UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
IN RE GRAND CASINOS, INC.
Master File No.
JURY TRIAL DEMANDED
Plaintiffs, individually and on behalf of all others similarly situated, by their attorneys, allege the following, upon information and belief (except for those allegations pertaining to plaintiffs, which are based on personal knowledge), after due investigation by their counsel. The investigation included a review and analysis of public statements and corporate documents of defendants, including various public filings by the corporate defendant with the United States Securities and Exchange Commission ("SEC"), and analysts reports, and other review and analysis of materials concerning the defendants named herein and the allegations set forth below, including newspaper articles and articles in financial publications. Plaintiffs believe that these allegations and factual contentions are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.
3. The magnitude of defendants' wrongful conduct is evident from the extraordinary rise in the price of Grand Casinos common stock. The stock, which had steadily traded at around $10 for the first few months of 1995 and which rose to trade in the teens and low to mid $20s throughout the rest of 1995, soared to a 52-week high price of over $35 per share on February 9, 1996. Several of the defendants shortly thereafter began a few days of massive selling of their Grand Casinos shares, yielding proceeds to themselves of approximately $50 million. Weeks after these sales were completed, the defendants' scheme began to collapse, with the initial disclosure in the press of financial problems plaguing the Grand Casinos controlled Stratosphere. The market price of Grand Casinos stock tumbled in response, despite defendants' continued efforts to prop it up. Grand Casinos stock declined, closing at $20.25 on July 22, 1996, and steadily fell thereafter, falling to a close of $14.125 per share on August 19, 1996.
5. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28 U.S.C. § 1391(b) and (c). A substantial part of the events and omissions giving rise to the claims alleged herein, including the dissemination to the investing public of false and misleading statements, occurred in this District. Additionally, Grand Casinos' principal place of business and executive offices are located within this District.
6. In connection with the acts and conduct complained of, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails, interstate telephone communications, and the facilities of the national securities exchanges.
8. Plaintiff Robert D. Marcus purchased 22,800 shares of the common stock of Grand Casinos during the Class Period, at prices ranging from $23.75 to $30.25 per share, as follows: 300 shares on December 29, 1995 at $23.75 per share; 4,700 shares on December 29, 1995 at $23.875 per share; 5,000 shares on May 9, 1996 at $30-00 per share; 10,000 shares on May 20, 1996 at $30.00 per share; and 2,800 shares on June 10, 1996 at $30.25 per share, and has been damaged thereby.
9. Plaintiff Gary Friedman purchased 4,200 shares of the common stock of Grand Casinos during the Class Period, at prices ranging from $24.00 to $34.125 per share, as follows: 250 shares on January 5, 1996 at $24 per share; 100 shares on February 20, 1996 at $31 5/8 per share; 100 shares on February 20, 1996 at $31 7/8 per share; 100 shares on February 20, 1996 at $31 7/8 per share; 100 shares on February 20, 1996 at $31 7/8 per share; 100 shares on February 21, 1996 at $30 1/4 per share; 100 shares on February 21, 1996 at $30 1/8 per share; 100 shares on February 21, 1996 at $30 1/2 per share; 100 shares on February 21, 1996 at $29 3/4 per share; 100 shares on February 21, 1996 at $30 1/4 per share; 100 shares on February 29, 1996 at $32 1/8 per share; 100 shares on February 29, 1996 at $32 1/8 per share; 100 shares on February 29, 1996 at $32 1/8 per share; 100 shares on February 29, 1996 at $32 1/2 per share; 100 shares on February 29, 1996 at $32 1/2 per share; 250 shares on January 5, 1996 at $24 1/4 per share; 500 shares on May 7, 1996 at $31 per share; 500 shares on May 23, 1996 at $34 1/8 per share; 500 shares on July 9, 1996 at $24 5/8 per share; 100 shares on February 15, 1996 at $33 1/4 per share; 100 shares on February 15, 1996 at $33 3/4 per share; 300 shares on February 15, 1996 at $33 3/4 per share; 100 shares on April 12, 1996 at $33 3/8 per share; 100 shares on April 12, 1996 at $32 5/8 per share; and 100 shares on April 12, 1996 at $32 5/8 per share; and has been damaged thereby.
10. Plaintiff Kevin Malakouti purchased 600 shares of the common stock of Grand Casinos on June 27, 1996, at a price of $35.00 per share, and has been damaged thereby.
11. Plaintiff Robert Friedland purchased 1,000 shares of the common stock of Grand Casinos on June 25, 1996, at a price of $27.25 per share, and has been damaged thereby.
12. Defendant Grand Casinos is incorporated under the laws of the State of Minnesota, with its principal executive offices located at 13705 First Avenue North, Plymouth, MN 55441. Grand Casinos develops and manages land-based and dockside casinos and bingo facilities. It owns and operates the #1 and #2 dockside casinos on the Mississippi Gulf Coast, the Grand Casino Gulfport and Grand Casino Biloxi, and Grand Casino Avoyelles in Marksville, LA. The Company also manages four casinos on Native American land in Louisiana and Minnesota, including Native American-owned Grand Casino Mille Lacs and Grand Casino Hinckley in Minnesota. It also acquired Grand Gaming Corp. in 1995, giving Grand Casinos full ownership of the Diamond Lakes Casino/ Resort under development in Tunica, Mississippi. Grand Casinos also owns approximately 43% of Stratosphere, a Delaware corporation with its principal place of business located in Las Vegas, Nevada. Grand Casinos is the largest stockholder of Stratosphere. Stratosphere is the owner and operator of the Stratosphere Tower, Casino & Hotel, a fully integrated casino/hotel, observation tower and entertainment complex, located at the north end of the Las Vegas Strip ("Stratosphere complex"). Phase I of the Stratosphere complex was funded from an initial public offering in February 1994, a note offering in March 1995, and proceeds from the exercise of warrants issued on the initial public offering. Phase II of the Stratosphere complex was to be funded primarily by an equity offering of Stratosphere stock in December 1995. Upon its final completion, Stratosphere was to include a 118,500 square foot casino, approximately 2,500 hotel rooms and suites, an entertainment complex including retail and dining space, an observation tower, an aquarium, seven restaurants and numerous other operations.
13. Since at least 1994, the management of Grand Casinos was involved in the planning and design of the Stratosphere complex and actively participated in the management of Stratosphere. Grand Casinos had a Management and Development Agreement with Stratosphere (entered into in mid-1994) for Grand Casinos to supervise all facets of Stratosphere's development through its opening ("Management Agreement"). The Management Agreement specifically provided that Grand Casinos would supervise the desire development, construction, and opening of Stratosphere. Grand Casinos was to oversee and manage the development of the entire Stratosphere project. According to the former Chairman of the Board of Stratosphere, Bob Stupak ("Stupak"), Grand Casinos "is the controlling stockholder" of Stratosphere, appointed the management and controls the board of directors and strategic business decisions of Stratosphere, and has been directly involved in construction management controls, unexplained project costs, marketing, and other management decisions concerning Stratosphere. According to Stupak, Grand Casinos' decisions adversely affected development of the Stratosphere complex.
14. In March 1995, the Company invested an additional sum of approximately $33.5 million in Stratosphere by purchasing Stratosphere convertible preferred stock concurrently with Stratosphere's closing of a public offering of first mortgage notes. The Company also advanced Stratosphere certain amounts to fund continued construction of Stratosphere. Grand Casinos also entered into (i) a completion guaranty by which the Company agreed to complete the Stratosphere complex so that it becomes operating and guaranteed the payment of all project costs owing prior to such completion, up to $50 million, and (ii) a standby equity commitment whereby Grand Casinos agreed to purchase up to $20 million of additional equity in Stratosphere during each of the first three years of Stratosphere's operation if Stratosphere's annual consolidated cash flow did not reach $50 million.
