The Securities and Exchange Commission charged a Rhode Island agency and its bond underwriter Wells Fargo Securities with defrauding investors in a municipal bond offering to finance 38 Studios, a startup video game company led by former Boston Red Sox pitcher Curt Schilling.
The Rhode Island Economic Development Corporation (now called the Rhode Island Commerce Corporation) issued $75 million in bonds for the 38 Studios project as part of a state government program intended to spur economic development and increase employment opportunities by loaning bond proceeds to private companies.
According to the SEC’s complaint filed in federal district court in Providence:
“Municipal issuers and underwriters must provide investors with a clear-eyed view of the risks involved in an economic development project being financed through bond offerings,” said Andrew Ceresney, director of the SEC Enforcement Division. “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.”
The SEC also charged Wells Fargo’s lead banker on the deal, Peter M. Cannava, and two then-RIEDC executives Keith W. Stokes and James Michael Saul with aiding and abetting the fraud. Stokes and Saul agreed to settle the charges without admitting or denying the allegations and must each pay a $25,000 penalty. They are prohibited from participating in any future municipal securities offerings. The SEC’s litigation continues against Cannava, Wells Fargo, and RIEDC.
The SEC’s complaint further alleges that Wells Fargo and Cannava misled investors in an additional way in bond offering materials:
“An underwriter’s ‘skin in the game’ is material information to investors,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. “We allege that Wells Fargo failed to fully disclose its own economic interest in this bond transaction.”
The SEC’s complaint charges the RIEDC and Wells Fargo with violations of Sections 17(a)(2) and (a)(3) of the Securities Act of 1933, and charges Stokes, Saul and Cannava with aiding and abetting those violations. Wells Fargo also is charged with violations of Section 15B(c)(1) of the Securities Exchange Act of 1934 and Rules G-17 and G-32 of the Municipal Securities Rulemaking Board (MSRB). Cannava is charged with aiding and abetting those violations.
In a separate administrative proceeding, the RIEDC’s financial advisor for the bond offering – First Southwest Company – agreed to settle charges that it violated MSRB rules by failing to document in writing the scope of the services the firm was providing in the bond offering until seven months after the financial advisory relationship began. Without admitting or denying the findings, First Southwest agreed to pay disgorgement of $120,000, prejudgment interest of $22,400 and a penalty of $50,000.
Business continues to hold steady or even improve in equipment finance, as the Top 25 Private Independents reported $7,504.5 million in new business volume for 2018, topping a record-setting 2017 with a growth of 17.2% year-over-year. Four companies achieved volume... read more
Industry behemoths are losing market share and some have even declared bankruptcy as they’ve been reluctant to accept technological change. According to the 2017 Deloitte Global Human Capital Trends Report, only 12% of fortune 500 companies present in 1955 are... read more