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Rhode Island Economic Development Corp. v. Wells Fargo Securities LLC

Superior Court of Rhode Island

June 1, 2016

RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION, Plaintiff
v.
WELLS FARGO SECURITIES, LLC, ET AL., Defendants.

         Providence County Superior Court

          For Plaintiff: See attached list.

          For Defendant: See attached list.

          DECISION

          SILVERSTEIN, J.

         This litigation was commenced by Plaintiff's filing of its Complaint against a number of Defendants on November 1, 2012. It arises out of actions by Plaintiff to assist a start-up, electronic game company, 38 Studios, Inc., created by former Boston Red Sox pitching star, Defendant Curt Schilling, to obtain financing to complete its multi-player computer game, Copernicus; to move its primary headquarters and facility to Rhode Island. Plaintiff, as well as governmental and political leaders, expected that 38 Studios would be the nucleus for economic development in Rhode Island of similar and related entities, and that such development would be a catalyst for employment providing above-average paying jobs in the State.

         Ultimately, Plaintiff issued $75 million in so-called moral obligation municipal bonds, of which approximately $50 million of the proceeds went to 38 Studios – the balance was used to pay expenses and fees broadly related to the bond issue and to fund reserve funds required pursuant to the legislation authorizing Plaintiff to engage in this type of financial assistance with respect to economic development.

         The Defendants originally sued by Plaintiff consisted of certain of its employees, certain entities involved in the sale of the bonds; Plaintiff's fiscal advisor, certain officers of 38 Studios, 38 Studio's insurance carrier, as well as attorneys and law firms for Plaintiff that functioned as general counsel and as bond counsel in connection with the bonds, not sued by Plaintiff because it had availed itself of protection under the provisions of Chapter 7 of the Bankruptcy Code less than six months following the issuance of the bonds.

         As indicated, this litigation commenced in 2012 and has been vigorously litigated by the parties ever since. A number of Defendants have settled, including Plaintiff's outside law firm, which acted as its general counsel, together with the partner in that firm who functioned as its primary counsel and was the Secretary of the EDC; the outside law firm that functioned as bond counsel to the EDC in connection with the $75 million bond issue hereinabove referred to, together with the partner in that firm with primary responsibility in connection with the bond issue. Also settling were the Executive Director and the Deputy Executive Director of Plaintiff, its two senior officers.

         To date, all payments due to the holders of the issued bonds have been made in accordance with their proposed dates of payment. The source of the payments, rather than being payments to be made by 38 Studios pursuant to its agreements, have come from the original reserve funds set aside from the proceeds of the bond issue as aforesaid, together with funds received by EDC from settlements obtained from the settling Defendants, also payments authorized by the General Assembly pursuant to the so-called moral obligation aspect of the bond issue, and certain other miscellaneous funds held or paid into the reserve accounts.

         Recently, after a lengthy investigatory process, the Security and Exchange Commission, an agency of the United States, brought suit against Plaintiff, Wells Fargo Securities, LLC (a Defendant herein), Peter M. Cannova (an employee of Wells Fargo and not a defendant in the instant action), and against the former Executive Director and Deputy Executive Director of Plaintiff herein. The SEC action is pending in the United States District Court for the District of Rhode Island as civil action number 1.16-cd-00107-JJM.

         Certain of the Defendants in this case, that is to say the case pending in the Providence County Superior Court, have moved that this Court stay all further proceedings pending final resolution of the SEC litigation in the Federal Court system. Defendants, Wells Fargo and Barclays Capital, Inc., argue, inter alia, that the Federal Courts have more familiarity with the statutory and regulatory scheme with respect to securities law, that findings in the State Court proceeding may be at variance from well-established securities law jurisprudence and that certain findings in this litigation might be inconsistent with findings in the Federal proceedings. The Defendants point to the anomaly that Plaintiff here is indeed a Defendant, together with Wells Fargo, in the proceedings brought by the SEC as regulator.

         The EDC resists Defendants' motion arguing, among other things, that the Federal litigation has just commenced, that its response to that suit is not presently due, that there is no assurance that a resolution of that proceeding will in any way impact the disposition of this matter, that Plaintiff's claims here are Rhode Island common law in nature while the Federal litigation is incident to alleged violation of Federal Securities law, and that while claims under the 1934 Securities Act (against Wells Fargo) are subject exclusively to suit in the Federal system, claims under the 1933 Securities Act (such as those asserted by SEC against the EDC) are cognizable both in the Federal and State Courts.

         Further, Plaintiff correctly makes the point that the SEC action is to acquit the rights of the investing public while the State action is brought against the Defendants claiming a violation of rights and of duties owed to Plaintiff by the Defendants and by each of them.

         In the final analysis, this Court notes that the stay request is addressed to the sound discretion of the trial justice. This Court believes ...


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