SEC pushes back in 38 Studios case

WASHINGTON — The Securities and Exchange Commission is trying to keep its enforcement case against Wells Fargo banker Peter Cannava on track by asking a federal judge to deny Cannava's recent motion that charges against him be dismissed.

The SEC late last week filed its answer to Cannava’s month-old motion for a summary judgment in his favor. Cannava is the sole remaining defendant in the SEC’s 2016 38 Studios case, in which the commission charged Wells Fargo, Cannava, and the Rhode Island Economic Development Corp. over allegedly fraudulent disclosures related to the bond transaction to finance a multi-player video game being developed by then-Massachusetts-based 38 Studios. While Cannava’s lawyers contended a few weeks ago that the SEC can’t show their client acted at all recklessly, the SEC told the Rhode Island federal court that the banker should be held accountable.

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The SEC told the court that Cannava played a “critical role” in creating the private placement memorandum, which the commission said 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 studio was receiving only $50 million of the bond proceeds. The SEC said the deal team also failed to disclose to bond purchasers that Wells Fargo was receiving additional compensation from 38 Studios, totaling $400,000, that was directly tied to the issuance of the municipal bonds.

Cannava’s motion for summary judgment dismissing the case against him noted that he was one of many members of the deal team and that some of the expert witnesses have appeared to say in depositions that the information omitted from the placement memo might not be material. But the SEC urged the court not to let Cannava get away with “hiding behind” the rest of the deal team.

“The placement agent plays a critical role as the gatekeeper obligated to provide disclosure for the investing public,” the SEC told the court. “As a result, the mere presence of other professionals — with different responsibilities — in the decision-making process does not reduce Cannava’s responsibilities as the placement agent on the transaction.”

The court should also reject Cannava’s “narrow and cramped view of materiality,” the SEC urged, telling the court that generic warnings about 38 Studios being a startup company weren’t sufficient and that the reality of a $25 million funding gap facing the company certainly meets the materiality standard. The Supreme Court has said that information is material if it would have been important to a reasonable investor in deciding whether or not to invest.

Wells Fargo decided last month to settle the case for more than $800,000. The RIEDC, now called the Rhode Island Commerce Corp., had already settled. Cannava’s attorneys have said he will not settle and will continue to contest the charges at trial if the judge does not grant a summary judgment for Cannava.

The stakes are high for Cannava because a settlement or a loss at trial in a securities fraud case generally means the end of an investment banking career.