SEPARATION AGREEMENT AND RELEASE

SEPARATION AGREEMENT AND RELEASE

          This Agreement (“Agreement”) is entered into as of this 19th day of September 2007 (the “Termination Date”), between W. Edward Scheetz (the “Executive”) and Morgans Hotel Group Co. (the “Company”), on its own behalf and on behalf of its parents, subsidiaries and affiliates and their respective predecessors, successors and assigns.

          WHEREAS, the Company and the Executive (collectively referred to as the “Parties”) are parties to an employment agreement dated February 14, 2006 (the “Employment Agreement”); and

          WHEREAS, the Company and the Executive mutually desire to effect an agreement pursuant to which the employment relationship between the Parties shall be terminated; and

          WHEREAS, the Company and the Executive have agreed upon and wish to confirm the various arrangements relating to such termination from employment.

          NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the Parties agree as follows:

           Resignation, Cooperation and Benefits

          1. The Executive hereby resigns from, and the Company hereby agrees to take all actions to remove the Executive from, effective on the Termination Date, all positions as an employee, officer and director of the Company and each of its subsidiaries and affiliates including without limitation Hard Rock Hotel Holdings LLC

and its subsidiaries and affiliates. The Company further agrees to cooperate with the Executive to seek the withdrawal of the Executive from any pending gaming licenses, liquor licenses and other permits or authorizations reasonably related to the business and operations of the Company, including but not limited to the payment of all fees or expenses related thereto on behalf of the Executive.

          2. As a material inducement to the Company to enter into this Agreement, the Executive agrees that he will, at no expense to the Company, (i) for 12 months following the Termination Date, cooperate with and make himself available to assist the Company in the transition following his resignation, (ii) for 24 months following the Termination Date, not take any action, or fail to take any action, that would reasonably be expected to have a material adverse impact on the Company, its parents, subsidiaries, affiliates, partners, joint venture partners, directors, officers, agents and employees, (iii) not, without the consent of the chief executive officer, engage in any material discussion of the Company’s business, affairs, operations, assets, strategy or prospects with any of the Company’s employees, officers, agents, or joint venture partners, or (iv) until September 19, 2010 together with the Executive’s affiliates, not (A) initiate or otherwise participate in any actual or threatened solicitation of proxies or written consents to vote, seek to advise or influence any person with respect to the voting of any securities of the Company or otherwise act or seek to control or influence management or (B) nominate any individual for election as a director. Executive agrees that he will not, directly or indirectly, acquire or hold voting securities of the Company if such holding would have an adverse effect on: (i) the Company’s ability to obtain or maintain any gaming license, registration, finding of suitability, qualification or similar

gaming approval in any jurisdiction that permits licensed gaming activity; or (ii) the Company’s ability to enter into agreements with licensed gaming companies or their affiliates or maintain existing agreements with such companies or their affiliates; provided , however , that this sentence shall cease to be applicable if the Executive or any “group” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of which he is a member acquires more than 51% of the voting securities of the Company.

          3. The Company shall provide the Executive with the consideration described below, subject to the conditions set forth below. Except as otherwise provided in this Agreement, the consideration to be provided is in lieu of, and not in addition to, payments, benefits or other consideration the Executive would be entitled to under the Employment Agreement or pursuant to any policy or practice of the Company.

          (a) Accrued Obligations . The Company shall pay the Executive in cash within 30 days following the Termination Date, the sum of (i) the Executive’s annual base salary through the Termination Date to the extent not theretofore paid, (ii) the Executive’s business expenses that are reimbursable pursuant to the Company’s reimbursement policies in effect as of the date hereof but have not been reimbursed by the Company as of the Termination Date; and (iii) any accrued vacation pay to the extent not theretofore paid.

          (b) LTIP Units granted on February 14, 2006 which are currently vested . Executive shall retain (subject to paragraph 12 of this Agreement) the rights to the 171,529 LTIP units in Morgans Group LLC which were granted to Executive on February 14, 2006 and which were vested pursuant to their terms on the date hereof.

          (c) Unvested LTIP Units . Subject to paragraph 12 of this Agreement, the 153,471 LTIP units in Morgans Group LLC which were granted to Executive on February 14, 2006 which, as of the date hereof, have not vested pursuant to their terms on the date hereof and the 98,000 LTIP units which were granted to Executive on April 27, 2007 in Morgans Group LLC which, as of the date hereof, have not vested pursuant to their terms shall vest according to the schedule set forth in the applicable award agreements; provided that any of the foregoing LTIP units that are not vested on September 19, 2009 shall fully vest on September 19, 2009.

          (d) Stock Options . Executive shall retain the rights to the 158,331 options to purchase Company common stock which were granted to Executive on February 14, 2006 which have vested pursuant to their terms as of the date hereof and, notwithstanding anything to the contrary in the applicable award agreement, shall (subject to paragraph 12 of this Agreement) be permitted to exercise such options for the lesser of 30 months from the date of this Agreement and the remainder of their originally scheduled term. Subject to paragraph 12 of this Agreement, the 141,669 options to purchase Company common stock which were granted to Executive on February 14, 2006 which have not vested pursuant to their terms as of the date hereof shall vest according to the schedule set forth in the applicable award agreement, and shall (subject to paragraph 12 of this Agreement) be exercisable in accordance with the applicable award agreement; provided , that any of the forgoing stock options that have not vested as of September 19, 2009 shall fully vest on September 19, 2009.