15. Defendant Lyle Berman ("Berman"), a co-founder of the Company, is, and has been since October 1991, the Chairman and Chief Executive Officer of Grand Casinos. Berman also was (since July 1994 and at all relevant times) the Chief Executive Officer and a director of Stratosphere. Prior to the sales during the Class Period of a significant portion of his holdings in Grand Casinos, he held 16.8% of the common stock of Grand Casinos. Even after his sale of approximately 20% of his Grand Casinos stock as complained of herein, he still controlled 10.7% of all of its outstanding stock. For 1995, Berman received annual cash compensation in excess of $800,000 from the Company, plus substantial other benefits. Berman is also a director, officer, or controlling shareholder of a number of corporations which do business with Grand Casinos and Stratosphere.
16. Defendant Patrick R. Cruzen ("Cruzen") was, at all relevant times, the President of Grand Casinos. He joined Grand Casinos as Executive Vice President in June 1994 and was named President of the Company in August 1994. Cruzen has also served as a director of Grand Casinos since August 1994 and was, at all relevant times, a director of Stratosphere. For 1995, Cruzen received annual cash compensation of approximately $575,000 from the Company, plus substantial other benefits. On or about September 10, 1996, Cruzen resigned as Grand Casinos' President, but continues to serve as a consultant to the Company. He also resigned as a director of the Company.
17. Defendant Stanley M. Taube ("Taube"), a co-founder of the Company, is, and has been since the inception of the Company, an Executive Vice President and a director of Grand Casinos. He also controlled a personal corporation which provided consulting services to the Company from October 1991 through November 1992. Taube also is, and at all relevant times was, a director of Stratosphere (and signed a Registration Statement for Stratosphere's December 19, 1995 public offering). Prior to the sales during the Class Period of virtually all of his direct holdings in Grand Casinos and approximately 30% of his indirect holdings, he owned, directly or indirectly through immediate family members or two consulting corporations which are wholly-owned by Berman, 5.1% of the common stock of Grand Casinos. Even after his sale of some of these holdings, he still owned, directly or indirectly, and controlled 2.9% of all the outstanding stock of the Company. For 1995, Taube received annual cash compensation in excess of $410,000 from the Company, plus substantial other benefits. Under the terms of his employment contract with Grand Casinos, he is obligated to provide the Company with only 80 hours of work a month.
18. Defendant Timothy J. Cope ("Cope") is, and has been since January 1994, the Chief Financial Officer of Grand Casinos. He was appointed corporate secretary in May 1995 and from August 1993 through January 1994 he served as Vice President of Finance of the Company. For 1995, Cope received annual cash compensation of in excess of $200,000 from the Company, plus substantial other benefits.
19. Defendants Berman, Cruzen, Taube, and Cope are sometimes hereinafter referred to as the "Individual Defendants." Members of Grand Casinos' management, including the Individual Defendants were involved in the planning, finance, and design of the Stratosphere complex and defendants Berman, Cruzen, and Taube directly participated in the management and control of Stratosphere.
20. By reason of their stock ownership, positions as officers and/or directors of Grand Casinos and/or their ability to make public statements in the name of the Company, the Individual Defendants were controlling persons of Grand Casinos within the meaning of Section 20(a) of the Exchange Act and had the power and influence and exercised same to cause the Company to engage in the unlawful conduct complained of herein. Because of their positions of control and authority as officers and/or directors of the Company, they were able to and did control the contents of the various quarterly and annual financial reports, SEC filings, press releases and presentations to securities analysts pertaining to the Company. The Individual Defendants were provided with copies of Grand Casinos's stockholder reports, press releases, and SEC filings alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their Board membership and/or executive positions with Grand Casinos, these defendants had access to the adverse non-public information about the Company's business, finances, products, markets, and present and future business prospects particularized herein via access to internal corporate documents, conversations or connections with corporate officers and employees, attendance at Grand Casinos' management and Board of Directors meetings and committees thereof, and via reports and other information provided to them in connection therewith. As a result, these defendants were responsible for the accuracy of the various public reports and releases detailed herein and are therefore responsible and liable for the misrepresentations contained therein. Any acts attributed to Grand Casinos were caused and/or influenced by the Individual Defendants by virtue of their domination and control thereof.
21. The Individual Defendants participated in the drafting and preparation of the various public filings and shareholder reports and other communications complained of herein, and approved the issuance of such statements at or about the time of their issuance, and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom and their materially misleading nature.
23. Plaintiffs also bring this action as a class action under Fed. R. Civ. P. 23(a) and 23(b)(3) on behalf of an Insider Trading Class consisting of plaintiff Friedman and all other persons or entities who purchased the common stock of defendant Grand Casinos during the period from February 14, 1996 through February 22, 1996, inclusive (the "Insider Trading Class Period"). Excluded from the Insider Trading Class are the defendants herein, members of the Individual Defendants' immediate families, any entity in which any defendant has a controlling interest, all present and former officers and directors of Grand Casinos, any subsidiary, affiliate, or controlled person of any such person or entity, and the legal representatives, heirs, successors or assigns of any such excluded person or entity.
24. The Class is so numerous that joinder of all members is impracticable. According to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as of March 25, 1996, there were approximately 41.6 million shares of the Company's common stock outstanding. There are approximately 1,600 shareholders of record of the Company, and therefore, there are thousands of beneficial owners. Grand Casinos common stock is listed and traded on the New York Stock Exchange. More than ten million shares of the Company's common stock traded on the New York Stock Exchange during the Class Period. There are believed to be thousands of persons who purchased Grand Casinos common stock during the Class Period and that the members of the class are geographically dispersed throughout the United States. The exact number of Class members is unknown to the plaintiffs at this time and can only be ascertained through appropriate discovery.
25. The Insider Trading Class is also so numerous that joinder of all members is impracticable. More than 5 million shares of the Company's common stock traded on the New York Stock Exchange during the Insider Trading Class Period. There are believed to be in excess of a hundred persons who purchased Grand Casinos common stock during the Insider Trading Class Period and that the members of this class are geographically dispersed throughout the United States. The exact number of Class members is unknown to the plaintiffs at this time and can only be ascertained through appropriate discovery.
26. Grand Casinos' shares are listed and traded on the New York Stock Exchange, an efficient and developed securities market. Thousands of brokers nationwide have immediate access to trading information about Grand Casinos through the NYSE National Market System. This system displays, within minutes of the transactions taking place, the most recent trades and practices. The following well-known retail brokerage firms, among others, reported regularly on Grand Casinos: Montgomery Securities, Gerard Klauer Mattison & Co., Ladenburg, Thalmann & Co., Inc., Bear, Steams & Co., Inc., and Rodman & Renshaw.
27. Plaintiffs' claims are typical of the claims of the other members of the Class and Insider Trading Class, as plaintiffs and all members of the Classes sustained damages arising out of defendants' conduct in violation of federal law as complained of herein.
28. Plaintiffs will fairly and adequately protect the interests of the members of the Class and Insider Trading Class and have retained counsel competent and experienced in class action and securities litigation. Plaintiffs have no interests that are contrary to or in conflict with those of any Class.
29. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. Since the damages suffered by individual class members may be relatively small, the expense and burden of individual litigation make it virtually impossible for the class members individually to seek redress for the wrongful conduct alleged. Plaintiffs know of no difficulty which will be encountered in the management of this litigation which would preclude its maintenance as a class action.
