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Wells Fargo charged with fraud in 38 Studios case

Former Boston Red Sox pitcher Curt Schilling, center, is followed by members of the media as he departs the Rhode Island Economic Development Corporation in Providence, R.I., May 21, 2012.
Steven Senne | AP

The Securities and Exchange Commission has charged Wells Fargo and the Rhode Island Economic Development Corp. with fraud in connection to a bond offering that supported ex-Red Sox pitcher Curt Schilling's now-defunct video game company.

The charges stem from a bond offering Wells worked on with the Rhode Island Economic Development Corp. that raised $50 million to support 38 Studios, the video game company named for Schilling's jersey number while he pitched for Boston.

Investigators said that bond investors were not made aware that the $50 million they were pledging to Schilling's company would still leave it short of all the capital it needed to launch a video game. 38 Studios went bankrupt in 2012.

"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's 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."

Wells banker Peter M. Cannava was charged Monday in the fraud case, the SEC said. RIEDC officials Michael Saul and Keith Stokes were also charged with aiding and abetting the fraud. Saul and Stokes settled charges without admitting or denying allegations, and will pay a penalty of $25,000. SEC litigation with the bank, Cannava and RIEDC is ongoing.

UPDATE: "Wells Fargo disputes the SEC's allegations in connection with the placement of these municipal bonds," a bank spokeswoman said to in an e-mail. "We will respond to the specific allegations in the complaint in court."

A lawyer for Cannava did not immediately respond to a request for comment.

UPDATE: "The Commerce Corporation is still reviewing today's filing,which concerns events that occurred under a previous administration," a spokeswoman for the Rhode Island Economic Development Corp., which renamed itself The Commerce Corp., said in an e-mailed statement. "The Corporation will continue to work toward its goals of recouping money for Rhode Island and holding the defendants in the Commerce Corporation's lawsuit accountable."

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Investigators allege that the bank completed a $50 million bond deal with the economic development agency, but that Cannava did not disclose what the SEC calls a "conflict of interest," in that the bank was paid $400,000 from bond proceeds.

Also, the SEC said, investors in the bond deal were not told the bank had struck a side deal with 38 Studios that "enabled the firm to receive nearly double the amount of compensation disclosed in offering documents."

Three-time World Series champion Schilling, who became a hero in Boston after defeating the rival New York Yankees in a postseason game where he pitched to a win while bleeding through a sock, has encountered some challenges in the years after his retirement from baseball.

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The former pitcher has said he has lost the bulk of his $50 million fortune, largely on the 38 Studios deal, and has endured post-retirement cancer treatments as a result of his 30-year chewing tobacco habit.

"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."