THIRTEEN
After the Fall
The Stratosphere pod was evacuated again on July 5 after a cardboard box caught fire in an electrical service room on the 10th floor of the pod. Although hotel officials assured skeptics that there was no danger, the tower was shut down the rest of the day. The job of explaining yet another ringing fire alarm fell to Stratosphere’s increasingly harried public spokesman, Tom Bruny. In recent weeks, Bruny had gone from conducting lighthearted media tours of the resort to attempting to calm journalists bent on reporting every false alarm and faulty roller coaster part. Bruny’s efforts at damage control aside, the Stratosphere was taking a beating in the press and on Wall Street.
It didn’t help matters that the resort’s radio and television advertising blitz was coming in the wake of the poor revenue returns. Las Vegas residents and tourists can sense desperation at a resort, and Stratosphere ran the risk of frightening off its customers by appearing to try too hard. Adding to its obvious financial woes was the torn relationship between Berman and Stupak. So much for high-stakes friendships. Wrote Review-Journal gaming reporter Dave Palermo: “The dismal figures have caused a rift between poker-playing buddies Bob Stupak, who conceived the project, and Lyle Berman, whose Grand Casinos Inc. bailed Stupak’s unfinished stump out of impending financial failure. Stupak last week again predicted he will resign as chairman of the board, a threat company executives are hoping he makes good on.”
Stratosphere could and did cut its payroll, by terminating 150 workers. Stratosphere could and did make itself more attractive to locals, by dropping the price of its elevator ride from $7 to $5. Casino managers also moved to adjust the payout percentages of the slot machines to make them more attractive to local players, and hotel managers started revamping the resort’s pricy restaurant menus.
But no one could snap his fingers and complete 1,000 unfinished hotel rooms. No one could wave a wand and open the three dozen retail shops that were behind schedule. For that matter, no one could force tourists to sit and play slot machines they could operate anywhere in the city from a 7-Eleven to Caesars Palace.
Stupak’s personal world was coming apart faster than his tower. He appeared to have exhausted his good fortune and then some. On July 9, Stupak informed the Reno City Council through attorney Sam McMullen that he was abandoning his plans to remodel the Riverside Hotel and add a Stratosphere-like thrill ride downtown. Development in Reno has never approached Las Vegas’s blinding growth, and the reason why was clear to Stupak. After requesting the city council to assist him in acquiring the run-down property from owner Peter Eng, Stupak was faced with the possibility of putting up a $500,000 nonrefundable deposit with the city and spending another $500,000 in site plans, only to have Eng back out of the deal.
“We are not interested in going forward under these circumstances,” McMullen said. “Stupak is not going into a deal where all of the effort and time will end up for naught.”
The city had granted Eng eight years to improve the shuttered property after he acquired the Riverside in 1987. Bob Stupak was realizing he would receive nowhere near the same consideration.
__________________
The moment Bob Stupak had been hinting at for months arrived Monday July 22, when he resigned as chairman of the board of the tumbling Stratosphere Corporation. The resort’s $11.1 million first-quarter loss was ushered in by predictions of impending bankruptcy from two respected Wall Street firms. In his last official act as the figurehead chairman of the resort he dreamed up, Bob Stupak crafted his letter of resignation and addressed it to his ex-friend, Lyle Berman.
July 21, 1996
Lyle Berman
Chief Executive Officer
Stratosphere Corporation
2000 Las Vegas Blvd. South
Las Vegas, NV 89104
RE: RESIGNATION
Dear Lyle,
You are long aware through personal conversations and formal business meetings of my continuing dissatisfaction with the “Grand” management of the Stratosphere and the methods and results of operations.
My increasing frustration with my inability to have any meaningful say or input with respect to discussions or decisions made by “Grand,” the Board of Directors or any management personnel clearly leaves me no alternative but to tender my resignation as Chairman and Director, effective immediately.
Pursuant to the terms of the November 15, 1993 agreement as amended on December 22, 1993, I will be exercising my right to nominate my successor to the Board of Directors. I am currently considering various qualified candidates and will promptly notify you as soon as I have made what I believe is a satisfactory selection.
Sincerely,
Bob Stupak
Chairman of the Board
Stupak sent copies to Stratosphere officers Thomas G. Bell, Andrew Blumen, Patrick Cruzen, Morris Goldman, Ronald Kramer, Robert Maheu, David Rogers, Neil Sell, Stanley Taub, Joe Weller, and David Wirshing.
