Judge sanctions SEC in win for 38 Studios defendants
WASHINGTON - The Securities and Exchange Commission's case against Wells Fargo and banker Peter Cannava appears on track for a trial next year after a federal judge sanctioned the SEC for withholding evidence and ordered more time for the defense to interview witnesses.
U.S. District Judge John J. McConnell, Jr. ruled last week that the discovery phase of the case should be reopened for three months because the SEC did not properly disclose to the defense statements it had taken from multiple witnesses.
The ruling is a victory for Wells and Cannava, whose attorneys had asked that the court reopen discovery or even preclude the SEC from using the statements altogether.
“It is clear from the record that the SEC should have produced the declarations of potential witnesses in response to the defendants’ discovery requests,” wrote McConnell, who presides in U.S. District Court for the District of Rhode Island.
The case stems from charges brought against Wells, Cannava, and the Rhode Island Economic Development Corp. for making fraudulent disclosures related to $75 million of muni bonds that the RIEDC privately placed in November 2010.
The RIEDC, now called the Rhode Island Commerce Corp., agreed to settle the charges but Cannava and Wells are continuing to fight. Cannava’s attorney, Brian Kelly of the law firm Nixon Peabody, has said his client wants to go to trial and prevail because accepting any sort of settlement with the SEC would effectively end Cannava’s career.
The RIEDC bonds were issued to help finance a multi-player video game being developed by then-Massachusetts-based 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 video game.
But the bond placement memo failed to disclose to investors that 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.
Seven investor declarations were not disclosed to the defense, according to court filings, and include statements from individuals who purchased the RIEDC bonds or looked into the bonds and did not buy them. The declarations generally indicate that disclosure in the placement memo of the “funding gap” facing 38 Studios would have influenced their decisions whether to buy the bonds.
The judge decided against precluding the SEC’s use of the disputed witness statements because he didn't agree with the defense’s theory that the SEC was engaging in legal gamesmanship to gain “an unfair advantage.”
“While the SEC’s failure to produce the declarations was a violation of its discovery obligations, there is no evidence that the SEC acted intentionally to violate the rules,” McConnell wrote.
The new discovery period will close Oct. 26, and both sides must submit their motions for summary judgment by Feb. 8, 2019.