30. Common questions of law and fact exist as to all members of the Classes and predominate over any questions affecting solely individual members of the Classes. Among the questions of law and fact common to the Classes are:
(b) whether statements disseminated by defendants to the investing public and to the shareholders of Grand Casinos during the Class Periods omitted and/or misrepresented material facts about the business, operations, prospects and financial condition of the Company,
(c) whether defendants participated in and pursued the concerted action or common course of conduct complained of,
(d) whether defendants acted willfully, knowingly, or recklessly in omitting and/or misrepresenting material facts;
(e) whether the market prices of the Company's common stock during the Class Period and Insider Trading Class Period were artificially inflated due to the material nondisclosures and/or misrepresentations complained of herein,
(f) whether the members of the Classes have sustained damages and, if so, the proper measure of such damages; and
(g) as to the Insider Trading Class, whether the defendants who sold their shares during the Insider Trading Class Period sold them while in possession of material, non-public information.
33. In order to raise additional funds, on November 15, 1995, Stratosphere announced that it would offer 10 million shares of its stock to the public, the proceeds of which would be used to finance the Phase II construction of the Stratosphere complex.
34. By December 1995, defendants had primed the market to expect that the Stratosphere complex - which was to contribute 20% of the earnings of Grand Casinos in 1996 - would be a huge success when it opened in April 1996. Defendants continued to foster this impression, which was accomplished through the issuance of false and misleading statements as set forth herein.
35. The Stratosphere complex was repeatedly touted by Stratosphere and the defendants herein as a "major destination resort containing a fully integrated casino/hotel, observation tower and entertainment complex located at the north end of the Las Vegas Strip." As a result of the Stratosphere Tower's physical presence rising above the Las Vegas skyline and its gaming and entertainment facilities, defendants created a "unique, highly visible destination attraction," not only for visitors to, but also residents of Las Vegas.
36. In a public offering in December 1995, Stratosphere sold 10 million shares of stock for $75.2 million, 8.4 million shares to the public and 1.6 million shares directly to Grand Casinos (one million shares), defendant Berman (500,000 shares), and defendant Taube (100,000).
37. The Registration Statement for the offering, signed by Berman, Taube, and Cruzen (by their attorney-in-fact), stated that the net proceeds of the offering would be used to finance the construction of Phase II of the Stratosphere complex -- to expand the complex by an estimated 1,000 rooms and suites (for a total of 2,500 rooms); to expand the casino space and the retail center; to add pool, health club, and spa facilities, and to provide additional parking for 500 rental vehicles. The Registration Statement also represented that, as part of Phase II, Stratosphere planned a third thrill ride, the King Kong gorilla ride -- which was to be owned and financed by Grand Casinos -- featuring a gorilla that would carry passengers up the Tower's west leg in a cage as it climbed the Stratosphere Tower. At the top of the ride the gorilla would shake the cage and passengers would experience a free fall at various intervals on the way back down. The Registration Statement also described two already-planned attractions near the top of the 1,149 foot tower; a roller coaster around the outside of the Tower and another ride that shoots patrons into the air before a free fall back to the launching pad.
38. The Phase II development was to cost $87.9 million, to be funded by the proceeds of the offering and the remaining $8.7 million proceeds from the previous exercise of warrants. Although not adequately disclosed, completion of Phase II construction was critical to the long-term viability of the Stratosphere complex. The Registration Statement represented that construction budgets for Phase I and II were reasonable and that management believed that Stratosphere would be able to generate sufficient cash flow to meet expenses, although defendants generically stated that there could be no assurance with respect thereto.
39. The "risk factors" set forth in the Registration Statement contained nothing but generic statements of the kinds of risks that affect any developmental stage company in a competitive industry, and contained no specific factual disclosure of any of the adverse factors which were then actually negatively affecting Stratosphere's business and, as a result, Grand Casinos' financial condition and prospects.
40. On December 19, 1995, in a press release announcing that Grand Casinos had purchased one million shares of Stratosphere stock in the offering, defendant Berman stated:
We are excited about the opportunity to enhance the Stratosphere project as a result of the additional capital. The additional hotel rooms and related amenities will rank Stratosphere as one of the major destination resorts in Las Vegas.41. After the public offering, a number of articles appeared, for example, on Business Wire and on the Dow Jones News Service, on or about December 20, 1995, stating that Montgomery Securities analyst Amy de Rham had initiated coverage of Stratosphere with a "BUY" recommendation and including forecasts of estimated earnings.
42. Thereafter several research reports issued by stock market analysts, based in part on statements made by Stratosphere and Grand Casinos representatives, recommended the purchase of Grand Casinos common stock, as well as Stratosphere common stock, with an attendant increase in the price of Grand Casinos. These included a January 19, 1996, Gerard Klauer Mattison & Co. research report on Grand Casinos, authored by William Schmitt, in which he recommended the purchase of the Company common stock; a February 13, 1996, Gerard Klauer Mattison & Co., research report on the gaming industry, authored by William Schmitt, in which he stated that Stratosphere which was "on budget" should provide for earnings acceleration at Grand Casinos in 1997; and a February 23, 1996, Gerard Klauer Mattison & Co. research report on Stratosphere, authored by William Schmitt, recommending Stratosphere as a "BUY."
43. On or about February 12, 1996, Grand Casinos issued its financial results for the year ended December 31, 1995. The Company reported fourth quarter profit from operations more than doubled; Grand Casinos had record earnings of $.40 per share for the fourth quarter of 1995; net revenues for the three month period ended December 31, 1995 were 44% higher than the previous year; and net earnings for the quarter increased 159%. The Company also reported that net revenues for the year increased 30% over the previous year and earnings per share increased 128%. Cruzen stated with respect to the Company's financial results that:
We are pleased to report excellent results from operations at our six existing casino resorts. Our strategy of enhancing each of our projects with high-quality amenities that complement the gaming experience such as full-service hotels, a variety of dining venues, live entertainment, and child care continues to pay dividends. Continued enhancement of four product combined with strong financial controls and efficient operations has led to our impressive performance over this past year.44. Defendant Berman stated in a February 12, 1996 release announcing Grand Casinos' 1995 financial results:
We look forward to the opening of Stratosphere in April of this year, as well to Grand Casino Tunica in June. These two major projects will further enhance Grand Casinos' leadership in the gaming industry and will position us for earnings growth in 1996 and for several years to come.45. Shortly after the positive February 12, 1996 announcement of the year end financial results for Grand Casinos, two of the co-founders of Grand Casinos, together with defendant Cope, sold approximately 1.6 million of their shares of the common stock of the Company (Berman had also previously sold 135,000 shares in December 1995).
46. On or about February 22, 1996, shortly after the February 12, 1996 release of financial results, Ladenburg, Thalmann & Co., Inc., the chairman and chief executive of which is also a director of Grand Casinos, issued a research report, authored by A. Zarnett, based upon information obtained from defendants, reestablishing coverage on Grand Casinos with a "buy" recommendation, stating that its "one-year price target is $45, or 15 times our 1997 EPS estimate of $3.10. " Based upon information from defendants, the report stated that "further growth is expected to derive from creation of Stratosphere Resort" and that this resort was "forecast to drive dramatic EPS expansion during the next two years. In our view, Grand Casinos offers strong investment attraction for investors who wish to participate in the growth forecast in the gaming industry.... We believe the prospects for Stratosphere Tower are impressive. The fanfare and media attention that will center on Stratosphere Resort.... There has been much discussion about the entertainment options in Las Vegas, but we believe that the Tower will be the number one entertainment option following its opening in April. * * * thus, we forecast that the Tower will generate high-margin revenues. For 1997, we estimate total revenues of $320 million, EBITDA of $125 million, and net income of $44 million. Grand's 42.6% share of net income would approximate $19 million, or about $0.45 in earnings per share. For 1996, we project about a $10 million contribution (after a preopening charge) to Grand's bottom line, or about $0.24 in earnings per share."
