SEC, Wells Fargo Securities trade shots in 38 Studios case

Register now

WASHINGTON - The Securities and Exchange Commission is denying accusations it dishonestly withheld evidence in a case against Wells Fargo Securities and one of its bankers, and is asking a federal court to deny the defendants' motion to prevent the use of that evidence.

The SEC and lawyers for Wells Fargo and banker Peter Cannava traded shots in court filings over the past two weeks following the defendants’ motion in May to either reopen discovery or prevent the use of certain witness statements against them.

The case stems from charges the SEC filed two years ago against Cannava, Wells, and the Rhode Island Economic Development Corp. They were accused of making fraudulent disclosures related to the financing of a multi-player video 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 a remaining $25 million 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 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.The RIEDC, now called the Rhode Island Commerce Corp., agreed to settle the charges but Cannava and Wells are continuing to fight.

Responding to the earlier accusations by Wells and Cannava, the SEC told the court that it worked “diligently and in good faith” to provide evidence as required during the discovery period. That statement stands in contrast to the accusations of the defendants, who previously told the court that the SEC crafted misleading declarations for its witnesses to sign and then deliberately withheld them. The SEC said it didn’t hand those declarations over to the defense because it didn’t think it needed to.

“The commission did not produce the contested declarations during the fact discovery period because its counsel believed in good faith that these declarations are the result of its ongoing work to investigate the case and need not be produced unless or until the commission decides to use them,” the SEC said in a filing.

Further, the SEC said, the defense lawyers knew about the witnesses in question and what they would say, but simply didn’t have their statements in the form of a written declaration. The court need not reopen discovery and should not preclude the use of those witness statements, the SEC argued, but rather simply allow the defense to depose some of the witnesses in question.

The defense attorneys, including Luke Cadigan of Cooley for Wells Fargo and Nixon Peabody’s Brian Kelly for Cannava responded in another filing last week, renewing their request to preclude use of the investor statements and telling the court it should expect more from the federal government than “legal gamesmanship.”

“The SEC wields broad enforcement powers over the public, and the outcome of this case could potentially end Mr. Cannava’s career,” the defense team told the court.

If the court does indeed grant some of what the defense is asking, the defense said the court should order the SEC to pay “reasonable expenses,” including attorney’s fees connected to the work done arguing the discovery issue. Lawyers have said that if both Wells and Cannava do not settle, and it is unlikely Cannava will because doing so would effectively end his career, then the legal battle could continue until at least late this year.

For reprint and licensing requests for this article, click here.
SEC enforcement Enforcement Securities law Court cases SEC Wells Fargo Washington DC