Three directors, including Berman, quit Stratosphere

Gary Thompson

Friday, Aug. 1, 1997 | 11:03 a.m.

Three Grand Casinos Inc. directors, including Chairman Lyle Berman, have resigned from similar posts at Stratosphere Corp.

But far from signaling Grand Casinos is giving up the fight for control of the foundering company, the resignations may presage a bid by Grand Casinos to thwart billionaire Carl Icahn's takeover attempt, which some Stratosphere directors favor.

Grand Casinos said Berman, Stanley Taube and Neil Sell, who have served as Stratosphere directors since 1994, resigned from its board "to avoid conflicts of interest arising from Stratosphere's response" to bankruptcy restructuring plans offered by two Icahn affiliates.

The brief announcement said Grand Casinos notified Stratosphere "that it intends to explore ... alternatives for a consensual reorganization" and may amend a reorganization plan it submitted several weeks ago.

That plan, Grand Casinos' second proposal for reorganizing Stratosphere under Chapter 11 bankruptcy provisions, has been roundly criticized by Stratosphere creditors and independent directors as inadequate.

It called for a significant reduction in the principal amount and interest payments on Stratosphere's $203 million of first-mortgage notes. Holders of those notes, the company's senior secured debt, wield considerable influence over the fate of any reorganization plan, which must be approved by a federal Bankruptcy Court judge.

Berman, Taube and Sell remain directors of Grand Casinos, which owns 42 percent of Stratosphere common stock. Their resignations follow by less than a week a similar move by Stratosphere President Richard Schuetz, brought in by Berman last year to staunch the flow of red ink at the hotel-casino.

Schuetz resigned after some Byzantine corporate intrigue only hinted at in the dry legalese of Bankruptcy Court filings. But the court papers reveal a glimpse of the shifting fortunes and loyalties at work as the future of the half-billion-dollar property plays out.

Several weeks ago, the filings disclose, Schuetz began negotiating a so-called "retention package" with members of the committee representing creditors.

The package was structured to reward 12 top Stratosphere executives, including Schuetz, Executive Vice President and General Counsel Andy Blumen and Chief Financial Officer Tom Lettero, if they agreed to stay with the company until restructuring was complete.

The move, designed to ensure continuity and avoid wholesale management desertions, is common in bankruptcy proceedings. The creditors' committee reportedly agreed to the package, which was to be submitted to the bankruptcy judge for approval.

Somehow, though, Stratosphere's lawyers "forgot" to submit the package to the court before Icahn began his secret bid to gain control of the company through clandestine purchases of mortgage notes.

The corporate raider ended up with $94 million in principal amount of Stratosphere debt purchased at 65 to 75 cents on the dollar through his High River Limited Partnership and American Real Estate Partners. The purchases made Icahn the single largest holder of Stratosphere notes.

On June 25 -- after Icahn began buying Stratosphere notes -- the company filed its motion seeking approval of the retention package. The noteholders committee now said it agreed to the package for nine "junior" executives.

But the creditors' group objected to the inclusion of Schuetz, Blumen and Lettero because of "too many unresolved issues over what a successful reorganization will look like" and questions over the "propriety" of paying bonuses to executives "who insist on pursuing a plan that can't be confirmed."

That plan, of course, was Grand Casinos', not Icahn's.

Icahn's attorneys then filed briefs saying that while they conceded "it is in the debtors' best interest to make enhanced payments to midlevel executives" plus Lettero and Blumen, they would "specifically object to Richard Schuetz," saying they were "hard pressed to figure out what functional contribution Mr. Schuetz has made and will make in the future to the debtors' success as an ongoing concern."

"His particular retention agreement is, consequently, wasteful, amounts to an abuse of the debtors' business judgment and should not be approved," Icahn's lawyers argued.

Harsh words, especially about the executive widely credited with being responsible for the $4 million turnaround in Stratosphere's monthly cash flow.

Troubling, too, in light of the fact that one of Icahn's Las Vegas lawyers is Jerry Gordon -- partner of Stratosphere's outside counsel, Jeff Silver.

Realistically, Schuetz had no option but to resign. Not only was Icahn's reorganization plan favored over that of Schuetz mentor Berman's, but Schuetz himself was clearly unacceptable to Icahn loyalists and would never see his retention package approved.

Even worse, he could no longer count on the loyalty of some of his most trusted Stratosphere advisers.

Schuetz declined to comment about the Icahn filings or the actions leading to his resignation.

But as he walked out of his office at the resort earlier this week, Schuetz reflected on his year at the helm of Stratosphere Corp.

"I've just completed the most exhilarating and thrilling year of my life, one I wouldn't trade for anything," he said.

"I just feel saddened by the spectacle unfolding in Bankruptcy Court. You see lawyers running around arguing over how big their fees will be, rather than talking about what it all means to the 2,700 people who work here.

"It's like watching a sausage being made -- it's an ugly thing to see."

It's a sentiment echoed by his close friend, Las Vegas Major Jan Laverty Jones.

"Richard will do fine," she said. "My biggest concern is the employees of the Stratosphere. If Carl Icahn does succeed in the takeover, I hope he recognizes it's more than real estate involved here, it's people."