Suit details failure of Riviera sale

John Wilen

Tuesday, June 2, 1998 | 10:40 a.m.

California businessman Allen E. Paulson made millions buying and selling airline companies and champion racehorses. But in Las Vegas, Paulson claims he was tricked out of $22.3 million by a financial advisor and two gaming companies.

The entrepreneur says he was deceived into agreeing to buy the poorly performing Riviera Holdings Corp. and Elsinore Corp. last year by Jefferies & Co. Inc., a Los Angeles-based financial firm Paulson claims was secretly working for Morgens, Waterfall, Vintiadis & Co. Inc., a major shareholder of both companies.

Paulson is suing Jefferies, Riviera and Elsinore in federal district court in Los Angeles. His 44-count suit also names Riviera shareholders Morgens, Keyport Life Insurance Co., and SunAmerica Life Insurance Co., as well as State Street Bank and Trust Co., the escrow agent for the Riviera and Elsinore acquisitions.

Collectively, Morgens, Keyport and SunAmerica own 58.9 percent of Riviera. Morgens owns 94.3 percent of Elsinore. Riviera owns and operates the Riviera hotel-casino, operates the Four Queens hotel-casino and is developing a casino in Black Hawk, Colo. Elsinore owns the Four Queens.

Jefferies emphatically denies Paulson's charges, claiming that the company fully disclosed its relationship with Morgens.

According to court papers filed by Paulson, Jefferies was hired in January, 1997 to be Paulson's "exclusive financial advisor," for the Riviera acquisition. Shortly thereafter, Paulson alleges, Morgens, Waterfall agreed to pay Jefferies a finder's fee of about $1.25 million if Paulson agreed to buy Morgen's interest in Elsinore.

In September, Paulson agreed to acquire Riviera for $15 per share, which translated to $75 million in cash and the assumption of $175 million in debt. He agreed to buy Elsinore for $3.16 per share, or $16 million in cash and the assumption of $38 million in debt. Morgens told Paulson it would only sell its stake in Riviera if he also agreed to buy its stake in Elsinore.

Paulson says he was not told of Jefferies' deal with Morgens until October.

"This undisclosed conflict of interest fatally infected the proposed acquisition because it meant that the price, the terms and the conditions were compromised," states Paulson in papers filed in U.S. District Court in Los Angeles.

Paulson terminated the acquisition agreements in March without explanation. He is suing to recover the $22.3 million in cash and letters of credit he placed in escrow as a downpayment on the companies.

Jefferies' representatives told Paulson that, "the price, terms and conditions which Jefferies had negotiated for the Riviera/Elsinore transaction were the best which could be negotiated," states Paulson's filings. In fact, Jefferies, "should have known that ... both Riviera and Elsinore were facing substantial financial difficulties," the filings continue.

For example, Paulson states, Riviera's earnings before taxes were projected to be $12 million for 1997; they turned out to be $3.4 million. Projected 1997 EBITDA was $8 million to $10 million for Elsinore, and $32 million for Riviera; actual EBITDA turned out to be $4.6 million and $29 million, respectively, Paulson states.

Jefferies advised Paulson that a $175 million Riviera debt offering would not affect the company's operations; instead 1997 interest expense exceeded expectations by $3.1 million, Paulson said. And finally, Paulson alleges, Jefferies assured Paulson that the Black Hawk casino project would be completed within its $55 million projected budget; in fact, Paulson alleges, Riviera, "cannot meet capital cost projections for the Black Hawk project without materially changing the project."

"The Shareholder Defendants caused false material information to be delivered to Moving Plaintiffs, other material information to be withheld, and the performance of the hotel operations to be manipulated to Shareholder Defendant's advantage and Moving Plaintiffs' detriment," Paulson states.

Jefferies disputes the allegation, stating in its filings that it disclosed the agreement with Morgens "on several occasions," and ultimately was not paid any finders fee by Morgens.

Jefferies claims Paulson had ample opportunity to review the books of Elsinore and Riviera, and in fact spent more time performing due diligence on the companies than anyone from Jefferies.

As for Morgens, the New York investment banking firm denies it had an agreement with Jefferies.

Both Paulson and Morgens declined comment. According to Mark Rappel, a lawyer whose firm Latham Watkins represents Jefferies, "we believe the allegations have no merit and we fully expect to prevail."

Rappel declined further comment.

Duane Krohn, chief financial officer of Riviera, largely declined comment.

"As is our practice, we cannot comment on such litigation other than to deny all the allegations and (say) that we will vigorously defend," Krohn said.

Paulson's allegations were made in an April application for a temporary restraining order to prevent Morgens, Keyport and SunAmerica from cashing $16.5 million in letters of credit he had filed with State Street Bank as a downpayment on the acquisitions. Paulson lost that bid, and the letters were cashed.

Last week, Paulson agreed to extend the term of $5.2 million in letters of credit he issued to holders of the remaining 41 percent of Riviera stock. According to sources close to the case, Paulson extended the term of those letters from June 30 until May 1, 1999 to prevent them from being cashed while his lawsuit is being heard.

According to the same sources, Paulson filed an updated version of his lawsuit last Friday. Neither Jefferies nor Riviera had been served with the updated suit Monday.