Riviera settles merger lawsuit

David Strow

Thursday, Oct. 14, 1999 | 11:53 a.m.

Riviera Holdings Corp. of Las Vegas won approval of a $9.4 million settlement with a former merger partner, despite the efforts of a major shareholder to block it.

Riviera announced Wednesday that a federal court in Los Angeles has approved the settlement of a lawsuit brought by California businessman Allen Paulson. Paulson filed the suit in 1998, claiming he was deceived into buying a financially struggling Riviera hotel-casino on the Las Vegas Strip. Paulson terminated his buyout agreement with Riviera in March 1998.

Riviera Chief Financial Officer Duane Krohn said the company's defense against the Paulson suit was costing $750,000 to $1 million a year.

"You can always lose in a jury trial, no matter what the facts are," Krohn said. "It's a good deal for everyone, we thought."

The settlement does not settle litigation against Morgens Waterfall Vintiadis & Co. Inc., Keyport Life Insurance Co. and Sun America Life Insurance Co. These companies hold about 57 percent of Riviera's stock, and are co-defendants in the Paulson lawsuit.

Paulson's suit claimed he was tricked into buying Riviera by Jeffries & Co. Inc., a financial advisory firm working for Morgens Waterfall.

Morgens Waterfall had tried to block the settlement, claiming that it was unfair to the three major shareholders, since it failed to dismiss charges against them as well, and left them liable for wrongdoing it blamed on Riviera. Morgens Waterfall had sought a temporary restraining order against Riviera preventing it from participating in the settlement.

Within days, Riviera had the case removed to federal court. Court records indicate no restraining order was issued against the company.

Morgens Waterfall's attorney could not be reached for comment.

As part of the settlement, Riviera is repurchasing more than 463,000 shares from Paulson at $7.50 per share, a 76 percent premium over Riviera's Wednesday closing price of $4.25. Riviera will also pay Paulson $1.5 million held in an escrow account established by Paulson for the down payment on the Riviera acquisition.

The settlement also calls for the remaining $4.4 million in the escrow account to be repaid to the holders of Riviera contingent value rights. Krohn said the company entered into the settlement partly to avoid having the CVR holders' money tied up during litigation.

This condition drew fire from Morgens Waterfall in its lawsuit, because two Riviera directors had CVR holdings -- Riviera President William Westerman and director Robert Barengo. Westerman, the largest CVR holder, did not participate in the discussion or vote on the settlement, although Barengo did. Riviera noted that Barengo owned only "a relatively small number of CVRs."

Morgens Waterfall also claimed the settlement was also being funded primarily from Riviera's general funds, rather than the escrow fund, unfairly benefitting the CVR holders.