NetEase Faces $900M Lawsuit Over Fraud Allegations

Jeff Strain and Annie Strain, co-founders of ArenaNet and co-creator of State of Decay, are suing NetEase, the creator of Marvel Rivals, for $900 million. Their lawsuit alleges NetEase deliberately devalued and ultimately caused the closure of their studio, Prytania Media Group, by spreading false rumors of fraud to investors.

Filed initially in Louisiana state court and subsequently moved to federal court, the amended complaint accuses NetEase, a Chinese entity, of seeking to avoid U.S. law compliance. The Strains' account details a complex situation surrounding Prytania's subsidiary, Crop Circle Games. NetEase held a 25% stake in Crop Circle Games, with Han Chenglin serving on the board alongside the Strains.

Initially a positive relationship, the Strains claim NetEase expressed concerns about U.S. foreign investment laws, requesting a "low profile" investment to circumvent CFIUS regulations and suggesting offshore branches in Canada or Ireland to facilitate investment. The complaint highlights NetEase's alleged ties to the Chinese Communist Party (CCP), citing Tencent's designation as a "Chinese military company" by the U.S. government and reports of NetEase CEO Ding Lei allegedly leveraging CCP threats against Activision Blizzard in 2023. The Strains also mention Lei's purported U.S. immigration plans and concerns about jeopardizing this process through publicized investments.

As the Strains pressed for regulatory compliance, their relationship with NetEase deteriorated. Crop Circle Games experienced financial difficulties, leading to layoffs and furloughs in February 2024, causing internal confusion and anger. On February 22nd, Jeff Strain received a text alleging Crop Circle Games' fraudulent activities, a rumor traced back to NetEase by a venture firm managing director. Han Chenglin later acknowledged contributing to the rumor.

Following these accusations, investors withdrew funding, leaving Prytania unable to secure new investments. The company, once valued at $344 million, became virtually worthless. Crop Circle Games closed in March 2024. In April, Annie Strain published a website letter attributing the company's struggles to the economic downturn and funding difficulties, mentioning an un-published Kotaku article. This letter was later removed. Possibility Space, another Prytania subsidiary, subsequently closed.

Jeff and Annie Strain, along with Prytania Media, are suing NetEase for defamation, unfair trade practices, tortious interference, and negligence, seeking damages exceeding $900 million. NetEase denies the allegations, stating they are without merit and vowing a vigorous defense, asserting confidence that the legal process will vindicate their position.