Riviera shareholder files suit to block merger settlement

David Strow

Thursday, Oct. 7, 1999 | 11:29 a.m.

Riviera Holdings Corp.'s largest shareholder is attempting to block a $5 million settlement with California businessman Allen Paulson, saying the Las Vegas company is leaving it open to litigation caused by Riviera's misconduct.

The settlement would close a lawsuit filed by Paulson last year in federal court in Los Angeles. In that suit, Paulson claimed he was tricked into buying a financially struggling Riviera by Jeffries & Co. Inc., a financial advisory firm working for New York-based Morgens Waterfall Vintiadis & Co. Inc., holder of 25 percent of Riviera's stock. Paulson backed out of the acquisition in March 1998.

In addition to Riviera, Paulson's lawsuit named Morgens Waterfall, Keyport Life Insurance Co. and Sun America Life Insurance Co. as defendants. Those three companies control 56.9 percent of the company's stock.

In settling this lawsuit over the aborted Paulson takeover, Riviera agreed to pay Paulson $7.50 per share for his Riviera shares, an agreement valued at about $3.5 million. Riviera also agreed to pay $1.5 million from escrow funds held for holders of the company's contingent value rights.

But in a lawsuit filed Sept. 30 in Clark County District Court, Morgens Waterfall says the settlement is unfair to the three major shareholders, because it does not dismiss all claims against them.

"Riviera has breached its fiduciary duty to Morgens Waterfall by entering into ... a settlement agreement with actual knowledge that it leaves Morgens Waterfall unprotected from claims based on Riviera's own conduct, representations and breaches," Morgens Waterfall's lawsuit states.

Morgens Waterfall is also taking issue with how the settlement is structured. By paying $3.5 million from general company funds for Paulson's shares -- but only $1.5 million from escrow funds -- Morgens Waterfall claims Riviera is signing an agreement that unfairly benefits the contingent value rights holders. Two of the largest holders of these rights are Riviera President William Westerman and director Robert Barengo.

Morgens Waterfall calls the settlement "wasteful" of company assets, saying that Paulson is receiving an unfair premium of about $3.50 on his 463,655 Riviera shares.

Morgens Waterfall is asking the court to block the settlement until it and the other major shareholders are granted protection for all future claims by Paulson. It is also seeking indemnity from Riviera for its role in the failed acquisition, and an order blocking the payment of a premium for Paulson's shares.

Riviera officials declined comment.