          (e) Performance Restricted Stock Units . Subject to paragraph 12 of this Agreement, the employment service requirement with respect to the 67,000

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performance restricted stock units granted to Executive on April 27, 2007 shall be waived but the payment of common stock under such award shall be subject to the Company’s achievement of the stated performance vesting objective in such award agreement.

          (f) The Executive will be provided notice of his eligibility to continue medical insurance coverage in accordance with the Consolidated Omnibus Reconciliation Act (COBRA), at the Executive’s expense.

          (g) Attorneys Fees . The Executive and the Company shall each be responsible for such party’s legal fees and expenses incurred as a result of any action, claim or proceeding (regardless of the outcome) regarding any provision of this Agreement or otherwise arising out or related to Executive’s employment with the Company or the termination thereof.

          4. The Executive expressly understands and agrees that the consideration received by him pursuant to this Agreement shall be in lieu of any and all other amounts to which the Executive might be, is now or may become entitled from the Company and, without limiting the generality of the foregoing, except as otherwise provided in this Agreement or as may be otherwise required by law, the Executive hereby expressly waives any right or claim that he may have or assert to payment for back pay, front pay, interest, bonuses, severance, damages, accrued vacation, accrued sick leave, medical, dental, optical or hospitalization benefits, pension plan contributions, 401(k) plan contributions, education benefits, life insurance benefits, compensatory time, outplacement, severance pay and/or attorneys’ fees.

          5. The Executive hereby represents that he has not filed any action, complaint, charge, grievance or arbitration against the Company and, subject to the

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Company’s compliance with this Agreement, covenants and agrees not to file any action, complaint or arbitration or commence any other judicial or arbitral proceedings against the Company with respect to events occurring prior to the termination of his employment with the Company.

           Waiver and Release

          6. The Executive acknowledges that the Company has no obligation to enter into this Agreement. The Executive acknowledges and agrees that, in consideration of the Company entering into this Agreement and for other good and valuable consideration, the Executive, on behalf of himself and his heirs, executors, administrators, successors and assigns, hereby knowingly and voluntarily waives, releases, and discharges the Company, its parents, subsidiaries and affiliates and their respective predecessors, successors, assigns, representatives, officers, directors, agents and employees (the “Releasees”), from whatever claims, charges, actions, and causes of action he may have against the Releasees, whether known or unknown, from the beginning of time through the date of this Agreement based upon any matter, cause or thing whatsoever arising out of or related to the Executive’s employment with the Company or the termination thereof. Notwithstanding anything else herein to the contrary, this waiver and release shall not affect: (i) rights to indemnification or coverage, as applicable, the Executive may have (A) under applicable law, (B) under Section 3(c)(ii) of the Employment Agreement (except for the second sentence thereof), (C) under any other agreement between the Executive and any Releasee, and (D) as an insured under any director’s and officer’s liability insurance policy now or previously in

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force and (ii) any obligations of the Company or any Releasee under this Agreement (including, but not limited to, paragraph 3 of this Agreement).

          To the extent coverage is available, the Company shall maintain the Executive’s coverage under any director and officer insurance policy obtained by the Company after the date hereof to the same extent as other current or former directors or senior executive officers of the Company, provided that if the inclusion of the Executive in such policy increases the premiums due thereunder in a manner that is disproportionate in relation to the premiums applicable to the inclusion of other directors and senior executive officers, the Executive will be included in such policy only if the Executive pays such disproportionate premium increase in cash prior to the date that the Company is due to pay the premium for such policy.

          7. Except as provided in paragraph 6, this waiver and release includes but is not limited to any rights or claims under United States federal, state or local law and the national or local law of any foreign country (statutory or decisional), for wrongful or abusive discharge, for breach of any contract, for impairment of economic opportunity, for defamation, for intentional infliction of emotional distress, or for discrimination based upon race, color, ethnicity, sex, age, national origin, religion, disability, sexual orientation, or any other unlawful criterion or circumstance arising out of or related to the Executive’s employment with the Company or the termination thereof. Such released claims include, but are not limited to, rights or claims under the Age Discrimination in Employment Act of 1967 (“ADEA”), the Older Workers Benefit Protection Act of 1990, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1871, the Civil Rights Act of 1991, the Fair Labor Standards Act, the Employee Retirement Income Security

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Act, the Americans with Disabilities Act, the Family and Medical Leave Act of 1993, the New York State Labor Law, the New York State Human Rights Law, and the New York City Human Rights Law.

           Other Continuing Obligations

          8. Unless the Executive has prior written authorization from the Company, the Executive may not discuss any information about the Compa