“He was trying to save face,” a Stratosphere executive said after reading the letter.
A day later, Lyle Berman and his corporate crew held a national teleconference to attempt to explain the company’s terrible first quarter and assuage the fears of dozens of fretful stockbrokers, many of whom were scrambling to spin their own version of events to investors.
Stratosphere shares dropped from $4 to $3 as stockholders dumped 5.2 million shares onto the market.
Salomon Brothers analysts Bruce Turner and Tim Kelsey spared no body blows and made no attempt to be politically correct in predicting the failure of the property with its bad location and worse debt load.
“With a prohibitively expensive debt structure, bankruptcy may prove the only option,” Turner and Kelsey wrote.
If their financial predictions proved correct and the tower generated only half the $80 million projected by company officials, Stratosphere would fail to meet its bond obligations, even with Grand Casinos kicking in up to $50 million in a promised one-time capital infusion.
Bankruptcy “has not been in our vocabulary at this point,” Berman told the teleconference of reporters and securities analysts.
Grand’s investment in Stratosphere had swollen to approximately $125 million: $75 million in equity and $48.5 in debt through a completion guarantee. The company appeared to have $90 million in cash reserves, but every penny was earmarked toward construction and expansion. Berman had personally purchased $8 million in Stratosphere bonds.
While Stratosphere was reeling, Grand Casinos reported quarterly revenues of $194 million—$1 million more than the same period the previous year.
There was plenty to look forward to.
Simon and Gordon, which was designing and building the Stratosphere’s shopping arcade, planned to have 35 stores open by the end of 1996. Phase two would add another 35 stores, giving the Stratosphere one of the larger malls in the city. The Stratosphere was in the process of adding 875 rooms, including 150 suites, as well as a pool area. With an occupancy rate anywhere near the city’s standard 90 percent, there would be sufficient traffic flow at the hotel.
Berman’s Kids Quest child-care center, a popular trend in casinos across the country, would give parents a chance to gamble without worrying whether their offspring were learning to say, “baby needs a new pair of shoes.”
But the improvements were months away.
Berman announced that the casino, which had been so disappointing, would loosen its wagering structure. Odds on craps would be increased to as much as 30 times. Dollar slot machines would return more than 98 percent. With maximum coins bet, select video poker machines would return more than 100 percent. What’s more, they would institute crapless craps, double exposure blackjack, and single-zero roulette.
For all his acumen and education, Lyle Berman was beginning to sound a lot like Bob Stupak.
If Stupak sought refuge in a public willing to forgive its favorite reformed huckster, he would be sorely disappointed. Securities & Exchange Commission filings revealed that, while he was busy touting the wonders of the Stratosphere, Stupak was quickly selling off thousands of shares of stock. A shareholder lawsuit would later claim that he sold 471,000 shares in a period of six weeks from May 10 to July 24 at prices ranging from $8.72 to $6.75; the sales amounted to six percent of his stock and netted him approximately $3.6 million, but lesser investors who had believed Stupak’s pronouncements of the infallibility of the resort were destined to suffer big losses.
On July 24, Stratosphere stock fell to 2 11/16ths after 1.7 million shares were dumped on the market.
Ironically, Stupak’s replacement at the head of Stratosphere would have to possess many of the talents of casino promotion that had made Stupak famous. Berman found his man in longtime friend Richard Schuetz, a 45-year-old former blackjack dealer who had bounced around Las Vegas at nearly every level of the casino business for two decades. Schuetz had dealt at Reno’s Harrah’s casino and had worn a suit at the Golden Nugget, Frontier, and Sands. More recently, Schuetz had served as Grand Casinos’ vice president of corporate marketing before resigning to become an industry consultant. He also wrote a lighthearted column for Casino Executive magazine. Berman trusted Schuetz.
Although industry insiders respected his intelligence, Schuetz had offended more than one staid corporate type with his sense of humor and less-than-understated demeanor on the casino floor. Still, he appeared to be an ideal choice for the interim position: he was loyal to Berman and was experienced enough to know Stratosphere had to bust loose or it was going to bust out.