47. On March 14, 1996, Stratosphere, under the direction of and with the knowledge and consent of Grand Casinos and the Individual Defendants herein, issued a press release stating that the Stratosphere Tower would open on April 30, 1996. The release quoted Stratosphere's President, as stating:
Construction has been proceeding very well, and at this time we are able to pinpoint our completion date and announce the opening. Stratosphere will be the next generation entertainment superstore for Las Vegas and take its place among the premier attractions not only in this city, but anywhere.48. The March 14, 1996 release stated that Phase II of the Stratosphere complex was currently under construction and was scheduled to be completed by December 1996. In addition, a $30 million, 80,000 square foot aquarium -- which was to be partially owned and financed by Grand Casinos -- was scheduled to be completed and open in 1997. The release stated:
We are going full speed ahead with Phase 2 construction and are fully integrating the April 30th opening and operation of the property with Phase 2 construction.... Stratosphere will be a growing and evolving entertainment complex, but beginning April 30, we will be providing a first-class experience for all of our guests. We are dedicated to guest service, and our guests will enjoy a complete destination resort when we open.49. Defendant Berman was also quoted in the release:
Stratosphere is Grand Casinos' entry into the Las Vegas market which is the most exciting and profitable market in the nation. I can't think of a better way to enter this market than with a landmark property. And that's just what Stratosphere will be.50. On or about March 29, 1996, defendants caused Grand Casinos to file its annual report on Form 10-K, signed by defendants Cruzen, Berman, Taube, and Cope, for the fiscal year ended December 31, 1995 with the SEC. In it, defendants emphasized Grand Casinos investment in Stratosphere, stating (and reiterating at various points in the Form 10-K):
Marketing:51. In Stratosphere's Form 10-K for the year ended December 31, 1995, filed with the SEC on March 15, 1996, defendants repeated many of the favorable representations contained in the above December 19, 1995 Registration Statement and set forth Stratosphere's strategy for success:
The Company targets its marketing strategy to attract and retain the repeat customer. Management believes that its emphasis on enhancing the entertainment value represented by the Grand Casino experience, coupled with marketing programs, contributes to attracting the repeat customer.
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The Company owns approximately 43% of Stratosphere Corporation. Stratosphere Corporation is developing and will own and operate Stratosphere Tower . . . an integrated casino/hotel and entertainment complex located at the north end of the Las Vegas Boulevard South (the "Las Vegas Strip") in Las Vegas, Nevada. Stratosphere is centered around the Stratosphere Tower which at 1,149 feet will be the tallest free-standing observation tower in the United States and the tallest free-standing structure west of the Mississippi River. The Stratosphere Tower will be more than three times taller than any other building in Las Vegas and will be visible from all directions, including to visitors flying into Las Vegas....
Stratosphere is scheduled to open by April 1996 and is planned to include a 354,500-square-foot building at the base of the Stratosphere Tower (the "Base Building") consisting of a 194,5000-square-foot first level containing a 97,000-square-foot casino and a 160,000-square-foot second level containing an entertainment complex (the "Entertainment Complex")....
The Casino, located on the first level of the Base Building, will contain approximately 2,400 slot machines and 75 table games, as well as a sports book and keno lounge. On their walk to and from the Stratosphere Tower elevators, located on the second level of the Base Building, visitors will have access to various services and attractions including specialty restaurants, Kids Quest child care entertainment center, retail and gift shops, a state-of-the-art video arcade, and other entertainment attractions. These attractions and services are designed to provide entertainment alternatives for all visitors to Stratosphere.
The Stratosphere Hotel will have approximately 1,500 rooms and suites. Stratosphere has acquired the 932-room Vegas World Hotel & Casino. . . which is adjacent to the Stratosphere Tower, and certain other assets. The Vegas World Hotel will be closed and refurbished prior to the opening of Stratosphere, and an estimated 526 additional rooms and suites will be constructed adjacent to the Stratosphere Tower. The two hotel buildings will be connected and operated as an integrated hotel, which will provide operational efficiency as well as convenience to its guests. The exteriors of these buildings and the Stratosphere Tower have been designed to have a cohesive, attractive presence.
The Stratosphere Hotel and Casino is planned to contain four additional restaurants. Stratosphere will have parking for at least 3,000 cars and a 1,000 seat showroom which will provide moderately priced, Las Vegas-style entertainment.
* * * *
In order to appeal to a broader crossection of visitors and take advantage of the recent increase in the number of visitors to Las Vegas, Management has decided to expand Stratosphere's gaming and nongaming features, as well as the number of rooms and suites (collectively, "Phase II"). Phase II will include a new 1,000 room and suite hotel tower, expanded and reconfigured retail and casino areas, a remodeled 650-seat showroom, new health club, spa and pool facility, an 80,000-square-foot aquarium (the "Aquarium"), a three-dimensional neon light casino sign package for Stratosphere's slot machines, an additional porte cochere, a new parking facility for approximately 500 cars, and a third thrill ride, an approximately 70-foot tall lifelike gorilla that will carry passengers in a cage while it climbs up and down the exterior of the Tower's east leg (the "Gorilla Ride"). Phase II, which will be funded with the proceeds from the recently completed Equity Offering, is scheduled to be substantially completed in late 1996. Management believes the increased number of rooms and suites, the property upgrades, and the other added features will expand Stratosphere's appeal as a destination resort and lead to more visits from guests staying at other Las Vegas hotels.
When Phase II is completed, Stratosphere will include three hotel towers with approximately 2,500 rooms and suites (the "Hotel"). Stratosphere's three hotel towers will be located above a portion of the 483,400-square-foot building at the base of the Tower ... and will be operated as an integrated hotel to provide operational efficiency as well as convenience to guests. The Base Building's 252,400-square-foot first level will contain guests registration, a 111,000-square-foot second level will contain the 160,000-square-foot Entertainment Complex, stratosphere's 650-seat showroom and the Aquarium. A new full service health club and spa will be located adjacent to the 94,500-square-foot fourth level pool area.
(i) attract a share of the general Las Vegas visitor market by offering unique attractions, such as the observation decks, the Thrill Rides, the Gorilla Ride, the Aquarium, the revolving restaurant and an outdoor light show, (ii) generate casino traffic from visitors to the Tower and guests who stay at the Hotel; and (iii) encourage repeat visitors to Stratosphere through its quality service, features and customer development programs. The Company believes that, as a result of Stratosphere's wide variety of gaming and non-gaming amenities, Stratosphere will appeal to most segments of the Las Vegas market, including independent travelers, tour groups, conventioneers and local residents.52. The Stratosphere Form 10-K also stated that the Stratosphere complex's location, on the north end of the Las Vegas Strip and approximately two miles south of downtown Las Vegas, would allow the Company to attract both local customers as well as visitors who desire proximity to the Las Vegas Strip and ease of access to the major highways of Las Vegas. The Stratosphere Form 10-K said:
Stratosphere has been designed to create an exciting and unique gaming and entertainment experience that management believes will make Stratosphere a "must see" tourist attraction for may of Las Vegas' 28 million annual visitors and over one million local residents. Management also believes Stratosphere's unique attractions, high-quality lodging and dining facilities and Las Vegas style entertainment will make it one of Las Vegas' most popular destination resorts.53. The Stratosphere Form 10-K also stated that the expected cost for completion of the first phase of the development was $358.9 million, and that funding for the project had come from equity contributions of $92.9 million, a 1995 note offering which generated gross proceeds of $203 million, estimated capital lease borrowing of $37.5 million and a $25 million portion of proceeds from the recent exercise of warrants.
