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Rod Smith

$4 Million Archon Bonuses Challenged by New York Firm

21 June 2005

A New York investment firm alleges in a complaint filed with federal regulators that Las Vegas-based Archon Corp. diluted minority shareholders' interests by giving unjustified bonuses to relatives of majority shareholder Paul Lowden.

In the complaint, filed Friday with the Securities and Exchange Commission, D.E. Shaw & Co. claim that Lowden, who is also Archon's board chairman, gave bonuses worth $4 million each to close relatives to the detriment of minority shareholders.

The investment firm, which last year was involved in a hostile effort to take over Riviera Holdings Corp., said it will consider acting because of the issue. Actions may include trying to take Archon private or forcing it into a merger or litigation.

D.E. Shaw also told the SEC it will consider financing those and other efforts, such as a proxy solicitation or a tender offer, and is prepared to force the issue at Archon's shareholder meeting June 30.

Last month, Archon granted Paul Lowden's son, Chris, and his brother, David, options to purchase 150,000 shares for $1 per share, effectively amounting to a combined bonus package of $8 million, SEC filings show.

David Lowden is in charge of real estate projects for Archon; Chris Lowden heads design and development.

Because Paul Lowden, who the SEC filing said declined a similar offer he presumably made to himself, owns 75.6 percent of Archon's common shares, the bonuses did not require further shareholder approval.

D.E. Shaw Senior Vice President Marc Sole argued in a letter to Lowden that such large bonuses without shareholder approval are "unseemly."

"Given that the company hasn't broken ground on any significant new real estate development project in recent years, it is hard for me to conclude, however, why now, in the midst of the greatest boom in land values in recent Las Vegas history, is the appropriate time for the board to grant unprecedented stock awards to relatively junior employees," Sole said.

Sole said the bonuses, which have not been explained, make D.E. Shaw wonder if Archon "is seeking to be run as a family fief on which minority shareholders remain as serfs."

Archon owns the 26-acre former Wet 'n Wild site on the Strip and a second site at the corner of Rainbow Boulevard and Lone Mountain Road in Las Vegas. It also operates the Pioneer Hotel & Gambling Hall in Laughlin under long-term lease and licensing arrangements. The company also owns investment properties in Dorchester, Mass., and Gaithersburg, Md.

Archon's Sahara Las Vegas Corp. subsidiary in May 2003 signed a lease extension that would have kept Wet 'n Wild going for 10 more years. But the unit reversed course seven months later when it announced plans to build a 3,250-room hotel-casino and observation wheel on the site.

Newport Beach, Calif.-based park operator Palace Entertainment closed Wet 'n Wild at the end of its 20th season Sept. 26.

D.E. Shaw bought 4.8 percent of Archon's common stock, or 361,000 shares, Nov. 23 for about $16.50 a share.

It also bought 8 percent of the company's preferred stock on which no dividends have been paid since 1996.

Sources closed to D.E. Shaw said it invested in Archon not as part of a takeover attempt, but because D.E. Shaw's analysts suggested Archon's stock did not properly reflect the value of its land on the Strip.

Otherwise, D.E. Shaw has no more interest in Las Vegas investments than it does in other locations.

Analysts who asked not to be named said minority rights depend on corporate governance rules and generally are very limited.

However, they confirmed D.E. Shaw's claim that bonuses in the $4 million range for employees who are not senior executive officers are very rare for firms capitalized at less than $200 million.

Brian Gordon, a principal in Applied Analysis, a Las Vegas-based financial consulting company, said a company's officers and board members have a fiduciary duty to protect the interests of shareholders.

"Without knowing the contributions the employees are making, it at least seems unusual," he said.

D.E. Shaw dropped plans to take over Riviera Holdings after David Shaw, company chairman and founder, discovered he would have to get a gaming license and endure an onerous process to get it, said Sole.

Wall Street analysts had predicted Shaw would persevere, arguing the company had never before yielded on a takeover attempt.

D.E. Shaw sold its 9.6 percent interest in Riviera Holdings on May 5 to a subsidiary of Canadian mall developer Triple Five Group in multiple transactions valued at more than $20 million.

Archon closed Monday at $27.50, down 50 cents, or 1.8 percent, on 400 shares traded.