The resort’s physical maladies—guests found the valet parking arrangement inconvenient, for example—could be corrected. But Stratosphere suffered from other ailments as well. Its group room bookings were nearly nonexistent and casino marketing efforts lagged months behind. It didn’t help that the room-reservation number in the phone directory was incorrect, or that Stratosphere’s managers failed to sell the rooms months ahead of time. And nothing had changed in the casino—throngs of tourists visited the tower daily, but few stopped at the machines and tables long enough to spend a quarter. They bought more T-shirts than gaming tokens.
The lavish piece of Native American artwork that dominated the entrance was a symbol of the extravagant lengths to which Stratosphere’s designers had gone in order to dress up the resort. Although the figure of two Indians reaching for the stars was handsome, it stood in the spot where, in other casinos, slot machines ruled.
“This store is a casino, not a museum,” the witty Schuetz told a reporter not long after taking over. He would need every ounce of his sense of humor in the coming months.
National newspaper headlines pulled no punches. Stratosphere was considered the biggest flop since Bob Snow’s Main Street Station debacle five years earlier. Going broke in a boomtown was bound to leave room for criticism—and not merely for the media’s favorite whipping boy, Bob Stupak.
The Los Angeles Times proclaimed:
HYPE, HOPE AREN’T ENOUGH—
VEGAS TOWER FAILS TO CASH IN
The Wall Street Journal, which had all but championed the project from the start, joined in the mugging:
STRATOSPHERE’S STOCK, BONDS
TUMBLE TO EARTH, AS CASINO IS STUNG
BY DELAYS, COST OVERRUNS
The headlines had Schuetz feeling every bit like Rodney Dangerfield. He’d have to hustle to earn Wall Street’s respect. Many of the analysts who lauded the tower’s can’t-miss potential now called it a half-billion-dollar bust.
“One of the problems is this company may have made statements it couldn’t deliver on,” Schuetz said. “Now this place needs to be fundamentally repositioned. There’s no risk to that. What are we going to do? Screw it up?”
With 1,000 unfinished rooms, more than a dozen unfinished retail shops, and a nonexistent aquarium, it was too late for that.
“We’re trying to make this an attractive place with what we’ve got,” Schuetz said in late August after the company announced it was halting construction on the resort’s phase two projects. The rooms and shops would go unfinished. The aquarium idea was shelved.
But on the casino floor, Stratosphere was changing dramatically. Schuetz made sweeping changes in an attempt to attract players to the slots and tables. Adopting his best huckster mode, Schuetz instituted single-zero roulette, which lowers the house’s advantage over the player from 5.26 percent to 2.7 percent. At the crap table, he instituted 20-times odds, and later upped the figure to an unprecedented 100-times odds. The move decreased the casino’s edge to a microscopic .02 percent of the total action wagered on the pass line and odds. He loosened the slots to a 98 percent return on $1 machines. As a special incentive, Schuetz installed 80 video poker machines that returned more than 100 percent. These positive-return video poker machines were, ironically, the brainchild of Bob Stupak, who debuted them at Vegas World several years earlier.
Then he lowered admission to the tower from $7 to $5 and dropped the price of the buffet. These were desperate moves that would have made Bob Stupak proud.
“Right now, we’ve been able to generate a lot more interest in the cheese than the trap,” Schuetz cracked to a journalist. To another reporter he boasted, “We’re showing that we’re a dynamic, aggressive property willing to take risks.” “Best Place to Gamble on the Planet” was the unofficial motto.
As much as he might have wanted to, Stupak could not stay out of the news. He wasn’t making public appearances, but substantial stock transactions connected to him had drawn the attention of small-time shareholders and the Securities & Exchange Commission. Stratosphere’s shareholders immediately began accusing him of dumping his stock to the detriment of the company, and that same argument would be made in litigation filed in the weeks to come. What critics didn’t know, or failed to acknowledge, was that many of the shares sold under Stupak’s name were moved on the market by PaineWebber to attempt to recoup margin-account loans to Stupak. He later argued in an SEC filing that he had no control over the approximately 2 million shares of Stratosphere. When, according to Stupak’s filing, PaineWebber called in the $2.1 million in margin loans on July 22, it made him look like he was abandoning a sinking ship. Although anyone who understood finance would have found it incredible that Stupak—a corporate officer and largest individual shareholder in the company—could have somehow forgotten about the regulations, he appeared to have done just that. Gaming-industry insiders whispered that the stock sale held the potential for a securities violation, but Stupak bristled at the suggestion.