54. On or about March 12, 1996, Montgomery Securities' Amy W. de Rham issued a research report on Grand Casinos in which she stated that "Recent conversation with management [of Grand Casinos] indicates that operations remain strong." Based thereon, she continued to recommend the purchase of Grand Casinos common stock.
55. In the 1995 Annual Report to Shareholders ("1995 ARS") issued by Grand Casinos on or about the end of March 1996, defendants Berman and Cruzen emphasized the Company's investment in Stratosphere and the benefits to be reaped by investors in Grand Casinos. They stated in their letter to shareholders:
[O]ur goal is to be recognized as the best gaming company in America while providing superior long-term returns to our shareholders and partners. In 1995, we took great strides towards that goal, and 1996 looks even more exciting.56. Defendants continued to state in the 1995 ARS that:
* * *
We assisted Stratosphere Corporation in raising $326 million for the development of the Stratosphere tower, casino, and hotel.
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We are very excited about the April 1996 opening of Stratosphere, an integrated casino/hotel and entertainment complex located at the north end of the Las Vegas Strip and centered around a 1,149-foot tower. The scope of the entire Stratosphere project is now in the range of $500 million dollars. In 1995 three separate financings were completed for the Stratosphere project totaling $326 million.... Grand Casinos purchased additional shares in Stratosphere during 1995 totaling a $41 million investment -- $33.5 million in conjunction with the closing of the First Mortgage Notes and $7.5 million as part of the secondary stock offering. Grand Casinos now owns approximately 43 percent of Stratosphere Corporation.
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Our growth and success are the result of the diligent execution of a well-conceived plan. We have invested for the long term, and as a result we are in a position to provide our shareholders with long-term value for their investment.
Our strategy today remains as it was in 1991 ... First we select premier locations, with plenty of available land for expansion. Then, we build the best and most complete entertainment product in the market and quickly add a broad range of attractive amenities. We market aggressively, continually focus on providing superior guest service, and strive to operate at a maximum level of efficiency.57. In the 1995 ARS, defendants forecast that Stratosphere would provide 20% of Grand Casinos' 1996 revenues.
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This past year we continued to dominate our markets, we attained the best margins in the industry, and we have grown our company to the threshold of becoming the third largest gaming company in the world, as measured by capacity. With the opening of Stratosphere and Grand Casino Tunica in 1996, our capacity will grow....
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THE YEAR AHEAD
We've greeted 1996 with much anticipation at Grand Casinos. In April a new wave of development begins in the Las Vegas market with the opening of Stratosphere, a mega-resort that offers a world of luxury and entertainment. The Stratosphere casino/hotel complex i& centered around the tallest free standing observation tower in the United States. This major destination resort raises the standard for excitement in the Las Vegas market-a market with a track record for growth.
* * *
The compelling Stratosphere Tower, soaring to 1,149 feet, is more than three times taller than any other building in Las Vegas. The Tower's pod, a 12-story building at the top of the tower, will premiere with indoor and outdoor observation decks, a revolving restaurant and lounge, three wedding chapels, and gravity-defying thrill rides-the "High Roller" roller coaster zooms around the pod over 100 stories above the Strip, the "Big Shot" simulated space shot thrusts riders up 170 feet in 1.6 seconds, and then drops them in a free fall that's even faster.
At the base of the Tower is a 3 5 5,000-square-foot complex that will open with three World's Fair casino pavilions....
By the end of 1996, an additional I 000 rooms including 150 magnificent suites open at Stratosphere, along with a beautiful pool and state-of-the-art spa. Guests can also look forward to a high limit gaming area, a major showroom, a Kids Quest, a Rainforest Cafe, and even more shopping. By 1997 an aquarium with see-through tunnels and 360-degree views will add to the fun, and King Kong, a ride with 48 passengers inside, will make a lurching climb up the entire height of the Tower's exterior.
* * *
The opening of Stratosphere and Grand Casino Tunica add to the company's overall diversification - diversification in both dockside and land-based casinos, in both emerging and established markets, in both Indian- and company-owned properties, and finally, in geographic location. Geographically, we are one of the most diversified companies in the gaming industry. By the end of 1996, we will have made our presence known in half of the top ten gaming markets, a statement that can be made by only a very few members of our industry.
... Grand Casinos is a leader in a growing and competitive industry.
58. On or about April 3, 1996, based upon communications with management of the Company, analyst Andrew Zarnett of Ladenburg, Thalmann, issued a research report on Grand Casinos in which he estimated that the Company's "expansion plans will nearly double revenue over the next two years" and that Stratosphere was "expected to drive dramatic EPS expansion during the next two years." He continued to recommend the purchase of Company common stock and stated that, based on recent discussions with management, he was confident that the $0.37 first quarter EPS estimate from operations would be met and possibly exceed reported earnings, beating the $0.36 consensus estimate.
59. On or about April 22, 1996, Grand Casinos issued a press release announcing its first quarter 1996 financial results ("April 22, 1996 press release"). It announced earnings of $.41 per share for the first quarter ended March 31, 1996. Net revenues for the quarter rose to $103.8 million from $81.6 million, or 27.2% higher than that earned for the same period the prior year. Net earnings for the quarter totaled $17.6 million, a 16.6% increase over the prior year. Earnings before interest, taxes, depreciation, and amortization for the quarter were $33.9 million, or a 15.3% increase. Per-share results reflected a 28% increase in common shares. These results beat the expectations of Wall Street analysts which averaged only $.37 per share.
60. In the April 22, 1996 press release, defendant Cruzen stated, "[t)he first quarter was again a quarter of excellent financial results for our company. We have again surpassed our record for revenues in a single quarter."
61. As a result of the April 22, 1996 announcement of financial results, the price of Grand Casinos common stock increased.
62. On April 10, 1996, based in part on statements made by defendants, Gerard Klauer Mattison & Co. issued a report on Stratosphere authored by William Schmitt, reaffirming his "BUY" rating on Stratosphere stock and stating that "[a]dvanced bookings are strong and we believe this property will meet or exceed our expectations over the coming year."
63. On or about April 24, 1996, Ladenburg, Thalmann & Co., Inc. issued a research report on Grand Casinos, authored by A. Zarnett, based in part on discussions with management of the Company, in which it rated the shares of the Company a "buy." The report stated that "[w]e are bullish on the success of the [Stratosphere complex].... we believe the stock [of Grand Casinos] will begin to expand its multiple * * * Together, these projects are forecast to drive dramatic EPS expansion during the next two years. Incremental EPS from Stratosphere Resorts, Grand Casino Tunica and the additions to the Biloxi and Gulfport properties are forecast to contribute about $1.04 from 1995's current base of nearly $2.06, a compound annual growth rate of over 20% over the next two years. In our view, Grand Casinos represents a strong investment for those who wish to take advantage of growth in the gaming industry ......
64. On April 29, 1996, the Stratosphere complex officially opened.
65. On May 1, 1996, a Stratosphere spokesman commented on the opening of the Stratosphere complex:
Everything has gone very smoothly. We've had a steady stream of people going up to the tower this morning.66. On May 2, 1996, based in part on statements made by defendants, Gerard Klauer Mattison & Co. issued a report on Stratosphere authored by William Schmitt, reaffirming his "BUY" rating on Stratosphere stock and reporting that the Stratosphere had a very positive opening, and, as a result of the strong opening, Schmitt stated that, "We are confident that this property will be a success."
