Jeff and Annie Strain Sue NetEase for $900M, Alleging Fraud Misrepresentation to Investors

Jeff Strain, co-founder of ArenaNet and co-creator of State of Decay, along with his wife Annie Strain, have filed a $900 million lawsuit against NetEase, the creators of Marvel Rivals. The Strains allege that NetEase spread false rumors among investors, claiming that they had committed fraud with their latest venture, Prytania Media Group. This, they argue, led to the devaluation and eventual closure of their studio.

The lawsuit, initially filed in January in the civil district court for the parish of Orleans in Louisiana and later moved to federal court, accuses NetEase of "the destruction of the careers of two gaming industry veterans and their company by a Chinese entity seeking to avoid compliance with United States law." The complaint, as seen by IGN, details a complex narrative surrounding the unexpected shutdown of Prytania Media's subsidiaries.

NetEase had initially invested in one of Prytania's subsidiaries, Crop Circle Games, acquiring a 25% stake and placing Han Chenglin on the board alongside Jeff and Annie Strain. Initially, the relationship was described as positive. However, tensions arose as NetEase allegedly expressed concerns about compliance with U.S. laws regarding foreign investment. The Strains claim they were asked to keep the investment "low profile" and to open branches in Canada or Ireland to facilitate NetEase's investment without attracting regulatory scrutiny from The Committee on Foreign Investment in the United States (CFIUS).

The complaint further alleges that NetEase has ties to the Chinese Communist Party (CCP) and sought to conceal these connections from the U.S. government. It references Tencent's designation as a "Chinese military company" by the U.S. government and reports of NetEase CEO Ding Lei allegedly using the threat of CCP retaliation against Activision Blizzard in 2023.

The Strains also mention that Lei was reportedly in the process of immigrating to the U.S. and had purchased a $29 million Bel-Air mansion from Elon Musk in 2020. They claim that Lei expressed concern that his immigration could be jeopardized if NetEase's investments were publicized.

As the relationship deteriorated, Crop Circle Games faced financial difficulties, leading to layoffs and furloughs in early February 2024. The Strains allege that on February 22, Jeff Strain received a text from a venture firm's managing director accusing Crop Circle Games of fraud and misuse of funds, which they traced back to NetEase. In a March board meeting, Han Chenglin allegedly admitted to expressing surprise at the company's rapid financial decline, which the Strains claim fueled the fraud rumors.

Following these accusations, other investors reportedly withdrew funding from Prytania, and the company was unable to secure new investments. As a result, Prytania Media and its subsidiaries were significantly devalued, from an estimated $344 million to "nearly nothing," leading to the complete shutdown of Crop Circle Games by the end of March.

In April, Annie Strain published a letter on the company website attributing the company's struggles to the industry's economic downturn and difficulties in securing funding. She also mentioned an alleged article by Kotaku reporter Ethan Gach that she claimed would have disclosed her personal health struggles without her consent. The letter was later removed, and Kotaku did not publish the article. A week later, Prytania subsidiary Possibility Space closed, with Jeff Strain citing employee leaks to the press as the reason, without mentioning NetEase or the fraud allegations.

The Strains are suing NetEase for defamation, unfair trade practices, tortious interference with business relations, and negligence, seeking damages exceeding $900 million, which is triple their company's prior valuation.

In response, NetEase stated to Polygon:

The allegations by Prytania Media and its founders Annie and Jeff Strain are wholly without merit, and we emphatically deny and will vigorously defend ourselves against them. Our record as a global gaming company speaks for itself, and we remain committed to conducting business with integrity. We are confident that the legal process will vindicate our position and shed light on the real reasons behind the demise of the Strains’ studios.