SEC files fraud charges related to Curt Schilling video game company

Getty Images

The Securities and Exchange Commission (SEC) has filed charges against Wells Fargo and a Rhode Island state agency for defrauding investors when it came to investing in a video game company.

The regulator announced Monday that it was filing civil charges, arguing that the entities failed to inform investors about the financial situation of 38 Studios, a video game company started up by former Boston Red Sox pitcher Curt Schilling.

The litigation, which is ongoing, is the latest in a tumultuous series of events around 38 Studios, which went bankrupt in 2012 and was eventually sued by the state of Rhode Island after it defaulted on debt payments.

Specifically, the SEC claimed that Wells Fargo and the Rhode Island Economic Development Corporation (RIEDC) — now known as the Rhode Island Commerce Corporation — concealed from investors that the company needed to raise more money to finish its first game.

According to the SEC, the entities sold $75 billion in bonds to investors and loaned $50 million of those proceeds to 38 Studios to help finance its first video game. The remaining $25 million went to cover bond offering expenses and set up reserve and interest funds.

But the problem came when the entities failed to inform investors that 38 Studios believed it needed $75 million to complete its game and would need to come up with additional financing elsewhere. When that money did not come through, the company could not finish the game and ultimately went bankrupt.

“We allege that the RIEDC and Wells Fargo knew that 38 Studios needed an additional $25 million to fund the project yet failed to pass that material information along to bond investors, who were denied a complete financial picture,” said Andrew Ceresney, head of the SEC’s enforcement division.

The regulator also charged that Wells Fargo failed to inform investors that it had entered into a side deal with the video game studio so that it received nearly double the compensation that was disclosed to investors. The SEC argued this arrangement amounted to a conflict of interest.

The bank is vowing to fight those charges in court.

"Wells Fargo disputes the SEC's allegations in connection with the placement of these municipal bonds. We will respond to the specific allegations in the complaint in court," said the bank in a statement.

In addition to the agencies, the SEC charged Wells Fargo’s lead banker on the deal, as well as two former RIEDC executives. The Rhode Island executives agreed to settle the charges through a $25,000 penalty and a ban from participating in future municipal bond issues.

The case against the Wells Fargo banker, Peter Cannava, remains open.

Updated at 1:35 p.m.