Shareholder suit over Stratosphere plods along

A shareholder lawsuit against Grand Casinos related to Grand's operation of the Stratosphere hotel-casino is plodding slowly forward, and is not likely to be affected by the pending merger of Grand's Gulf Coast operations into Hilton Hotels Corp.

"It's completely unrelated," said Martin Washton, a Grand attorney.

On that point, at least, Grand is in agreement with the shareholders.

"What we would expect would be that Grand Casinos' liability in this case ... would either remain with what would exist of Grand after the merger, or would go to the new company," said Kevin Roddy, an attorney for the shareholders. "You can't just leave the people sitting by the side of the road."

A group of Stratosphere shareholders sued Grand in 1996, alleging the company made "false and misleading statements" during construction of the Stratosphere that "permitted defendants to sell the company's securities and caused such securities to trade at artificially inflated prices," according to their complaint.

Grand bought the Stratosphere's operating company from founder Bob Stupak while the resort was being planned, and many Grand officers also served as officers of the Stratosphere. From 1994 until 1997, Lyle Berman, Grand's chairman and chief executive, also served as chief executive of Stratosphere.

The suit names as defendants Grand, Berman and Stratosphere officers including Stanley Taube, David Wirshing, Thomas Lettero, Andrew Blumen and Thomas Bell.

The Stratosphere opened in April 1996 and declared bankruptcy in January, 1997 after its casino failed to generate enough business to service its high-interest debt. Grand has since written off its investment in the resort. Billionaire Carl Icahn bought a majority of Stratosphere's debt and was confirmed as the resort's owner by U.S. Bankruptcy Court in May.

In June, Grand and Hilton announced a $1.2 billion merger. Hilton will split into separate gaming and lodging companies, and the Hilton gaming company will acquire three Grand casinos in Tunica, Gulfport and Biloxi, Miss. Other Grand assets, including Indian casino management contracts, will remain with a down-sized Grand.

The Stratosphere shareholders are seeking class action status for the suit, and claim $120 million in damages for the entire class.

The shareholders allege a number of misrepresentations, including:

--Revenue projections based on a $102 daily win per machine, when actual per-day machine win in downtown Las Vegas was about $80.

--A failure to take into account the Stratosphere's location "in a dangerous, crime-infested neighborhood," or the potential effect of weather conditions on admissions and thrill ride revenues.

--A failure to disclose construction cost overruns, supported by a series of internal Grand memoranda.

In July 1996 the Stratosphere reported an $11.1 million loss for the quarter ending June 30, 1996, admitted its overall construction costs were overbudget, and said it would need to raise an additional $24 million to finish construction of a second hotel tower, according to the shareholder suit.

The company was unable to find financing to finish the second tower, and it stands incomplete today.

Stratosphere's stock fell from $14 to $3 by July 22, the end of the period in which the shareholders allege they were damaged.

"As a result," states the complaint, "plaintiffs and the members of the class who purchased securities at prices that were inflated by defendants' false and misleading statements, lost tens of millions of dollars as their investment in the company was literally wiped out."

In April, U.S. District Judge Philip Pro dismissed some charges, but left the body of the shareholder suit intact. Now pending are a new motion for summary judgement filed by Grand, and a motion to certify the suit as a class action suit, filed by the shareholders.

Grand and the other defendants deny the charges.

"These Defendants properly and accurately disclosed publicly all material facts concerning the construction, budget, sources and uses of funds, and operation of the Stratosphere project during the class period," states Grand's motion for summary judgement.

In fact, the motion concludes, the Grand officials would have been remiss if they had reported "tentative" projections concerning earnings and construction cost overruns.

"Officers and directors of public companies face a veritable 'Catch 22' when faced with the need to disclose evolving projections," states the motion. "They can disclose tentative projections and face potential liability when it turns out they over or underestimated cost overruns, or they can publish information when it is sufficiently reliable to determine its numerical limits and materiality."

Grand chose the latter course, a perfectly allowable option, concludes the motion.

No hearing date has been set for either the summary judgement or class certification motions. No trial date has yet been set.

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