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 rumors among investors about fraud within their latest venture, Prytania Media Group, leading to the devaluation and 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 causing 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."

According to the Strains' 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. The relationship reportedly started positively but soured over time due to concerns about compliance with U.S. laws on foreign investment. NetEase allegedly asked the Strains to keep the investment low-profile and suggested opening branches in Canada or Ireland to facilitate their investment while avoiding scrutiny from the Committee on Foreign Investment in the United States (CFIUS).

The complaint also delves into NetEase's alleged ties to the Chinese Communist Party (CCP), suggesting that the company wanted to keep these connections confidential. It references Tencent's designation as a "Chinese military company" by the U.S. government and reports that NetEase CEO Ding Lei threatened Activision Blizzard with CCP retaliation in 2023 over licensing issues.

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 might threaten his immigration.

As the Strains continued to question and push for regulatory compliance, their relationship with NetEase deteriorated. In early February 2024, Crop Circle Games faced financial difficulties, leading to layoffs and furloughs. On February 22, Jeff Strain received a text from a managing director of a venture firm invested in Prytania, alleging fraud and misuse of funds at Crop Circle Games. 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 withdrew funding from Prytania, and the company struggled to secure new investments. By the end of March, Prytania's valuation plummeted from an estimated $344 million to nearly nothing, leading to the closure of Crop Circle Games.

In April, Annie Strain published a letter on the company website attributing the company's struggles to the industry's economic downturn and inability to secure funding. She also mentioned an alleged forthcoming Kotaku article about her personal health struggles, which was never published. A week later, Prytania subsidiary Possibility Space closed, with Jeff Strain citing employee leaks to the press as the reason. Neither NetEase nor the fraud allegations were mentioned at the time.

The Strains are suing NetEase for defamation, unfair trade practices, tortious interference with business relations, and negligence, seeking damages exceeding $900 million, 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."