Legal fees eat up majority of Stratosphere settlement

David Strow

Monday, Oct. 9, 2000 | 11:19 a.m.

Shareholders in the defunct Stratosphere Corp. will receive less than half of the funds being paid to settle a class-action lawsuit on their behalf under a settlement proposed in Las Vegas federal court.

Under terms of the settlement, first announced in June, Lakes Gaming Inc. of Minneapolis agreed to pay $9 million to former Stratosphere shareholders. Grand Casinos, Lakes' predecessor company, held 42 percent of the defunct corporation's stock, and had been accused of making misleading statements to investors.

That adds up to an average of 39 cents per share for the shareholders.

But of that $9 million, $3 million will go to the plaintiff's attorneys as fees. As much as $2.1 million more will be paid out for attorney expenses. That $5.1 million bill will add up to about 22 cents per share, according to a settlement agreement filed in U.S. District Court Oct. 3.

This proposed fee of 57 percent must still be approved by Judge Philip Pro during a final hearing to approve the settlement agreement.

Lead plaintiffs' law firm Milberg Weiss of San Diego -- the nation's largest firm specializing in shareholder litigation -- argues that the size of the fees is justified.

"Over the last four-plus years, there was an awful lot of work done by plaintiffs' attorneys in this case," said Ellen Stewart, an attorney with Milberg Weiss. "The expenses were high because we had to retain experts, and we went through discovery twice.

"That (the size of the fee) isn't unusual. We worked really hard to get these people whatever we could, but the company doesn't have a lot of money."

But the size of the fee enraged one gaming industry observer.

"The attorneys should get a cut, maybe 35 percent, and that should be their entire fee," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "What they're getting is a 33 percent profit and their costs back. That's ludicrous.

"What is this (law) called, the shareholders' derivative relief act, the lawyers' permanent relief act? What about the people who lost money? This whole subject just grinds me almost to bits."

Still, Ehlers acknowledged such fees aren't rare.

"It happens too damn much," Ehlers said.

Fees from the settlement -- or what's left of the settlement -- will be distributed to shareholders who acquired Stratosphere shares from Dec. 19, 1995, to July 22, 1996. The amount each shareholder will receive is based on the date the stock was sold, and whether the shareholder actually lost money on Stratosphere stock.

The settlement does not involve the current Stratosphere Corp., which is a different company controlled by Carl Icahn.

The plaintiffs' attorneys had alleged Grand Casinos misstated the anticipated construction costs of the Stratosphere and failed to disclose cost overruns in a Stratosphere prospectus filed in December 1995. These costs were also not revealed in quarterly and annual reports filed with the Securities and Exchange Commission through July 1996, the lawsuits claimed.

Stratosphere filed for bankruptcy in January 1997. To settle its bankruptcy case, the Stratosphere's debt was converted to equity in a new corporation, giving Icahn control of the hotel-casino. Stock in the old corporation became worthless.

Grand Casinos, meanwhile, was sold to Park Place Entertainment Corp. in December 1998. The tribal gaming business of Grand Casinos remained separate and became Lakes Gaming.

Lakes again denied wrongdoing in the settlement, but said that "further conduct of the litigation would be protracted and expensive, and ... it is desirable that the litigation be fully and finally settled."

The settlement would dismiss claims against all defendants in the case, including Stratosphere founder Bob Stupak, Lakes Chief Executive Lyle Berman and former Stratosphere Chief Financial Officer Tom Lettero.

Lakes also paid an additional $9 million to settle claims brought directly against Grand Casinos in federal court in Minneapolis.

A hearing on the terms of the settlement will be held at the Las Vegas federal courthouse on Dec. 4 at 1:30 p.m.