The postscript of 38 Studios’ 2012 downfall continues to play out, as the Securities and Exchange Commission has now levied fraud charges in federal court against both the Rhode Island Commerce Corporation and Wells Fargo Securities over the $75 million in bond funding that brought 38 Studios to Rhode Island in the first place.
The filing alleges 38 Studios execs told the RICC (then known as the Rhode Island Economic Development Corporation, or EDC) and Wells Fargo that they needed at least $75 million to develop its planned MMORPG, condenamed Copernicus.
According to the SEC, these lenders only signed over about $50 million to 38 Studios, holding the remainder in reserve. Notably, they did not inform loan investors that 38 Studios needed the full $75 million to complete its project, thus allegedly defrauding them.
“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,” reads an excerpt of the complaint filed by the SEC today.
While 38 Studios released Kingdom of Amalur: Reckoning (pictured) in 2012, it went bankrupt before it could finish its Copernicus project. Emails sent by a former 38 Studios exec (and used in court as evidence) suggest some of the studio’s high-ranking members knew the studio would not have enough money to finish the project.
On top of that, the SEC is alleging that Wells Fargo failed to inform bond investors about nearly $400,000 in compensation it received in a deal with 38 Studios. This was in addition to $50,000 plus fees that it did disclose it would receive as part of the deal, which seems to suggest Wells Fargo knowingly double-dipped without telling investors it was doing so.
“You may also want to point out the cross-sell was big here too. [Corporate Investment Banking] advised the company on the equity side,” wrote Wells Fargo dealbroker Peter Cannava in an email to colleagues the day this deal closed. “They received fees as well so a good deal for the firm across platforms.”
These alleged shady business dealings are well in line with the sort of backroom dealmaking that allegedly took place to put together the financial deal that brought 38 Studios to Rhode Island in 2010. Though the state of Rhode Island’s lawsuit against the stakeholders of that deal is still ongoing, some partial settlements have been reached.