67. On May 6, 1996, in an article about Stratosphere appearing in Business Week magazine, Stratosphere officials, under the direction and control of and with the knowledge and consent of defendants, projected $244 million in revenues and $81 million in operating cash flow for its first year of operation.
68. On or about May 6, 1996, Bear, Steams & Co., Inc. issued a research recommendation, authored by J.N. Ader, in which it rated the Company "Attractive."
69. On May 9, 1996, Stratosphere issued a press release following its first week of operations. The press release reported that 127,000 visitors had gone to the top of the Stratosphere Tower, making the resort the number one paid attraction in Las Vegas. Defendant Berman stated: "Business has been very good and overall has supported our expectations.... The response to our multi-dimensional product has been tremendous." The president of Stratosphere stated that: "The demand for reservations to the Top of the World revolving restaurant has been phenomenal and our casino action has met expectations. Our average room rate is higher than projected and we are rapidly increasing occupancy levels."
70. Defendant Cruzen, Grand Casinos' president, was also quoted in the May 9, 1996 press release, as being quite pleased with the first-week results and excited about Stratosphere's expansion plans which are currently under way. He added: "We are aggressively building Phase 2 of the Stratosphere project ... We have another 1,000 rooms and suites that will come on line in December, along with a complete spa and pool recreation center ... A third thrill ride, the King Kong gorilla ... is also scheduled for completion in December. And coming in ... will be our $30 million aquarium attraction."
71. On or about May 15, 1996, Grand Casinos filed its Form 10-Q for the quarter ended March 31, 1996 with the SEC (signed by defendants Cruzen and Cope), reiterating the favorable financial results reported in the April 22, 1996 press release. The Company also reiterated its loan guaranty agreements concerning Stratosphere, stating that the Company has agreed to provide credit enhancements to guarantee completion of construction of the project to a limit of $50 million and to purchase up to $20 million of additional equity in Stratosphere during each of the first three years (up to $60 million) that Stratosphere is operating to the extent Stratosphere's consolidated cash flow does not reach $50 million in each of such years.
72. On or about May 23, 1996, based, in part, upon communications with Grand Casinos' management, analyst William Schmitt of Gerard Klauer Mattison & Co., issued a research report on Grand Casinos in which he lauded the Company, stating that "We believe the company offers one of the best value in the gaming group." He recommended the purchase of Grand Casinos stock.
73. On or about May 23, 1996, Rodman & Renshaw issued a research report, authored by D. Davila, initiating coverage on Grand Casinos with a "buy" recommendation.
74. On June 6, 1996, Grand Casinos issued a press release, approved by the individual Defendants (and filed with the SEC by defendant Cope), announcing that it would loan Stratosphere $48.5 million pursuant to a completion guaranty for Stratosphere's 1, 149 foot high observation tower and hotel. The release stated:
The majority of the funds advanced under the guaranty have been used to pay for enhancements to the original scope of the project.The loan was unsecured and subordinate to the $203 million of mortgage notes issued by Stratosphere in March 1995. Stratosphere issued a release to the same effect.
75. Stratosphere announced on or about June 6, 1996 that results from its first five weeks of operations fell below estimates. Although the results were below expectations, Stratosphere's president, stated that the results were principally due to the project not yet being fully completed. The press release issued by Stratosphere stated that operating results should improve with the Phase II "addition of 1,000 hotel rooms and suites, the opening of retail shops and the completion of other amenities, as well as additional marketing programs. . . ."
76. In order to maintain the price of the common stock of the Company and to halt a decline in the price of the shares resulting from the announcement concerning its investment in Stratosphere on June 6, 1996, on or about June 13, 1996, the Individual Defendants caused Grand Casinos, through Thomas Brosig, an executive vice president of the Company, to issue a release stating that it was "comfortable" with estimates that it would earn $2.08 per share for 1996.
77. On June 29, 1996, Stratosphere, under the direction of Grand Casinos, announced a 5% reduction in its total labor force of 3,000, resulting in the loss of 150 jobs. A spokesman for Stratosphere stated that this job loss was merely "a normal business adjustment for an opening property." Defendants, however, knew that revenues from the Stratosphere complex were insufficient and far below those previously publicly forecast and that construction costs for Phase II far exceeded the offering proceeds and the funds allocated for construction.
78. On July 22, 1996, Stratosphere shocked the market by announcing second quarter earnings sharply below expectations, reporting a loss of $11.1 million, or $(0.19) per share, on revenue of $29.9 million, compared with a year earlier loss of $2.5 million, or $(.07) per share, on revenue of $3.5 million. As a result of these shockingly dismal financial results, Stratosphere's stock price collapsed, falling 24% to close at $3.50 on volume of 5.2 million shares, a decline of 73% in Stratosphere stock price since the Stratosphere complex opened on April 29, 1996. The stock price continued to decline as additional adverse facts were disclosed, reaching a low of less than $1.00 on November 12, 1996.
79. Analysts' reactions to the July 1996 disclosures about Stratosphere and Grand Casinos' investment in Stratosphere were not favorable. One industry analyst at Salomon Brothers called it a "disaster." Another criticized Stratosphere's poor location in Las Vegas and "an inferior quality produced overall" and was "skeptical that business conditions would be able to hold up at all" and that Chapter 11 bankruptcy "is possible." Another expert said that he "expect[s] [Stratosphere] stock price [to] approach zero" and that they were "very concerned about Grand Casinos continuing involvement in this property." One analyst stated that "Drastic action appears necessary for [Stratosphere] to have some remote chance of salvage ... with a prohibitively expensive debt structure bankruptcy may prove the only option." An investment banker noted that "[Stratosphere investors] can kiss their money goodbye." Salomon Brothers' gaming industry analyst stated, "we find no logical reason for Grand Casinos to ... place their stockholders at greater risk." At the time, Grand Casinos' executives issued denials about a possible bankruptcy filing for Stratosphere. In particular, defendant Berman stated on or about July 22, 1996 that a Stratosphere bankruptcy is not "in our vocabulary."
80. On or about July 22, 1996, the Individual Defendants caused Grand Casinos to report its financial results for the second quarter of fiscal 1996, announcing that the financial results for the Company fell below analysts' expectations as a result of losses related to its stake in Stratosphere. The Company reported net income of $.45 per share versus analyst expectations of $.49 per share.
81. Further, as a result of the financial problems, Stratosphere announced that it may be forced to suspend construction if it does not receive additional financing and restructure its debt. Stratosphere stated in its filing with the SEC on Form 10-Q for the quarter ended June 30, 1996, that "[i]f [Stratosphere] cannot restructure its existing indebtedness, there will be serious doubt as to whether [Stratosphere] will be able to continue as a going concern." Stratosphere called upon Grand Casinos to loan it tens of millions of dollars.
82. As a result of the financial disaster at Stratosphere, investors in Grand Casinos suffered, as Grand Casinos' second quarter earnings, which were largely dependent upon revenues from Stratosphere, fell below expectations and its shares fell 8% or $1.75 per share and closed at $20.25 per share on July 23, 1996, down from $33.50 per share when the Stratosphere complex opened, less than three months before. As the adverse disclosures continue about Stratosphere, the price of Grand Casinos common stock has continued to decline, closing at a low for the year of $14.125 on August 19, 1996. Numerous stock market analysts have revised their assessments of Grand Casinos and its projected financial results downwards and downgraded their ratings and recommendations from "buy."
