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From Securities Regulation Daily, March 20, 2019

Wells Fargo settles SEC charges related to Curt Schilling bond offering

By Anne Sherry, J.D.

The bank agreed to pay $800,000 to settle charges of disclosure failures in a 2010 municipal bond offering that it underwrote to finance Curt Schilling’s video-game startup.

Wells Fargo Securities will pay more than $800,000 in civil penalties over its conduct as the placement agent for a 2010 municipal bond offering. The bonds were issued to finance the development of a video game by Schilling’s 38 Studios, but Wells Fargo failed to disclose that the proceeds would not be enough to cover development of the game. Litigation continues against the lead banker on the deal for failing to disclose that Wells Fargo was receiving additional compensation from 38 Studios (SEC v. Rhode Island Commerce Corporation, March 19, 2019, McConnell, J.).

The SEC brought charges in 2016 against the Rhode Island Economic Development Corporation, Wells Fargo Securities, and several individuals. RIEDC had issued $75 million of taxable revenue bonds in November 2010 to increase employment opportunities by loaning bond proceeds to private companies. According to the Commission, $50 million of the proceeds were loaned to 38 Studios, but the bond offering document did not disclose that 38 Studios needed at least $75 million to produce its video game. The company eventually defaulted on the loan.

The agency also alleged that investors were kept in the dark about a side deal that enabled Wells Fargo to receive another $400,000 from 38 Studios (paid from the bond proceeds). This nearly doubled the compensation actually disclosed in the offering documents and presented a conflict that should have been disclosed to investors. The SEC attributes this failure to the lead banker on the deal, against whom aiding-and-abetting litigation continues.

Following entry of the court’s final judgment, the SEC granted Wells Fargo’s request for a waiver of the bad-actor disqualification provisions of Securities Act Rules 506(d) and 262(b).

The case is No. 16-cv-107.

Attorneys: Louis A. Randazzo for the SEC. Christopher J. Valente (K&L Gates LLP) for Wells Fargo Securities, LLC. Max Wistow (Wistow, Sheehan & Loveley, PC) for Rhode Island Commerce Corp. f/k/a Rhode Island Economic Development Corp.

Companies: Wells Fargo Securities, LLC; Rhode Island Commerce Corp. f/k/a Rhode Island Economic Development Corp.

MainStory: TopStory Enforcement FraudManipulation MunicipalSecuritiesNews SecuritiesOfferings RhodeIslandNews

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