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Gaming Guru

Howard Stutz

Affinity Gaming sued by largest shareholder

6 March 2013

LAS VEGAS -- The largest shareholder in Affinity Gaming has sued the casino operator's board of directors, saying changes in the company's governance have breached fiduciary responsibility.

The lawsuit by Illinois-based private equity firm Z Capital Partners was filed Tuesday in Clark County District Court. On Monday, Affinity announced that Z Capital withdrew its nonbinding proposal to acquire all of the outstanding common shares of Affinity Gaming.

In the lawsuit, Z Capital said the board's move to change Affinity from a Nevada limited-liability company to a Nevada corporation "breached their fiduciary duty" and violated Z Capital's "clear contractual rights."

Z Capital CEO James Zenni has been critical of Affinity's board since last year. In October, he questioned a $300,000 payment made to chairman David Kornstein, who helped negotiate a three-way asset swap and sale among Affinity, Golden Gaming and JETT Gaming.

Z Capital owns 30.5 percent of Affinity and offered $14 a share for the remaining stock, a 22 percent premium over the current value.

In the lawsuit, Z Capital said it has invested more than $72 million into the casino operator, which owns properties in Nevada, Colorado, Missouri and Iowa.

"(The investment) was based on the rights it bargained for and was guaranteed as an investor in the company that defendants had no right to take away," the lawsuit alleged.

Z Capital accused the Affinity board of "a plan to entrench and enrich themselves at shareholder expense."

Z Capital also accused the Affinity board of creating a class of preferred stock that would permit "a dramatic dilution of Z Capital's equity and voting rights."

The Affinity board was accused of creating a "poison pill" that would reduce Z Capital's shares and voting rights by almost 85 percent.

Affinity Gaming was owned by former lenders and bond holders of Herbst Gaming. Z Capital has slowly acquired shares of Affinity Gaming over the past 19 months. Affinity Gaming has publicly held debt.

Before Z Capital took lead ownership, Silver Point Capital, a Greenwich, Conn.-based hedge fund, had been Affinity's largest shareholder with almost 19 percent of the company.