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Hedge Funds Say Elixir Rolled Craps

MANHATTAN (CN) - Four hedge funds say they lost millions of dollars to a company that abandoned "an established and valuable business" in U.S. casinos to lease out slot machines in Asia. Elixir Gaming Technologies fka VendingData made misleading statements to inflate its share price, which eventually plummeted by 90 percent, according to the federal complaint.

Prime Mover Capital Partners and three Strata Funds, all Delaware-based hedge funds, say they invested millions in Elixir.

After Elixir took control of Nevada-based VendingData in 2006, it steered the company away from its profitable business of supplying card-shuffling machines and radio frequency identification chips to U.S. casinos, according to the complaint.

The hedge funds say Elixir began buying electronic slot machines to Asian casinos, and exaggerating the scheme's profitability to the public and to the SEC.

Elixir claimed it would place 5,530 state-of-the-art machines, each of which would generate $125 in daily profits [or $691,250 per day], according to the complaint.

Such misleading statements helped Elixir inflate the price of its securities, but the investors say Elixir never did any budgeting.

"Among other things, defendants knew they had no factual basis for the assertion that 3,000 machines would be placed by the end of 2008," according to the complaint. "They also knew that they had no basis for the asserted $125 average net win figure at all, let alone their repeated claim that it was 'conservative' and, contrary to their statements, Elixir and the company had done no diligence, had consulted no experts, and had received no demographic or other data from PAGCOR [the Philippine Amusement and Gaming Corp.]."

The hedge funds claim that under regulatory laws in place at the time, Elixir could not place machines in several Asian countries, including Malaysia, Taiwan, Singapore and Korea. And they say Elixir did not investigate what kind of machines Cambodians prefer to use when gambling.

As fiscal year 2008 wore on without sign of the promised profits, Elixir continued to ignore its data and claim it was overcoming rollout delays and ironing out contracts; by August, Elixir shares had plummeted by 90 percent, according to the complaint.

"This was misleading, because at this point, defendants had extensive information, which they did not disclose, that venues were not returning the projected revenues and that there were numerous issues with operators," the complaint states. "When defendants' prior misrepresentation and fraudulent conduct were disclosed and became apparent to the market, the price of the company's common stock fell and the prior artificial inflation came out."

The investors seek damages from Elixir, its parent company Melco, and 15 officers, alleging fraud, negligent misrepresentations and breach of fiduciary duty.

They are represented by Daniel Osborn.

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