to support the aiding and abetting claims. Kathleen Burdette Shields, the lawyer handling the case for the SEC, filed a motion to amend the complaint after McConnell's Aug. 5 decision. She included more specific dates and facts to tie Cannava, who the SEC says was the lead banker on the 38 Studios deal, to the alleged fraud. McConnell's order filed Tuesday allowed that amended complaint.

The judge's order found that "the SEC has sufficiently and particularly alleged that Peter Cannava knowingly and substantially assisted Wells Fargo in the alleged primary violation of SEC laws and regulations and that in aiding and abetting the violations, he did so knowingly and/or recklessly."

Brian Kelly, a partner with Nixon Peabody who is representing Cannava, had filed a motion on Sept. 30 asking McConnell to dismiss Shields' motion to amend the complaint. He claimed that even with the amendments, the complaint failed to show his client had the required state of mind to justify the aiding and abetting charges.

The SEC has to show that Cannava knew or was reckless in not knowing about the alleged failure to state material facts in the private placement memo for the deal and that he gave "substantial assistance" to the primary violator in order to prove the aiding and abetting, Kelly said. He also argued that the SEC couldn't show a reason why it waited until Aug. 30 to amend the complaint with additional facts when it knew about them before filing the original complaint and was alerted to their absence in Cannava's motion to dismiss filed on May 9.

McConnell said in the order that the decision was "a close call" and that the SEC's allegations "come close to only alleging negligence," as Kelly had argued.

Ultimately though, McConnell concluded that "applying the standard of accepting all factual allegations as true at this stage of litigation, the SEC has met its minimal pleading requirement to allow the complaint to be amended and this matter to be litigated." He also said the amendment was timely.

Kelly said he and Cannava are ready to address the case moving forward.

"It's obviously disappointing to my client, but we look forward to moving to dismiss the case when the Court has had the opportunity to review the actual facts rather than just the baseless allegations in the SEC's complaint which the Court had to assume was true for purposes of this motion to amend," Kelly said.

The SEC declined to comment for this article.

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 twice the compensation 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 lent 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 revenue 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.


Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.