Wells Fargo's Cannava asks court to end 38 Studios case
WASHINGTON — Wells Fargo banker Peter Cannava is looking to put an end to the Securities and Exchange Commission's 38 Studios enforcement case, telling a federal judge the court should grant a summary judgment in his favor because the SEC can't show he acted with bad intentions.
Cannava’s lawyers, Brian Kelly and Steven Richard of the law firm Nixon Peabody, made that pitch in a filing in a Rhode Island federal court late last week. Cannava argues that emails, witness statements, and other evidence cast doubt on the SEC's claims that he acted recklessly during his work on an ill-fated 2010 $75 million private placement of bonds to help relocate then Massachusetts-based video game developer 38 Studios to Rhode Island.
“To prove its case, the SEC must show that Mr. Cannava acted with scienter, which requires proof that his conduct consisted of ‘a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it,’” Kelly and Richard told the court. “The extensive record shows there is no such evidence.”
In 2016 the SEC filed charges against 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, 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 38 Studios needed at least $75 million to produce the game and even more money to relocate to Rhode Island, the SEC said. 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.”
The video game company never got the extra financing and eventually defaulted on its loan in 2012. Cannava’s motion came less than two weeks after Wells Fargo decided to settle the case for more than $800,000. The RIEDC, now called the Rhode Island Commerce Corp., had already settled.
Cannava worked with Wells Fargo’s compliance department to disclose material information in the private placement documents, which undermines the SEC’s claim that he acted recklessly, Cannava’s lawyers told the court. Further, investors testified that they understood that 38 Studios was not creditworthy and that they were investing on the credit strength of Rhode Island.
One of the allegedly misleading statements in the private placement documents stated that 38 Studios was “dependent on” the bonds to finish its game, which the SEC argued suggested to investors that the game could be finished without additional funding beyond the bond proceeds. Cannava’s lawyers said that argument falls short.
“I think if a reasonable investor read this and – a reasonable investor could have read this and concluded a couple of different things because the statement is vague,” the defense motion quotes an SEC expert witness as saying. But a statement being merely vague is not enough to establish Cannava’s guilt, his lawyers told the court.
Kelly has maintained from the first that Cannava would not settle even if Wells Fargo did, because his client did nothing wrong. A settlement or a judgment in favor of the SEC probably would effectively end Cannava’s career.
The SEC is due to respond to the motion by April 15.