Recently, Wells Fargo Securities, a subsidiary of San Francisco-based Wells Fargo & Company WFC settled the U.S. regulator — Securities and Exchange Commission (SEC) — lawsuit by agreeing for more than $800,000 civil penalty. The regulating body had sued the bank, along with the Rhode Island government agency, of misleading investors in a municipal bond offering, which was issued for financing a start-up video-game company in 2016. Notably, former Phillies ace pitcher — Curt Schilling — was the founder of this game company.
The proposed settlement announced in the U.S. District Court in Providence by Wells Fargo and the SEC still awaits a federal judge’s approval. Per agreement, the bank has neither accepted nor denied any wrongdoing. Moreover, on the judge’s approval, Wells Fargo would be banned from violation of municipal securities and other laws permanently.
In March 2016, the SEC’s investigation revealed that Schilling’s company — 38 Studios — failed to produce a multi-player online game in the market at the stipulated time due to shortage of financing.
Broadly, in 2010, the game company estimated $75 million for development of the game in relation to which Wells Fargo was hired. Notably, a loan worth $50 million was provided by the Rhode Island Economic Development Corp. (RIEDC) to 38 Studios in bond proceeds. RIEDC’s interest was drawn toward selling the federally-taxable municipal bonds with the expectation of creating hundreds of jobs as it planned to persuade Schilling to move his start-up video game company from Massachusetts to Providence.
However, SEC discovered that bond offering proceeds fell short by $25 million to finance the game development, which was not disclosed to the investors. Furthermore, it was in the knowledge of RIEDC that proceeds from the bond sale will be insufficient to provide financing to 38 Studios.
Therefore, on failure to secure additional financing, the company couldn’t bring the game to the market and defaulted on loan as well. Further, it got bankrupt in 2012 and taxpayers were held responsible for the repayment of money.
Wells Fargo’s lead banker on the deal — Peter M. Cannava — and two RIEDC executives at that time — Keith W. Stokes and James Michael Saul — were also charged for aiding this fraud. The banking behemoth agreed to fight in the court denying charges. Nonetheless, Stokes and Saul agreed to the settlement to a penalty of $25,000 though they did not admit or denied allegations. Therefore, the case continued against Cannava, Wells Fargo and RIEDC.
Later in August 2016, a federal judge rescinded the bid filed by Wells Fargo to dismiss the lawsuit. Nevertheless, though U.S. District Judge John J. McConnell Jr. agreed to release a Wells Fargo banker from the complaint, the SEC instantly said the lawsuit will be re-filed and that it will look into the matter as in the reason for releasing the banker. Therefore, allegations against Cannava are still pending.
Banks across the globe have been facing heightened scrutiny for their business practices. Many of these firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Many investors have lost their hard-earned money as a result of such business malpractices. Such settlements help restore their confidence in law-enforcement agencies. Moreover, it reduces the existing litigation burden of banks.
Shares of Wells Fargo have been rallying and gained 13.9% in the past three months.
Wells Fargo & Company Price
Wells Fargo & Company Price | Wells Fargo & Company Quote
Wells Fargo currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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