SEC Files Fraud Charges Against 38 Studios Financiers

38 studios sec fraud charges filed kingdomsofamalur — Image used with permission by copyright holder

Just when you thought you’d heard the last of the tragic saga of 38 Studios, the company that went bankrupt after releasing Kingdoms of Amalur: Reckoning in 2012, a new chapter has begun to unfold. The Securities and Exchange Commission filed fraud charges on Monday against the Rhode Island Economic Development Corporation, the state agency that loaned the studio $50 million to finance its games, and Wells Fargo, the bank that underwrote bonds invested in the loan.

According to The Associated Press, the SEC charges asserted that the organizations knew 38 Studios would need at least $75 million to complete “Project Copernicus,” the unnamed Kingdoms of Amalur MMORPG, but did not disclose to investors that their investment would not cover the full cost of the game’s development. The developer re-located from Massachusetts to Rhode Island in 2010 after receiving a $75 million loan guarantee from the RIEDC. The agency issued $75 million in bonds to cover that investment, $50 million of which went to the developer, and $25 million going to cover expenses related to issuing the bonds and establishing other funds.

The charges also suggested that Wells Fargo should have disclosed that it held a potential conflict of interest in representing both RIEDC and 38 Studios.

“An underwriter’s ‘skin in the game’ is material information to investors,” LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit said in an official statement. “We allege that Wells Fargo failed to fully disclose its own economic interest in this bond transaction.”

In addition to the two organizations, the SEC has filed lawsuits against three individuals named in the charges for having direct actions related the fraud. Two former RIEDC executives, Keith Stokes and Michael Saul, who have both agreed to pay $25,000 penalties. Peter Cannava, whom the charges refer to as the “lead banker” for Wells Fargo related to the transaction, has not yet agreed: Cannava’s attorney called the charge an attempt to “scapegoat a mid-level banker instead of focusing on the mistakes of Rhode Island politicians.”

The SEC filing is just the latest in a long line of lawsuits related to the loan and 38 Studios’ bankruptcy, which has left the state of Rhode Island on the hook for $89 million in debt. To date, the RIEDC, now called the Rhode Island Commerce Corporation, has recovered $17 million through legal action against Wells Fargo, members of 38 Studios’ executive board, and others related to the deal.