Judge weighs issues in Santa Fe takeover battle

A Santa Fe Gaming Corp. attempt to block dissident creditor David Lesser from voting for two special company directors at next Monday's annual meeting is in the hands of a federal judge.

In U.S. District Court Tuesday, lawyers for Santa Fe urged Judge Johnnie B. Rawlinson to issue a preliminary injunction barring Lesser's Hudson Bay Partners LP from voting his preferred Santa Fe stock in favor of a self-nominated slate of two special directors for the company's board.

Hudson Bay, a New York investment firm, owns 33.2 percent of the company's preferred shares. Lesser is Hudson Bay's general partner.

Santa Fe argued that Hudson Bay, which has acquired the shares since late last year, should have disclosed in Securities and Exchange Commission filings an alleged plan to force Santa Fe to settle its debts by selling major company assets. Because it didn't make such a disclosure, Hudson Bay should be barred from voting its shares in favor of two special directors, said Santa Fe attorneys.

But Hudson Bay argued that it has adequately disclosed its plans in several SEC filings, and that there are no grounds to prohibit Hudson Bay from voting its shares.

Rawlinson said she would not rule until Hudson Bay had time to reply to Santa Fe papers filed Monday. She said she will rule before next Monday's annual meeting.

The ruling could have a significant impact on the annual meeting and on Hudson Bay's attempt to get independent directors on the Santa Fe board. If an injunction is granted, all eight board members will likely be loyal to Santa Fe. If an injunction is not granted, Hudson Bay will have a chance to get its nominees on the Santa Fe board.

Tuesday's court battle is just the latest skirmish in a month's-long war between Hudson Bay and Santa Fe.

Santa Fe owns the Santa Fe hotel-casino in northwest Las Vegas, the Pioneer hotel-casino in Laughlin, a parcel of land across from Sunset Station in Henderson on which it plans to build a hotel-casino, and a parcel of land on the Strip it leases to the Wet 'n Wild water theme park.

Last fall, Santa Fe subsidiary Pioneer Finance Corp. missed a $60 million balloon payment on bonds floated in 1988 to buy the Pioneer hotel-casino. Santa Fe, as guarantor of the bonds, tried to get bondholders to agree to extend the terms of the bonds to 2006. More than 75 percent agreed.

But a minority -- led by bondholder Hudson Bay -- did not accept the terms. Instead, Hudson bay and other bondholders representing about 13.5 percent of the bonds tried to force Santa Fe into bankruptcy.

Earlier this year, a federal bankruptcy judge denied that attempt. But in the meantime, Pioneer Finance and Pioneer Hotel Inc., the Santa Fe subsidiary that operates the Pioneer, voluntarily filed for bankruptcy.

At the same time Hudson Bay was trying to force Santa Fe into bankruptcy, Hudson Bay was buying up Santa Fe preferred stock. Because Santa Fe has missed dividend payments on its preferred stock for two straight years, the company's preferred shareholders are eligible to vote for two special directors for the company's board at this year's annual meeting. The directors will increase the board's size from six directors to eight.

Preferred shareholders are not normally allowed to vote at Santa Fe annual meetings. The company's common voting stock is controlled by Paul Lowden, Santa Fe's chairman.

Hudson Bay and Santa Fe have both nominated competing candidates for the new director seats.

In March, Santa Fe sued Hudson Bay, accusing it of using the bankruptcy process to try to gain control of the company, rather than to collect debts. Santa Fe also argued that the plan should have been revealed in Hudson Bay's Securities and Exchange Commission filings.

Lesser gained "intimate non-public" information about Santa Fe when working as a consultant for Crescent Real Estate Equities Co., of Fort Worth, in early 1998, alleges the suit. A Crescent offer to buy Santa Fe was later rejected. But Lesser then began buying company debt and preferred stock in a fraudulent scheme to gain control of the company, alleges the suit.

With Monday's annual meeting looming, Santa Fe asked Rawlinson for an injunction barring Hudson Bay from voting its shares.

"The whole point of this motion is to try to prevent Hudson Bay from voting its preferred shares," said Hudson Bay attorney Donald Chase at Tuesday's hearing.

Santa Fe argues that Hudson Bay bought its preferred stock and bonds at depressed rates with an eye toward forcing Santa Fe into bankruptcy, and selling its assets piecemeal to recoup its investment.

"What plans and proposals they have is to go into the company, carve it up and line their pockets with the profits," said Dean Kitchens, an attorney for Santa Fe.

Santa Fe says a Hudson Bay document, obtained through discovery, supports this view.

Under the title "Investment Highlights," the Hudson Bay documents reads: "With Pioneer bonds now in default, there exists an opportunity to bring the entire Santa Fe Gaming into bankruptcy ... Santa Fe Gaming has valuable assets that, while highly leveraged, could be sold, potentially creating excess value to partially satisfy Pioneer noteholders."

The document goes on to detail a plan under which Santa Fe's Strip and Henderson parcels could be sold.

Another Hudson Bay scenario would involve selling the Santa Fe hotel-casino to generate cash to pay other company debts.

The memo and Hudson Bay's actions demonstrate a clear intent to take control of the company, argues Santa Fe.

"There are many different things that they have done to attempt to control the company," said Kitchens.

But Hudson Bay argues that it has given more than adequate disclosure of its intentions in SEC filings. The company points to documents Hudson Bay filed disclosing its purchase of preferred stock that state: "The filing persons intend to continue to consider various alternative courses of action ... (that) may include ... pursuing a transaction or transactions involving a change in control of the Issuer (Santa Fe Gaming) or such other actions as each filing person may deem appropriate."

"Given all the information that the shareholders have at this moment, it is difficult to understand what more material information they would require," said Chase. "What more do they want?"

Chase also noted that Hudson Bay's filings state the company bought Santa Fe bonds and preferred stock for investment purposes only. That brought a question from Judge Rawlinson.

"Is it your contention that Mr. Lesser and Hudson Bay were not trying to control Santa Fe?" asked Rawlinson.

"It's not about getting control of the company," said Chase. "That's just one means for getting a return on an investment."

Chase said Lesser bought the instruments at lower than face value, hoping for a good return on his investment. The investment made good financial sense, he said.

"Ultimately, the return rate he was looking at in this transaction was 65 percent per annum," said Chase.

But Rawlinson still wasn't satisfied.

"Isn't that a little disingenuous, given the history of these two parties?" asked Rawlinson.

Chase responded that Lesser was only a consultant to Crescent in its attempt to buy Santa Fe. The motives of Crescent do not automatically transfer to Lesser, he argued.

Rawlinson declined to rule from the bench, saying she wanted to give Hudson Bay time to respond to Santa Fe papers filed Monday.

"My inclination is Hudson Bay was trying to gain control of the company," said Rawlinson.

Her dilemma, said Rawlinson, is deciding whether Hudson Bay adequately disclosed this plan to investors.

A ruling is expected prior to Monday's annual meeting.

archive