Santa Fe goes to court against dissident investor

John Wilen

Monday, March 15, 1999 | 11:13 a.m.

Santa Fe Gaming Corp. sued investor Hudson Bay Partners LP and its general partner, David Lesser, as the battle heated up over control of the Las Vegas gambling company.

Santa Fe's suit alleges violations of securities law, breaches of confidentiality agreements and "fraud, deceit and misrepresentations" related to Hudson Bay's attempt to force Santa Fe into bankruptcy.

The suit filed last week in U.S. District Court in Las Vegas accuses Hudson Bay and Lesser of illegally purchasing Santa Fe preferred stock in a fraudulent scheme to gain control of the company.

Santa Fe wants an injunction forcing Hudson Bay and Lesser to sell their stock back to its original owners, prohibiting Hudson Bay and Lesser from buying more preferred stock and for unspecified damages and costs.

Lesser declined comment on the suit. Through Hudson Bay, Lesser controls bonds in Santa Fe subsidiary Pioneer Finance Corp.

Separately, Santa Fe said it is delaying its annual shareholder meeting to give the company a chance to review information about special directors to be elected for the first time by company preferred shareholders.

The company will hold its annual shareholder meeting Friday, April 30, at 10 a.m. at the Pioneer hotel-casino in Laughlin, Santa Fe said in a release.

Santa Fe has missed dividend payments to its preferred shareholders for two years, giving the preferred shareholders -- including Hudson Bay and Lesser -- the right to elect two special directors at the annual meeting. The two special directors will serve in addition to the company's six existing directors.

Preferred shares are normally non-voting. Common shareholders elect the company's current six directors. Santa Fe is controlled by chairman Paul Lowden, who controls 53.4 percent of the company's common voting stock.

Santa Fe, owner of the Santa Fe and Pioneer hotel-casinos, is locked in a battle with Hudson Bay and other bondholders who are trying to force the company into bankruptcy. Last December, Santa Fe missed a $60 million balloon payment due on bonds it floated in 1988 to buy the Pioneer. Last month, Santa Fe voluntarily placed Pioneer Finance, the subsidiary created to manage the Pioneer debt, in bankruptcy.

In January, the bondholders filed involuntary bankruptcy petitions with U.S. Bankruptcy Court in Las Vegas, trying to force both Pioneer Finance and Santa Fe Gaming into bankruptcy. Santa Fe officials have said they will resist the attempt to force Santa Fe Gaming into bankruptcy, but in Securities and Exchange Commission filings have stated it is possible Santa Fe Gaming will also seek bankruptcy court protection.

Any bankruptcy filing will not affect the company's casino operations, Santa Fe officials say.

While Hudson Bay and other bondholders representing about 13.5 percent of the bonds want Santa Fe in bankruptcy, owners of about 77 percent of the bonds agreed last year to waive their rights to demand payment for the delinquent bonds and, if necessary, to exchange the bonds for new bonds due 2006. Santa Fe officials call the Pioneer Finance bankruptcy filing a "pre-packaged" bankruptcy, and expect speedy bankruptcy court confirmation of the plan backed by the majority bondholders.

In addition to owning Santa Fe debt, Hudson Bay and General Partner David Lesser control 26.4 percent of the company's preferred stock.

Last month, the Culinary Union filed a preliminary proxy statement with the SEC proposing two special directors for Santa Fe's board. According to that proxy, one of the director candidates was nominated by Hudson Bay, the other was self-nominated.

The union is in a dispute with Santa Fe over attempts to organize workers.

Though Hudson Bay did not file the proxy form, it is clear that the union consulted with Hudson Bay on its contents. The proxy cites Hudson Bay positions on certain subjects, and according to Hudson Bay filings in the bankruptcy cases, Hudson Bay and the union agreed to file a single proxy nominating the director candidates.

The union owns a few common and preferred Santa Fe shares, enough to let it nominate directors, but not enough to exert any control over the company. Hudson Bay, with more than a quarter of the preferred shares, is in a much stronger position to influence the outcome of the director election.

In a statement, Santa Fe said it delayed its annual meeting "to permit the company to review information about potential candidates for special directors to be elected by preferred shareholders."

Common shareholders will also be asked to elect three directors. Shareholders of record as of April 8 will have the right to vote at the meeting.

The timing of Hudson Bay's acquisition of Pioneer Finance bonds and Santa Fe preferred stock is one focus of the Santa Fe suit.

Santa Fe accuses Lesser and Hudson Bay of missing deadlines to file forms with the SEC notifying investors they had bought more than 5 percent of Santa Fe's preferred stock. According to the suit, Lesser and Hudson Bay owned 9 percent of the shares by the end of November, but failed to file a document saying so until the end of January. Securities laws require such a filing within 10 days of the date an investor buys more than 5 percent of a company's shares, states the suit.

Santa Fe also accuses Lesser of breaking a confidentiality agreement. Lesser represented Crescent Real Estate Equities Co. in its attempt last year to buy Santa Fe Gaming. At that time, Crescent was in a merger agreement with Station Casinos.

According to the suit, Station, Crescent and Santa Fe signed a confidentiality agreement that Lesser and Hudson Bay "by words and actions ... agreed to be bound by..."

Lesser bought Pioneer Finance bonds and Santa Fe preferred stock after gaining "intimate non-public information" while working on the Crescent/Santa Fe merger, alleges the suit. Santa Fe accuses Lesser of an "attempt to wrest control of Santa Fe and to force Santa Fe to undertake a financial restructuring that would unjustly enrich the defendants."

The charges are similar to those made by Santa Fe in documents filed in the bankruptcy cases. In answers to those bankruptcy court charges, Lesser denied signing or agreeing to a confidentiality agreement and denied trading on non-public information.

Fort Worth, Texas-based Crescent dropped its planned acquisition of Station last summer. Crescent's discussions with Santa Fe resulted in a $229 million purchase offer that was not accepted.

The Santa Fe suit also accuses Lesser of a lack of full disclosure in Hudson Bay SEC filings. According to the suit, Hudson Bay SEC filings that said Hudson Bay was acquiring preferred Santa Fe shares for "investment purposes" were misleading. The filings, states the Santa Fe suit, should have disclosed "that their intention was and is to acquire Santa Fe or its assets, or to effectuate a change in the control of Santa Fe, or to force Santa Fe to undertake financial restructuring for the sole profit of the defendants."

In fact a document filed with the SEC by Hudson Bay on Jan. 25 stated: "The filing persons intend to continue to consider various alternative courses of action ... (that) may include ... pursuing a transaction or transactions involving a change in control of the Issuer (Santa Fe Gaming) or such other actions as each filing person may deem appropriate."

The suit also says Lesser should have disclosed his contacts with the Culinary Union in Hudson Bay's SEC filings.

According to the suit, the Hudson Bay actions are wasting Santa Fe "time, effort and financial resources, all of which should be devoted to pursuing the interests of the shareholders." The actions of Hudson Bay and Lesser could force Santa Fe to sell assets at less than market value, states the suit.