83. On August 27, 1996, Grand Casinos announced that it expected its results for the second half of 1996 to be below estimates due to the operating shortfalls at Stratosphere. In a press release, the Company said that Stratosphere's operating losses at Stratosphere could result in a non-cash charge to Grand Casinos in the range of $.55 - $.60 per share for 1996, about $.50 more than originally disclosed. Grand Casinos also announced that revenue from its casino in Trenico, Mississippi fell below "expectations."
84. On August 30, 1996, Stratosphere announced that it had suspended indefinitely the construction of Phase II, which include the 1,000 rooms, pool area and spa, and additional retail spaces, because of cash shortfalls, the inability to pay for construction and interest on the debt, and the need to restructure existing debt. Previously, on July 23, 1996, Stratosphere had terminated its managing contractor for Phase II construction. As of the end of June 1996, an additional $24.8 million was still needed to complete Phase I construction and the estimated cost to complete Phase II (which was supposed to have been funded from the December 1995 offering) had increased to $142 million. Stratosphere, thereafter cancelled plans for the aquarium due to existing difficulties with the developer and the developer's inability to meet financing requirements and has cancelled plans for the King Kong gorilla ride.
85. Because of Stratosphere's inability to attract gamblers, on September 19, 1996, Stratosphere (with the knowledge, consent, and under the direction of Grand Casinos and the Individual Defendants) announced a new marketing program including offering over 98% return on all dollar slot machines, over 100% return on 102 quarter video poker machines, 100 times odds on craps, and liberal blackjack rules. This program, unprecedented in the history of the gambling industry, was intended to increase attendance at the Stratosphere casino. Analysts, however, still question whether the casino is actually making money despite the increased attendance generated by the marketing program, and the revenues created are still insufficient to pay creditors.
86. On October 24, 1996, Stratosphere issued a press release announcing its financial results for the third quarter of 1996, posting a net loss of $26 million, or $(O.45) per share, on net revenues of only $35.3 million. Stratosphere, also announced that it did not plan to make its next regularly scheduled payment on its First Mortgage Notes due on November 15, 1996, that it was attempting to restructure its $37.5 million capital lease obligations and renegotiate its over $200 million debt with its creditors, and that it was highly likely that Stratosphere would be filing a bankruptcy petition. It did not make such payment, the grace period for such has expired, and Stratosphere has announced that it will probably file for Chapter 11 bankruptcy.
87. Defendant Berman, Grand Casinos' Chairman and Chief Executive Officer, stated, on or about October 24, 1996, that Stratosphere's "debt structure is too high to make it a viable property." Berman also admitted on or about October 24, 1996, that Grand may have to write-off all of its investment in Stratosphere, which is currently on the books of Grand Casinos for almost $150 million.
88. Each of the positive statements about Grand Casinos and Grand Casinos' investment in Stratosphere's business made by defendants during the Class Period was materially false and misleading when issued, and failed to disclose, inter alia, the following adverse information, disclosure of which was necessary to make the statements made not false and misleading, and which was then known only to defendants due, in part to their overlapping management, executive, and directorial control of Stratosphere, and to their access to internal Stratosphere corporate data:
(b) That the Stratosphere equity offering which was supposed to fund the Phase II development was insufficient to fund the development of Phase II;
(c) That over $40 million of the proceeds of the Stratosphere equity offering was diverted from Phase II development to finance other construction and operations of Stratosphere, contrary to the offering materials;
(d) That the opening of Phase II would be materially delayed -by at least one quarter, if ever completed, due to (i) financial constraints and difficulties in contractual negotiations with developers, and (ii) diversion of funds from the offering to complete Phase I;
(e) That defendants herein, particularly those that signed the registration statement for the Stratosphere offering, had no reasonable basis for believing that the detail of the construction costs would be as originally projected, and in fact, knew or should have known that the actual costs were much higher;
(f) Despite Grand Casinos' official's statements that the Stratosphere complex and Tower would be a "must-see" tourist attraction that would draw visitors to the casino's gambling tables, in fact early on after the opening it was apparent that visitors were not gambling at the casino or staying at the hotel in the predicted numbers;
(g) That the type of customer Stratosphere was attracting, due to its ancillary non-gambling entertainment offerings, was not the type of customer who would sit at a gaming table and engage in high-stakes gambling;
(h) That as a result of the Stratosphere complex's northern location and lack of adequate hotel rooms, the casino was unlikely to draw the "high stakes gamblers," which ultimately forced defendants to announce that they had changed their strategy to make the complex a more "value-orientated" property, catering to tourists and lower stakes gamblers;
(i) That Stratosphere's marketing program, targeting package sales of its hotel rooms, was not attracting high-stakes gamblers to the casino and the casino lacked a cohesive design and marketing plan that would appeal to local gamblers;
(j) That the number of visitors to the Stratosphere Tower was far below that publicly forecast, averaging more than 20% below that publicly forecasted with many visitors merely visiting the top of the Tower and then leaving without gambling, and that due to the delays in completing the development as a result of the problems described herein, the Tower and complex would not attract the number of visitors publicly forecasted and the lengths of their stays would not be as long;
(k) That the casino was forced to improve its odds in customers' favor in order to attract gamblers, which efforts have been unsuccessful;
(l) That the casino's performance was unfavorable, and that only 40% of the Stratosphere complex's re venues were coming from the casino, materially less than the 50% realized at competing casinos;
(m) That defendants were and had been having difficulties in their negotiations with the developer of the proposed aquarium -- which was to be partially owned and financed by the Company -- significantly delaying and finally resulting in the cancellation of that project;
(n) That the cash flow and earnings per share projected for Stratosphere at the roadshows prior to the December 1995 equity offering for Stratosphere, designed to interest investors and the market, greatly exceeded Stratosphere's internal projections and forecasts;
(o) That the completion of 875 additional hotel rooms was delayed and would not be completed until the first quarter of 1997, at the earliest;
(p) That as a result of increased competition, specifically the opening of the Monte Carlo Resort at the south end of the Las Vegas Strip during the summer of 1996, any necessary turnaround would be made increasingly difficult because of the difficulty in attracting customers, particularly high-stakes gamblers, and because the casino had been forced to improve the gambling odds in customers' favor in order to attract customers, thereby reducing profit margins;
(q) That Stratosphere projects mentioned in Grand Casinos' SEC filings, specifically the King Kong Gorilla fide (which was to be owned and financed by Grand Casinos), were being delayed because of technical and financial difficulties that could not be resolved and were not being done because they did not make financial sense and that the King Kong Gorilla ride would never come to fruition because of severe technical problems, putting the project on indefinite hold;
(r) That, as a result of the foregoing, forecasts that Stratosphere would earn $0.20 in 1996 and that Grand Casinos would obtain 20% of its revenues from Stratosphere were false, as such results were impossible to achieve in light of these undisclosed problems;
(s) That Grand Casinos' investment in Stratosphere was significantly overvalued and the risks understated;
(t) That defendants' positive forecasts and projections regarding Stratosphere and Grand Casinos' investment in Stratosphere were known by defendants (or defendants were reckless in not knowing) to be false as they were inconsistent with the above negative factors; and
(u) That the forecasts for Grand Casinos' fiscal 1996 and 1997 earnings per share were known by defendants (or defendants were reckless in not knowing) to be false as they were contradicted by the adverse facts set forth above and were not genuinely believed by defendants.
(b) Defendant Berman, contrary to his prior trading practices of rarely selling any of his holdings in Grand Casinos, on December 21, 1995, disposed of 135,000 shares of Grand Casinos at $24.42 per share (at a value of $3,296,700); and on February 20, 1996, sold 1,000,000 shares of Grand Casinos common stock, approximately 20% of his holdings in the Company, at $32.25 per share, for proceeds of $32,250,000.
