Shareholder lawsuits against gaming companies heat up

Action is heating up in lawsuits filed since 2009 by disgruntled shareholders against MGM Resorts International, Las Vegas Sands Corp. and International Game Technology.

Shareholders -- and employees in one case -- complain in the suits they lost money after investing in the stock of those companies based on lack of disclosures or allegedly false statements about their financial outlooks.

In 2009, six shareholder class-action or "derivative" lawsuits were filed against MGM Resorts International -- then called MGM Mirage -- in state and federal courts over the decline of its stock price between August 2007 and March 2009.

These suits typically complain that between August 2007 and March 2009, shareholders invested based on statements about MGM's superior balance sheet -- only to lose money when the stock of the company dropped from more than $15 in early January 2009 to $1.89 on March 5, 2009.

The stock fell after the company disclosed problems at its CityCenter development on the Las Vegas Strip and that it faced liquidity problems -- all as the worst recession in memory was reducing travel to Las Vegas and spending at the company's resorts.

MGM Resorts since 2009 has improved its financial position thanks to debt and equity deals.

Last week, its attorneys filed a motion to dismiss two of the shareholder lawsuits, which have been combined in U.S. District Court for Nevada.

"Plaintiffs seek to blame MGM for failing to foresee the greatest economic collapse since the Great Depression. Instead of acknowledging the global economic crisis, its harsh effects on Las Vegas in particular, and the severe slump in the real estate development and gaming industries, plaintiffs cherry-pick positive statements from MGM’s public filings and earnings calls made before and during this crisis, claim those statements were made with knowledge of their alleged falsity, and seek to hold MGM and its officers ... liable for securities fraud," MGM Resorts' attorneys wrote in their filing.

MGM Resorts' attorneys added that the suing shareholders had failed to specify what statements were false.

"Although plaintiffs appear to contend that MGM’s projected construction budget and completion date for CityCenter were somehow false, the complaint never alleges facts to show that either turned out to be anything other than what MGM reported," MGM's filing said.

"Similarly, with respect to statements regarding MGM’s ability to secure lending and MGM’s overall financial condition, the complaint alleges nothing more than the fact that MGM’s optimism was later tempered by the impact of the worldwide financial crisis," the filing said.

In backing up their assertions, company attorneys included in their filing a chart showing MGM Resorts' 97 percent share-price decline during the period at issue was in line with other casino companies including Las Vegas Sands (down nearly 98 percent), Boyd Gaming Corp. (down 92 percent) and Wynn Resorts Ltd. (down 83 percent).

Separately, attorneys for Las Vegas Sands filed a motion for dismissal in January in two shareholder lawsuits filed last year in the same court.

In those cases, disgruntled investors are seeking to recover damages over a decline in the price of Las Vegas Sands stock from $144 in 2007 to less than $2 per share in early 2009. That stock has since rebounded somewhat as the company has improved its balance sheet and is reporting booming revenue from its casinos in Asia.

These suits claim that in 2007 increasing competition in Macau was steadily eroding the company’s foothold there, that it faced a liquidity crisis because of heavy capital spending in Macau and Singapore and that the company struggled to weather the economic downturn because the credit markets were drying up and Las Vegas Sands had been slow to access those markets.

In 2009, in state court lawsuits, Clark County District Court Judge Allan Earl ruled Las Vegas Sands shareholders failed to show mismanagement by board members or that they breached their fiduciary duties; and said the shareholders didn’t show Chairman and CEO Sheldon Adelson exerted undue influence on the other board members.

In responding in January to the federal lawsuits filed in 2010, Las Vegas Sands attorneys wrote: "This lawsuit is an unwarranted effort by plaintiffs to turn the effects of the global recession on both the gaming industry and the company into a purported scheme by the company and the individual defendants to defraud the company’s shareholders."

"There can be no dispute that the global recession hit just as the company was executing its multi-phase global expansion strategy. As the company faced challenges to its strategy due to the worldwide decline in gaming patrons and the tightening of credit markets, the company fully and repeatedly disclosed to investors those challenges as they arose, along with its plans for resolving them," the filing said.

It's not known when the judges handling these cases will rule on the motions for dismissal.

In Reno last week, U.S. District Judge Edward Reed Jr. declined to dismiss two lawsuits against International Game Technology -- but he threw out several of the charges within the lawsuits.

One was filed by shareholders alleging that in November 2007, IGT announced record results for its fiscal year ended Sept. 30, 2007, and "painted a picture of a bright future for IGT" -- but didn't disclose that play levels on IGT slot machines had started to drastically decline that month and that expenses were running unreasonably high.

The shareholders also complained that IGT failed to disclose problems with its new server-based systems technology and that IGT failed to disclose issues with contracts it was working on with Caesars Entertainment Corp. and MGM Resorts International's CityCenter. As evidence, the shareholders cited stock sales at the time by then-CEO TJ Matthews.

These shareholders complained the stock fell from about $49 in March 2008 to less than $8 in November 2008 as sales prospects dimmed due to the recession hitting the gaming industry

"While plaintiffs’ allegations based on defendants’ earnings forecasts, server-based technology schedule forecast, operating expense forecast and stock sales are insufficient to allege fraud under the Private Securities Litigation Reform Act, plaintiffs’ allegations based on defendants’ statements concerning play levels and omissions relating to the CityCenter and Harrah’s (Caesars) agreements create an inference of scienter (acting knowingly) at least sufficient to survive a motion to dismiss," Reed wrote in his ruling.

Reed also declined to dismiss a lawsuit claiming IGT employees were harmed when their retirement plan invested in IGT stock.

That suit charged that the value of IGT stock in the retirement plan tumbled by 67 percent in plan year 2008 to $34 million and the workers were harmed because company officials "either were or should have been aware that IGT's stock was artificially inflated as a result of inaccurate public statements by IGT."

In that case, Reed granted IGT's motion to dismiss certain claims including that it failed to avoid conflicts of interest and breaches of prudence and loyalty in investment of plan assets.

Reed refused to deny certain claims including one of "breach of duty to monitor" involving the IGT board of directors allegedly failing to properly supervise the committee responsible for the investment plan; and one of failure to disclose material facts about the plan.

The two cases against IGT may now proceed toward trial or summary judgment motions, unless they're settled.

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