On Monday, March 7, 2016, the Securities and Exchange Commission (SEC) charged Wells Fargo with fraud in its role as underwriter of a $75 million municipal bond deal. The Rhode Island Economic Development Corporation (RIEDC), a state agency, issued the bonds and loaned $50 million of its proceeds to 38 Studios, a now defunct video game company whose chairman and majority shareholder was the legendary Boston Red Sox pitcher, Curt Schilling. The RIEDC hoped to stimulate jobs and lure other businesses to relocate to Rhode Island.
According to the bond offering documents, 38 Studios planned to repay the loan from revenue from a future video game but Wells Fargo and the RIEDC failed to fully inform investors that 38 Studios needed at least $75 million in funding to produce the video game. When these sources failed to materialize, the company defaulted on the loan and declared bankruptcy. Because the bonds carried the state’s “moral obligation” to repay investors if 38 Studios could not, the state chose to pay the debt including interest, totaling about $90 million, rather than risk damage to Rhode Island’s credit rating.
The SEC also alleges that Wells Fargo cut a “side deal” with 38 Studios, which paid the bank an additional $400,000 if the bond deal closed. This side deal was never disclosed to the bond investors and enabled the bank to receive twice as much money as was detailed in the official offering documents.