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October 22, 2014

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Shareholder suits against MGM Resorts advance

More than a year after Las Vegas-based casino resort operator MGM Resorts International was hit with six shareholder class-action and "derivative" lawsuits over a decline in its stock price, some of the cases have advanced with selection of lead plaintiffs.

U.S. District Judge Gloria Navarro in Las Vegas last week selected as co-lead plaintiff in shareholders' and debt holders' class action cases a group of pension funds that claim to have lost $4.6 million when the stock of MGM Resorts -- then known as MGM Mirage -- sunk between August 2007 and March 2009.

The stock -- which has since rebounded -- fell through March 2009 as the company faced a liquidity crisis because of recessionary pressures as well as the need to finance the completion of the $8.5 billion CityCenter resort complex on the Las Vegas Strip.

The equity investor selected as lead plaintiff is Public Pension Funds, a consortium including the Arkansas Teacher Retirement System, the Philadelphia Board of Pensions and Retirement and the Luzerne County (Pa.) Retirement System.

Selection of the lead plaintiff is significant in the case as that plaintiff's law firms will execute the litigation against MGM Resorts and stands to collect legal fees if there's a judgment or settlement.

Attorneys for the plaintiff funds said they have the financial ability to represent all investor plaintiffs in the combined class action cases and have had success in the past pursuing securities lawsuits.

The Arkansas Teacher system manages more than $10 billion in assets, the Philadelphia system more than $3 billion and the Luzerne County system more than $150 million. The Arkansas and Philadelphia systems have recovered hundreds of millions of dollars for investors in previous securities actions, their attorneys said.

Selected as co-lead plaintiff, representing bond investors, was Netherlands-based pension fund manager Stichting Pensioenfonds Metaal en Techniek (PMT), which claims to have lost $2 million.

Citing an Enron Corp. securities fraud case, Navarro noted that there was no requirement that an investor in MGM Resorts bonds -- as opposed to stock -- be appointed as a lead plaintiff.

But Navarro wrote she "also recognizes the benefit that could be provided by having a co-lead plaintiff that bought debt securities and is therefore positioned to vigorously advocate on behalf of similarly-situated debt purchasers."

Representing the Public Pension Funds are law firms experienced in securities and business class-actions: Nix, Patterson & Roach LLP in Daingerfield, Texas; Barroway Topaz Kessler Meltzer & Check LLP in San Francisco; and Coulter P.C. in Reno.

Representing bondholders will be Coughlin Stoia Geller Rudman & Robbins LLP in San Diego and the Goodman Law Group in Las Vegas.

The selection of the Public Pension Funds group as the lead stock plaintiff was a setback for the DeKalb County (Ga.) Pension Fund and its attorneys with the Atlanta law firm Chitwood Harley Harnes LLP, who said that fund suffered the largest individual loss of $1.5 million and suggested that the Public Pension Funds consortium was put together solely for litigation purposes.

"The Pension Fund Group submitted a joint declaration that is inadequate because it fails to explain how this three-member group, each with varying percentages of the claimed losses of the group, will function as lead plaintiffs, especially in the event of a disagreement over litigation strategy. Likewise, the Pension Fund Group has failed to establish that it is not a lawyer-driven group formed solely to aggregate losses in an effort to obtain lead plaintiff appointment," the Chitwood Harley Harnes attorneys agued in court papers.

But Navarro found one of the DeKalb arguments is based on unsettled law.

She noted the 9th U.S. Circuit Court of Appeals -- which includes Nevada -- "has not yet addressed whether a group of institutional investors, banded together in an attempt to become lead plaintiff, needs to affirmatively demonstrate that their group is sufficiently cohesive to make timely, prudent decisions."

Six lawsuits were filed by MGM Resorts securities holders beginning on Aug. 19, 2009.

Two have been combined in federal court in Las Vegas as the class-action with lead plaintiffs Public Pension Funds and PMT. Two more suits are pending in federal court as "derivative" suits in which the plaintiffs seek to force MGM Resorts to sue its own officers and directors for the benefit of all shareholders. The fifth and sixth suits, also derivative cases, have been combined in Clark County District Court, where they are pending.

MGM Resorts last year responded to the suits with this statement: "The company believes that the allegations set forth in the complaint(s) are without merit. The company will vigorously defend against these claims but there can be no assurance that the outcome of the proceedings will not have a material adverse effect on the company."

Since then, the company has reiterated in Securities and Exchange Commission filings it intends to vigorously contest the suits.

The suits generally charge violations of securities laws and breaches of fiduciary duties because of allegedly overly-optimistic statements executives made about the company's revenue and earnings outlook and that CityCenter was progressing smoothly -- statements that allegedly inflated the company's stock price even as company insiders sold close to $90 million of their own stock.

"When the truth about MGM’s deteriorating financial situation became apparent, the stock price plummeted and caused large monetary losses to investors who had purchased the securities based on MGM’s allegedly false representations," Navarro wrote in a ruling last week, summing up the allegations.

"Throughout the `class action period' (August 2007 through March 2009), MGM touted its construction of the massive CityCenter complex as a historic achievement and the creation of an iconic landmark that would transform the face of the Las Vegas Strip. Despite ballooning construction costs, MGM issued positive statements about the progress of CityCenter, assuring investors that the project was on schedule and would open in late 2009. Along with MGM’s positive statements about the progress of CityCenter, the defendants boasted of MGM’s superior balance sheet and relative ease in securing billions of dollars in financing prior to and during the credit crisis in the fall of 2008. Both assertions were false," attorneys for the Public Pension Funds charged in their suit.

CityCenter did begin opening in December 2009, minus the Harmon Hotel, where work was halted because of construction defects. It's unclear when, or if , it will open.

In response to the problems disclosed in early 2009, MGM’s stock dropped from more than $15 in early January 2009 to close at $1.89 on March 5, 2009, the class action attorneys complained.

After a series of debt and equity issuances, refinances and asset sales, MGM Resorts is now considered by analysts to be on better financial ground and its stock is trading at about $11.

Separately, MGM Resorts has selected as outside counsel in the cases Los Angeles attorney George M. Garvey of the law firm Munger, Tolles & Olson LLP; as well as longtime Las Vegas business attorney Todd Bice of the firm Pisanelli Bice PLLC.

Garvey has extensive experience in securities and business law, for instance representing the owner of the Forum Shops at Caesars in litigation over the buyout of its limited partner and representing Berkshire Hathaway Inc. in class actions over buyouts of Burlington Northern Santa Fe railroad and other companies.

With the court system taking 14 months just to name the lead plaintiffs in the class-action cases, MGM Resorts has not yet filed its legal responses to the lawsuits and it appears they could continue on for months or years unless there's a settlement.

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