“The only mistake I made was I didn’t sell enough stock,” he sniped. He also criticized the apparent lack of marketing at Stratosphere.
“There is no place in town that doesn’t market, or they couldn’t survive,” he said as he watched his fortune in Stratosphere stock fall to 3 on the Nasdaq board on the last day of July.
As shareholders watched the stock drop, Stupak continued to sell. Analysts who had talked of Stupak’s creativity and Berman’s business acumen only a few weeks earlier blamed both men for the stock’s nosedive. Especially Stupak, who clearly contributed to the decline of the stock by dumping hundreds of thousands of shares. By mid-August, the stock had fallen to a few cents over $2.
On August 5, Stratosphere shareholders Michael Ceasar and Samuel Tolwin filed a federal class-action lawsuit alleging Stratosphere Corporation, Grand Casinos, Stupak, Lyle Berman, David Wirshing, Tom Lettero, Andy Blumen, and Las Vegas attorney Tom Bell had violated securities laws through misleading practices. Stupak was targeted for selling off 948,000 shares of Stratosphere stock for a profit of more than $8.25 million from December 19, 1995, through July 22, 1996. Clearly, Ceasar and Tolwin were looking to fuel a stockholder revolt after their combined 1,700 shares of Stratosphere dropped in value from nearly $21,000 to $10,000. The suit claimed Stratosphere officials misled stockholders by touting the resort’s grand potential while privately selling off stock.
According to the litigation, Stupak went on a selling binge in the months leading up to Stratosphere’s opening. He sold 88,000 shares of stock in January for a gain of more than $900,000; 145,000 in February for more than $1.5 million; 120,000 in March for another $1.2 million. In May, he dumped 334,000 shares on the market for an approximate gain of $2.9 million.
The suit quoted a July 30 Wall Street Journal article in which a stockbroker lamented the fact that Stupak had sold so many shares while investment experts were still recommending the stock.
“Had I known the chairman of Stratosphere was such a large seller, I would not have made such a recommendation to my clients,” the broker said.
Had Stupak violated SEC regulations requiring insiders to disclose their sales in a timely manner?
“Shame on me if I sold cheap in January, February, and March,” Stupak told the Journal. He denied any wrongdoing.
The day the Caesar-Tolwin lawsuit was filed, Stupak filed another SEC Schedule 13d. It read in part:
“Effective July 22, 1996, Mr. Stupak resigned voluntarily as a member of the Company’s Board of Directors. The resignation was not precipitated by the Company or its controlling stockholder, Grand Casinos, Inc. … To the contrary, such action reflects Mr. Stupak’s inability to conduct the customary functions or exercise the influence commonly associated with his position either as a director or as “Chairman of the Board, “ a position which he held from the Company’s inception until the date of his resignation. Mr. Stupak also has had significant and increasing concerns over construction management controls and unexplained project costs, marketing approaches and certain other Grand-directed decisions that in his view adversely affected the Company, as well as with respect to the general unwillingness of the Grand-appointed management and the Grand-controlled Board of Directors to consider his advice and opinions.”
In mid-August, Stratosphere officials contacted representatives of Donaldson, Lufkin & Jenrette, a respected Wall Street investment banking firm, to analyze its stock predicament and consider its options. None were appetizing. The company could rush out and seek outside capital at a high interest rate, or it could conduct a rights offering, which would enable shareholders to buy blocks of stock at a heavy discount. Even with Grand Casinos’ promised $48.5 million construction-completion guarantee, the project still wouldn’t be finished.
Then there was Grand’s other problem. If Stratosphere failed to generate at least $50 million in cash flow, Grand was on the hook for three years to make up the difference up to $20 million each year. With Stratosphere’s junk bonds taking their high-interest hit, confidence in the future of the resort was at an all-time low. So was the stock: 1 5/8.
Stupak, Berman, Stratosphere, and Grand were hit with a second federal class-action lawsuit on August 29 filed by Harvey Cohen, Dawn Ennis, Robert Buckler, Jeff Wexler, and Union Equity Partners. The complaint: deceptive trading and brokering.
“Fully aware of the risky, best-efforts nature of the offering, defendants secretly structured and conducted the offering so that all of the risk that the offering might not reach its maximum would fall on the investors and the selected dealers, but if the offering became ‘hot,’ almost all of the reward would flow to defendants and their affiliates, friends, and families,” the suit alleged. “… In other words, defendants deceived the investors and the selected dealers into taking on the risk of failure, while secretly denying the investors and the selected dealers the full upside potential in the event the demand for the units exceeded the maximum offering and the units were certain to trade at a premium to the offering price.”
