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Howard Stutz

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Gaming sector latest target of shareholder lawsuits

31 Aug 2009

By Howard Stutz

LAS VEGAS, Nevada –- Casino industry stockholders who collectively lost millions of dollars in investments when Wall Street tanked over the last 18 months are asking the courts to remedy their losses.

Federal class action lawsuits have been filed in recent weeks against slot machine manufacturer International Game Technology and casino operator MGM Mirage, alleging that two of Nevada's largest publicly traded gaming companies made false statements about their financial prospects as stock prices sank to historic lows.

Earlier this year, shareholders filed similar claims against Las Vegas Sands Corp.

Experts wouldn't be surprised if other publicly traded casino operators and slot machine manufacturers are also targeted.

The jury is still out, however, on whether the legal system will restore shareholders' bank accounts.

"People have a natural tendency to say they didn't make a bad choice," said Duke University School of Law professor James Cox, who specializes in corporate and securities law. "However, you need to prove a sustained serious course of action by a company that caused you to lose money, rather than just a stock market collapse."

In both the IGT and MGM Mirage cases, the lawsuits allege the companies overstated their earnings prospects, even as the business climate turned bleak. Meantime, company executives and other insiders cashed out large shares of stock, earning millions of dollars.

This week, MGM Mirage filed a one-paragraph statement with the Securities and Exchange Commission saying the company would mount a vigorous defense against the claims.

"The company believes that the allegations set forth in the complaint are without merit," according to the SEC filing. "But there can be no assurance that the outcome of the proceedings will not have a material adverse effect on the company."

Shareholder lawsuits usually involve cases with similar language filed by multiple firms, all hoping to snare large numbers of plaintiffs. Attorneys hope the cases are certified as class action and the lawsuits are merged.

"Achieving class action certification is the key to the success of many of these types of cases," said UNLV Boyd School of Law associate professor Rachel Anderson, who specializes in business law. "The potential costs for the defendant are so high, oftentimes there is substantial pressure to settle if the cases become a class action."

Anderson said recent shareholder lawsuits against Enron, WorldCom and AOL-Time Warner were settled, although she wasn't sure if class action certification was the primary reason for those resolutions.

Historically, massive stock market tumbles are usually followed by shareholder actions.

Lawsuits centering on collapsing stock prices peaked in 1998 when 242 securities actions were filed in federal courts nationally.

However, in following years various changes in law governing securities took place.

Also, the enactment of the Sarbanes-Oxley Act of 2002, known as the Public Company Accounting Reform and Investor Protection Act, gave the SEC and the U.S. Department of Justice more power in policing fraudulent financial reporting.

Those moves and the surging stock market led to a decline in shareholder actions.

In 2006, 116 actions were filed, a 10-year low.

However, the subprime mortgage crisis led to reversal. Between Aug. 1, 2007, and Nov. 30, 2007, there were 81 securities actions filed with the federal courts, the highest four-month volume since 2004.

Anderson said gaming companies are now in the same situation as companies in other sectors that have suffered massive price-per-share losses.

The cases hinge, she said, on determining whether a company's communications during quarterly earnings conference calls with analysts and in other public statements have a substantial effect on the actions of investors.

"Was there misinformation and did it change reasonable investor behavior?" Anderson said. "That's a matter for the courts to determine."

Cox said that almost half of all the actions are dismissed because the allegations brought up by the shareholders are found to be insufficient.

"If there isn't an SEC investigation the lack of a whistle-blower usually sends off some alarms in the back of my mind," Cox said. "The courts will then look skeptically at what's in front of them. Maybe the gaming industry was sick well before last year when the market fell apart."

However, red flags are often sent up when company executives and insiders cash in stock for large sums well before the markets collapse.

MGM Mirage executives and board members sold almost $91 million in company stock between Aug. 2, 2007, and March 5. IGT insiders sold nearly $29 million of their own shares in late 2007 and early 2008.

"The courts will take everything into account," Anderson said. "Sometimes, however, the inference is not helpful to the plaintiff."

Cox said many law firms specialize in shareholders actions and are oftentimes involved in multiple lawsuits. Three firms -- The Brualdi law firm, Izard Nobel, and Coughlin Stoia Geller Rudman & Robbins -- have sued both MGM Mirage and IGT.

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