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 about fraud among investors.

The lawsuit, originally filed in January in the civil district court for the parish of Orleans in Louisiana and later moved to federal court, 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 complaint provides a detailed narrative but leaves some gaps regarding the unexpected closure of Prytania Media's subsidiaries last year. According to the Strains, 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. foreign investment laws. The complaint mentions an email from NetEase asking the Strains to keep the investment "low profile" to avoid CFIUS regulations, and suggestions to open branches in Canada or Ireland to facilitate NetEase's investment.

The Strains' complaint also delves into NetEase's alleged connections to the Chinese Communist Party (CCP), suggesting that the company wanted to keep these ties hidden from the U.S. government. They reference Tencent's classification as a "Chinese military company" by the U.S. government and reports of NetEase CEO Ding Lei's alleged use of CCP threats in negotiations with Activision Blizzard in 2023.

The Strains also mention that Ding Lei was reportedly in the process of immigrating to the U.S., 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 press for regulatory compliance, their relationship with NetEase deteriorated. Financial difficulties emerged, leading to layoffs and furloughs at Crop Circle Games in early February 2024. The complaint alleges that on February 22, Jeff Strain received a text from a managing director of a venture firm invested in Prytania, accusing Crop Circle Games of fraud and misuse of funds. The Strains traced the rumor back to NetEase, with Han Chenglin admitting in a March board meeting that he had expressed surprise at the company's rapid financial decline.

Following this incident, other investors reportedly withdrew funding from Prytania, and the company was unable to secure new investments. The complaint states that Prytania Media and its subsidiaries became nearly valueless, despite once being valued at $344 million. 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 difficulty in securing funding. She also mentioned an alleged upcoming Kotaku article by Ethan Gach that 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, without mentioning NetEase or 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 previous valuation.

In response, NetEase issued a statement to Polygon, denying the allegations and expressing confidence in the legal process to clear their name:

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.