Stupak and the others accused scoffed at the allegations, laying them off to disgruntled stockholders who were happy as long as Stratosphere shares were climbing, but were unable to face the reality of the marketplace when the stock plummeted. Still, refuting the allegations would be time-consuming, costly, and would further damage the company’s reputation and potential.
__________________
Stupak’s image in the community mirrored Stratosphere’s financial position. Bob the Changed Man had begun to be portrayed as the Same Old Stupak, who flashed a bankroll for charity and cashed in on the media coverage only to withdraw his generosity a few months later.
His $100,000 reward offer for information leading to the persons responsible for the death of 10-month-old Francine Meegan was quietly withdrawn over the summer. In late August, when a key witness applied to receive the reward, it had vanished. Metro’s Homicide Bureau backed Stupak’s move, but the public impression was that he had reneged on his promise. “It would be our opinion right now that there is nobody qualified for the reward,” Sgt. Ken Hefner told a reporter, but the public’s impression was that Stupak had broken his promise.
While Stupak was quietly selling off Stratosphere stock, officials at St. Vincent de Paul Management Co. were banking on a 30,000-share gift bestowed by the generous casino man to pay for a new kitchen at the Stupak Mobile Assistance and Shelter for the Homeless. By September, they realized they would have to delay plans for the kitchen after the value of their stock dropped from $405,000 to $56,400 in a few short weeks. Officials said they had no intention of removing Stupak’s name from the building.
Days later, Stratosphere Corporation was chided in the press for failing to make good on its agreement to deed Naked City’s Chester Stupak Community Center to the city and throw in $100,000 for on-site improvements. City officials deemed the dilapidated 7,000-square-foot building that honored Bob Stupak’s father’s name one of the worst of its kind in Las Vegas. For her part, Mayor Jan Jones was reluctant to kick Stratosphere—which she had praised only weeks earlier as a triumph of urban redevelopment—for failing to turn over the property.
__________________
By September 30, Stratosphere stock had fallen to $1 per share, but Minneapolis-based Cargill Inc. added a wrinkle to the resort’s predicament when it purchased approximately $60 million of the company’s $203 million first-mortgage notes for 82 cents on the dollar. Given the likely prospect of bankruptcy, Cargill’s move was telling. Obviously, experts inside Cargill, the largest private company in the United States, believed the resort would survive a reorganization and eventually right itself.
With an additional $31.5 million from Grand Casinos in the form of a construction-completion guaranty, Stratosphere officials braced themselves for the remainder of the year.
Given its monumental financial woes and the fact that its former chairman, Bob Stupak, rarely let a day go by without criticizing its operators, it was hardly surprising that the statue of the founder of the tower who, according to its inscription, “shaped the destiny of the Las Vegas skyline,” was clandestinely removed from the casino and placed in storage in late September.
A month later, still having difficulty filling its 1,500 rooms, Stratosphere Corporation changed its official line and announced that it intended to file bankruptcy in an attempt to reorganize its behemoth debts. The resort would remain open throughout the process and, if its financial cards fell right, emerge in a superior position. A key reason for the announcement: its third-quarter losses were $26 million despite a 49 percent increase in revenue from $23.7 million to $35.3 million. Grand Casinos also took a hit, reporting an 84 percent drop in net income to $3.5 million. A new marketing program at Stratosphere was now essential not only for the tower’s survival, but for the well-being of Grand Casinos as well.
It was hardly shocking, then, when word surfaced that Stratosphere had failed to meet its $14.5 million payment to bondholders due December 16. The company’s executive vice president, Andrew Blumen, said, “We’re busier than we’ve ever been in the past.” But under the weight of its mortgage interest, the company was not recovering.
Stratosphere stock closed at 1 1/16 that day.
As if to underscore the changes to come in the new year, in late December the High Roller roller coaster again suffered mechanical difficulties, losing a wheel with a dozen passengers aboard. No one was injured, but the malfunction scared away tourists and forced another closure of the world’s tallest roller coaster. It would reopen with few passengers willing to take the wild ride that mirrored Stupak and the tower’s own tumultuous tale.