(c) Defendant Taube, contrary to his prior trading practices, sold over 99% of his direct holdings in Grand Casinos, 299,250 shares, on February 20, 1996, at $32.25 per share, for proceeds of $9,650,812.50. Defendant Taube also sold, contrary to his prior trading practices, 200,750 shares of the Company's common stock held indirectly by him, approximately 30% of the shares held indirectly by him, at $32.25 per share, for proceeds of $6,474,187.50.
93. This Count is asserted on behalf of the Class against all defendants and is based upon Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.
94. During the Class Period, defendants, singly and in concert, directly or indirectly engaged in a common plan, scheme, and unlawful course of conduct pursuant to which they knowingly or recklessly engaged in acts, transactions, practices, and courses of business which operated as a fraud and deceit upon plaintiffs and the other members of the Class, and made or participated in the making or issuance of various deceptive and untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading to plaintiffs and the other members of the Class. The purpose and effect of said scheme, plan, and unlawful course of conduct was artificially to inflate, maintain, and otherwise manipulate the price of Grand Casinos common stock to cause defendants to profit from sales of their Grand Casinos shareholdings, and to induce plaintiffs and the other members of the Class to purchase Grand Casinos securities during the Class Period at artificially inflated prices. Each of the misleading statements and/or material omissions made during the Class Period remained alive and uncorrected throughout the Class Period.
95. Defendants each knew and intended to deceive plaintiffs and the other members of the Class, or in the alternative, acted with reckless disregard for the truth when they failed to disclose or cause the disclosure of the true facts to plaintiffs and the other members of the Class.
96. As a result of the dissemination of the false and misleading statements set forth above, the market price of Grand Casinos securities was artificially inflated during the Class Period. In ignorance of the false and misleading, statements and omitted facts, plaintiffs and the other members of the Class relied to their detriment on the integrity of the market price of the stock in purchasing Grand Casinos common stock on an efficient market. Had plaintiffs and the other members of the Class known of the materially adverse information misrepresented or not disclosed by defendants, they would not have purchased Grand Casinos securities at the artificially inflated prices that they did.
97. At the time of the purchases by Plaintiffs and the members of the Class, the fair market value of Grand Casinos common stock was substantially less than the prices paid by them.
98. As a result of the inflation of the price of Grand Casinos securities during the Class Period caused by defendants' material misrepresentations and omissions, plaintiffs and the other members of the Class have suffered substantial damages.
99. Alternatively, even if any of the statements made by defendants were true on the date they were made, they breached their duty to the plaintiffs and the Class by failing to supplement or otherwise correct the statements made when subsequent events rendered those prior statements materially misleading.
100. The defendants against whom this Count is asserted are primarily liable. The defendants had actual knowledge of each others' violations and actively participated in each others' violations of the federal securities laws.
101. By reason of the foregoing, defendants, knowingly or recklessly, directly and indirectly, violated Rule 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
103. Plaintiffs assert this Count pursuant to § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), against the Individual Defendants.
104. The Individual Defendants by reason of their board membership, management positions in and stock ownership of the Company, and by reason of the acts described herein, controlled the Company within the meaning of Section 20(a) of the Exchange Act. These defendants had the power and authority to and did cause the Company to engage in the wrongful conduct complained herein.
105. By reason of the conduct alleged in Count I above, the Individual Defendants are liable pursuant to § 20(a) of the Exchange Act. As a direct and proximate result of the defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of the Company's common stock.
107. Plaintiff Friedman asserts this Count on behalf of the Insider Trading Class against defendants Cope, Berman and Taube.
108. By virtue of their positions as officers and/or directors of the Company, defendants Cope, Berman and Taube were privy to and had actual knowledge of the material non-public information concerning the Company, its operations, finances, financial condition, and future business prospects, including but not limited to, the material, adverse information referred to above, or in the alternative, acted with such reckless disregard that they failed or refused to ascertain such facts (which, by virtue of their positions were readily available to such defendants).
109. Based upon their positions as corporate insiders, defendants Cope, Berman and Taube had fiduciary obligations to plaintiffs and the other members of the Insider Trading Class to refrain from selling their Grand Casinos stock until the material non-public information enumerated above, was publicly disseminated. Defendants Cope, Berman and Taube sold their Grand Casinos common stock as described in ¶ 90 above, contemporaneously with the purchases by the members of the Insider Trading Class, without prior disclosure of this non-public information. These defendants also misappropriated material non-public information, thereby breaching their fiduciary obligations, and used that misappropriated information in connection with their sales of Grand Casinos stock.
110. In ignorance of the adverse information and facts concerning Grand Casinos' business and future prospects, which information was not adequately disclosed by these defendants and in reliance upon the integrity of the market, plaintiffs and the other members of the Insider Trading Class purchased Grand Casinos common stock at market prices artificially inflated by the nondisclosure and or misrepresentations of material adverse facts in the public statements released during the Insider Trading Class Period or shortly prior thereto, and were damaged thereby. Had plaintiffs and the other members of the Insider Trading Class known the material adverse information not disclosed by defendants, they would not have purchased Grand Casinos common stock at these inflated prices.
111. By virtue of the foregoing, defendants Cope, Berman and Taube have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
113. Defendants Cope, Berman and Taube knew that they were in possession of material adverse information which was not known to the investing public and members of the Insider Trading Class. Before selling their stock they were obligated to disclose the information to plaintiff and other members of the Insider Trading Class. Notwithstanding their duty to refrain from trading in Grand Casinos securities unless they disclosed the foregoing material adverse facts, and in violation of their fiduciary duties to the plaintiffs and the other members of the Insider Trading Class, defendants Cope, Berman and Taube sold an aggregate of approximately 1.6 million shares of Grand Casinos common stock during the Insider Trading Class Period (defendant Berman sold 135,000 shares in December 1995), and the members of the Insider Trading Class, contemporaneously with the sale of stock by the respective defendants, purchased stock of the same class sold by the defendants Cope, Berman and Taube.
114. By reason of the foregoing, defendants Cope, Berman and Taube, directly and indirectly, by use of the means or instrumentalities of interstate commerce, the mails, and the facilities of the national securities exchanges, employed devices, schemes, and artifices to defraud, and engaged in acts and transactions and a course of business which operated as a fraud or deceit upon members of the investing public who purchased Grand Casinos stock during the Insider Trading Class Period.
115. As a result of the foregoing, these defendants have violated Section 20A of the Exchange Act and members of the Insider Trading Classes have suffered substantial damages.
WHEREFORE, plaintiffs, on behalf of themselves and the members of the Classes, pray for judgment as follows:
(b) awarding compensatory damages in favor of plaintiffs and the other members of the Classes against all defendants, jointly and severally, for the damages sustained as a result of the wrongdoings of defendants, together with pre- and post-judgment interest thereon;
(c) awarding plaintiffs and the Classes their costs and expenses incurred in this action, including reasonable allowance of fees for-plaintiffs' attorneys, accountants and experts, and reimbursement of plaintiffs' expenses;
(d) imposing a constructive trust on, and disgorgement of, profits made by defendants who were unjustly enriched as a result of the artificial inflation of Grand Casinos stock in the manner alleged herein; and
(e) granting such other and further relief as the Court may deem just and proper.
|HEINS MILLS & 0LSON, P.L.C.
WOLF POPPER ROSS WOLF
Co-Lead Counsel for Plaintiffs
BERGER & MONTAGUE, P.C.
MAGER LIEBENBERG & WHITE
Attorneys for Plaintiffs
27 Jan 1998
Source: Scanned copy of court-stamped paper document