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, initially filed in Louisiana state court and subsequently moved to federal court, alleges NetEase deliberately devalued and ultimately caused the closure of their studio, Prytania Media Group, by spreading false rumors of fraud to investors.

The complaint dramatically accuses NetEase, a Chinese entity, of attempting to circumvent U.S. law. The Strains detail a complex series of events leading to Prytania's collapse. NetEase invested 25% in Crop Circle Games, a Prytania subsidiary, placing a representative on the board. Initially positive, the relationship soured as NetEase reportedly expressed concerns about U.S. foreign investment regulations, suggesting the Strains maintain a “low profile” to avoid CFIUS scrutiny and even proposing relocating operations to Canada or Ireland to facilitate investment.

The complaint highlights NetEase's alleged ties to the Chinese Communist Party (CCP), suggesting a motive to conceal these connections from the U.S. government. It cites the U.S. government's designation of Tencent as a Chinese military company and reports of NetEase CEO Ding Lei allegedly leveraging CCP retaliation threats against Activision Blizzard in 2023. The Strains also mention Lei's purported U.S. immigration plans and concerns about jeopardizing this process through public disclosure of NetEase's investments.

As regulatory compliance questions mounted, the Strains’ relationship with NetEase deteriorated. Crop Circle Games experienced financial difficulties, leading to layoffs and furloughs in early 2024, causing internal confusion and anger. The Strains allege that a rumor of fraud, originating from NetEase, was spread by a venture capital managing director, ultimately leading to investor pullback. A board meeting revealed NetEase's representative expressed surprise at Crop Circle's rapid depletion of funds, potentially confirming the rumor's source.

The loss of investor confidence led to Prytania Media and its subsidiaries becoming virtually worthless, plummeting from an estimated $344 million valuation. Crop Circle Games closed in March 2024. Annie Strain's subsequent public letter attributed the company's struggles to economic downturn and funding difficulties, mentioning an un-published Kotaku article. This letter was later removed. Possibility Space, another Prytania subsidiary, closed shortly after.

Jeff and Annie Strain, along with Prytania Media, are suing NetEase for defamation, unfair trade practices, tortious interference, and negligence. They seek damages exceeding $900 million—triple Prytania's previous valuation. NetEase denies the allegations, asserting their business integrity and confidence in a favorable legal outcome.