Lawsuit Filed Over Penn National Deal

Lawsuit filed in failed Penn National Gaming buyout.

A Maryland attorney who is a shareholder of Penn National Gaming Inc. has filed a styled class-action lawsuit against the publicly-traded gaming company and certain of its executives over the failed buyout attempt by two investment entities.

Herman M. Braude, who heads a Washington, D.C., firm specializing in construction law, levels allegations of securities fraud in PNG’s handling of the $8.9 billion buyout offer by Fortress Investment Group LLC and Centerbridge Partners LP, which was terminated July 3. Braude, who claims he individually suffered damages of at least $500,000, originally filed his lawsuit in Maryland federal court on the same day of the termination.

The lawsuit claims PNG management committed securities fraud, in part, by not disclosing to the “investing public” that the deal “was ever in jeopardy,” and suggests high volume of stock trading in the days and final months leading up to the termination announcement involved some sort of illegal insider action.

“Upon information and belief, defendants knew or had reason to know that the original buyout merger agreement was in jeopardy in the early spring of 2008, as defendants were engaging in discussions which made the termination ... a probability,” an amended complaint filed Aug. 6 said. “And defendants or other parties to the transaction leaked inside information to favored, close associates." 

During a telephone interview, Braude claimed PNG had a duty to inform the public about alleged months of negotiations to modify or terminate the deal. Instead, he claims, the company indicated through press releases that all necessary regulatory approvals were still being sought, and therefore, going forward as announced.

“We are supposed to be able now – since Enron, and even since the original (securities) amendment was passed after the Great Depression – to be able to rely on public disclosures of management,” said Braude, who in court documents claims to have once held 37,500 shares of PNG stock. “At the same time, the insiders are not supposed to have an advantage over the public investing community in general.”

Also named as defendants in the lawsuit are PNG chairman and chief executive officer Peter M. Carlino and chief financial officer William J. Clifford. Interview attempts requested through a New York investors relation firm representing PNG were not immediately successful. PNG did not reference the lawsuit, as companies sometimes do, in its most recent quarterly report filed Aug. 11 with the Securities and Exchange Commission.

The buyout deal was announced July 15, 2007 with a target purchase price of $67 per share, and shareholders in December gave their approval of the transaction. In June, PNG announced an agreed-to contractual extension, saying the closing date would move from June 15, 2008 to on or before Oct. 15, 2008.

The deal was terminated July 3 before stock market trading began. PNG reported it received a termination fee of $225 million, and $1.25 billion in what the lawsuit calls an interest-free loan, in exchange for 12,500 shares of “newly-issued” preferred stock as security.

From the alleged “class-action” period of March 20, 2008 through the end of July 2, 2008, the lawsuit claims the defendants issued “frequent updates … calculated to influence the investing public.”

Some financial writers and analysts questioned whether the deal would close under its stated conditions in the wake of a national credit crisis.

“Clearly, there's some serious doubt out there that the deal will ever happen at its original price,” the Wall Street Journal said in a March article. The New York Times, citing “people briefed on the matter,” in a May article, said parties were working to renegotiate the terms of the deal.

PNG’s stock price hit $63.29 on June 19, 2007, four days after the deal was announced. It hit a low of $24.47 on July 11, about a week after the buyout was terminated. Shares closed Sept. 11 trading at $31.37, up 1.72%.

In addition to Hollywood Casino at Penn National in Grantville, Pa., PNG includes among its holdings Thoroughbred racing operations Charles Town Races & Slots in Charles Town, W.Va.; and Black Gold Casino at Zia Park in Hobbs, N. M.