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 initiated a $900 million lawsuit against NetEase, the creators of Marvel Rivals. The Strains allege that NetEase's actions led to the devaluation and eventual closure of their studio, Prytania Media Group, by spreading false rumors of fraud among investors. The case, initially filed in January in the civil district court for the parish of Orleans in Louisiana, has been moved to federal court.

The amended complaint, as reported by IGN, begins with a strong statement: "This case is about 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 Strains' narrative in the complaint is intricate and does not fully clarify the reasons behind the unexpected shutdown of Prytania Media's subsidiaries last year.

According to the complaint, NetEase initially invested in Prytania's subsidiary, 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 expressed concerns about compliance with U.S. laws on foreign investment. The Strains claim they received an email from NetEase requesting to keep the investment "low profile" to avoid scrutiny from The Committee on Foreign Investment in the United States (CFIUS). They were also allegedly asked to establish branches in Canada or Ireland to facilitate NetEase's investment.

The complaint further delves into NetEase's alleged connections to the Chinese Communist Party (CCP), suggesting that the company wished to keep these ties hidden 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 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 purchasing a $29 million Bel-Air mansion from Elon Musk in 2020. They claim Lei was concerned that publicizing NetEase's investments could jeopardize his immigration status.

As the Strains continued to question NetEase about regulatory compliance, their relationship deteriorated. Financial difficulties emerged, leading Crop Circle Games to lay off and furlough staff in early February 2024. Amidst internal confusion and anger, Jeff Strain received a text on February 22 from a managing director of a venture firm invested in Prytania, alleging fraud and misuse of funds at Crop Circle Games. The Strains traced these rumors back to NetEase, with Han Chenglin admitting in a March board meeting to expressing surprise at the company's rapid depletion of funds.

Following this, other investors withdrew funding from Prytania, and the company struggled to attract new investors. The complaint states that Prytania and its subsidiaries became nearly worthless, down from an estimated $344 million valuation. Crop Circle Games was shut down entirely 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 funding issues. 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 soon 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. At the time, neither NetEase nor the fraud allegations were mentioned.

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 issued a statement to Polygon, denying the allegations and affirming their commitment to integrity:

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.