38 Studios: SEC Charges RI Commerce Corp, Wells Fargo with Fraud - RI Reacts
Tuesday, March 08, 2016
The SEC also charged Wells Fargo’s lead banker on the deal, Peter Cannava, and two then-RIEDC executives Keith Stokes and J. Michael Saul with aiding and abetting the fraud. Stokes and Saul agreed to settle the charges without admitting or denying the allegations and must each pay a $25,000 penalty, and are prohibited from any future municipal securities offerings. The SEC’s litigation continues against Cannava, Wells Fargo, and RIEDC.
Governor Gina Raimondo's office declined to comment on Monday, and referred comment to the Commerce Corporation.
“The Commerce Corporation is still reviewing today’s filing, which concerns events that occurred under a previous administration. The Commerce Corporation, in its own lawsuit, has alleged that Wells Fargo, Keith Stokes, and Michael Saul failed to disclose material information about the 38 Studios deal to the former Economic Development Corporation’s board of directors and to investors," said Kayla Rosen, spokesperson for Commerce.
"Today’s filing makes consistent allegations. In addition the SEC issued an order against First Southwest Company today for its conduct in acting as the financial adviser to the former Economic Development Corporation in connection with the 38 Studios transaction. That order concludes that First Southwest committed willful violations of fair dealing requirements of certain federal securities rules. That is also consistent with the allegations in the Commerce Corporation’s lawsuit against First Southwest Company. 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," said Rosen.
Speaker of the House Nicholas Mattiello commented on the SEC's finding.
“I would note that the SEC complaint has nothing to do with the General Assembly’s passage of legislation. The focus is clearly on the flawed implementation and execution of the 38 Studios’ bond offering. It is very troubling that the SEC alleges that Wells Fargo was working on both sides of the transactions and did not disclose this information to bond holders. It is also disturbing that the EDC failed to protect the best interests of the state’s taxpayers in this transaction," said Mattiello.
Default Back in Question?
SLIDES: See Who Supported -- and Who Opposed -- Defaulting on the 38 Studios Bonds in 2014
"Rhode Island should stop paying these bonds ASAP," said Ken Block on Monday, who lost in the 2014 Republican gubernatorial primary to Cranston Mayor Allan Fung -- and both opposed paying back the bonds at the time. "Now we know the bond offering was done fraudulently. The pushback against non-payment was nothing wrong was done - but now we know otherwise."
"The whole point of my pushing to not pay the bonds was because the deal was crooked from its inception," said Block. "We now have the first proof of that."
GoLocal MINDSETTER Michael Riley -- and former SEC lawyer and Forbes columnist Edward Siedle -- pointed to the involvment of the SEC as indication of action to come.
"This is a slam dunk case and as an advocate of clean government, I have been wondering why the SEC hasn't been looking at this," said Riley. "While they are here they should look at Providence, the last 3 Mayors and [the city's] lies about pension assets. Hopefully the era of political leaders and insiders rigging deals and misleading taxpayers and investors will come to a screeching halt."
Siedle offered the following.
"To me, this is just demonstration that absent federal intervention, nothing in Rhode Island gets cleaned up," said Siedle, who has called for the SEC to investigate the state's pension investments. "This creates an interesting atmosphere. We are now in the situation where other matters have been referred to the SEC. That SEC is looking into Rhode Island."
Pat Ford, who is the chair of the Rhode Island Libertarian Party, weighed in in Monday's development as well.
"The Rhode Island Economic Development Corporation has been a generational failure since its inception," said Ford. "Displaying none of the core competencies necessary to engage in what has been a veiled attempt at functioning as a venture capital firm, the EDC a.k.a the 'Commerce Corporation' has successfully socialized failure while trying to privatize success for legions of politically connected businesses."
Related Slideshow: Who Wants to Pay and Who Wants to Default on the 38 Studios’ Bonds
GoLocalProv showcases which Rhode Island politicians and organizations want to pay or default on the 38 Studios' Bonds.
Republican candidate for Governor
“38 Studios was a bad deal and a bad investment from the very beginning and now Rhode Island taxpayers are being asked to take the hit for bondholders who should have known better...As long as there are serious legal questions still to be decided, we need to stop the repayment process."
Greater Providence Chamber of Commerce
Laurie White, President of Chamber of Commerce
“I think it’s important that action occur quickly. Our view is that economic development in Rhode Island has to be the main event. … We need a very dramatic, aggressive effort to change the path that we’re on.”
Democratic candidate for Governor
“While I share the frustration of many Rhode Islanders, I believe that not paying back 38 Studios bondholders would have a detrimental impact on the state’s bond rating that would far outweigh any short-term benefit we might gain. We cannot afford to default on our obligations.”
Governor of Rhode Island
“The candidates who can’t understand these two obvious truths are unfit to be Governor. The consequences of default would place Rhode Island as one of the lowest state bond ratings in the nation, and the industry would reduce Rhode Island to ‘junk bond’ status. We have been told in no uncertain terms that the reaction to not paying our debt obligations will be severe and have an adverse impact on Rhode Island. In addition, failure to honor our obligations could have harmful effects on the pending lawsuit.”
Mike Stenhouse, CEO of RI Center for Freedom and Prosperity
"It's not just about not paying off bondholders. Bondholders are adults, they knew the risk. It's not just a question of the credit agencies. It's a question of what would payment crowd out, what reforms could we achieve with that money, such as sales tax reform, which would enable us to create jobs."
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