Feds allege fraud by bank, agency who made $75 million loan to 38 Studios

The federal government has now gotten involved in the ongoing saga of 38 Studios, which went bankrupt shortly after launching 2012's Kingdoms of Amalur: Reckoning. The Securities and Exchange Commission yesterday brought fraud charges against the Rhode Island agency that loaned the studio $50 million, and the bank that underwrote the bonds funding that loan.

The SEC says the Rhode Island Economic Development Corporation and Wells Fargo knew 38 Studios needed $75 million, not the $50 million it received, to complete "Project Copernicus," the code name for an MMO based on the Amalur franchise. Thus bond investors were unaware that the studio would still face a shortfall, jeopardizing the studio and its ability to repay the loan. The SEC alleges that the investors were acting on fraudulent information given to them by the RIEDC and Wells Fargo.

Three individuals also have been charged; two of them, RIEDC executives, have agreed to settle their charges, pay a $25,000 fine, and agree never to work in municipal securities offerings again. The third, Peter M. Cannava, was Wells Fargo's lead banker on the deal. His attorney told the Associated Press that Cannava was being made a scapegoat for "the mistakes of Rhode Island politicians."

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Image: 38 Studios/Electronic Arts

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A spokesman for Wells Fargo said the bank disputes the SEC's allegations and will defend itself in court.

Neither Curt Schilling, the Major League Baseball star who founded 38 Studios and went personally bankrupt in the aftermath, nor anyone connected to it are named in this complaint. The studio and its projects have been the subject of several state-level inquiries and legal proceedings since it collapsed in 2012.

However, in 2014, court documents showed that a 38 Studios board member was aware that the $50 million coming from the RIEDC was insufficient, and advised 38's chief executive and two others to conceal that detail from the rest of the board and studio staff. Three were sued by the state of Rhode Island over that, and another 10 individuals were sued for other matters related to the loan.

The RIEDC crafted the loan package for 38 as an incentive for the studio to relocate to Rhode Island. When 38 Studios went bust, the loan deal became a scandal in that state, with taxpayers on the hook for $89 million in state-guaranteed debt in total. At one point, state lawmakers debated willfully defaulting on its debt obligations, but the state has continued to make its payments. To date, the state has recouped about $17 million through financial settlements of the lawsuits brought against those responsible for the deal.