MORGANS HOTEL GROUP CO. Common Stock Purchase Warrant

Exhibit 4.2

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS INSTRUMENT MAY NOT BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF IN ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT.

Issue Date: October 15, 2009 (the “ Issue Date ”)

MORGANS HOTEL GROUP CO.

Common Stock Purchase Warrant

Morgans Hotel Group Co. (the “ Company ”), for value received, hereby certifies and agrees that YUCAIPA AMERICAN ALLIANCE FUND II, LLC, or its registered assigns (the “ Holder ”), is entitled, subject to the terms set forth below, to purchase from the Company, at any time during the Exercise Period (as defined below), Two Million Five Hundred Thousand (2,500,000) shares (the “ Warrant Shares ”) of the Company’s common stock, par value $0.01 per share (the “ Common Stock ”), at a purchase price (the “ Exercise Price ”) per share equal to $6.00. The Exercise Price and the number of Warrant Shares to be purchased upon exercise of this Warrant are subject to adjustment as hereinafter provided.

1.  Defined Terms .

“ Affiliate ” has the meaning ascribed to such term in Section 12 of the Exchange Act; provided , that, the existence of a management contract primarily for operational services provided by the Company or an Affiliate of the Company shall not be deemed to be control by the Company or such Affiliate, as the case may be.

“ Alternative Structure ” has the meaning ascribed to such term in the REF Agreement.

“ Appraised Value ” per share of Common Stock as of a date specified herein shall mean the fair market value of a share of Common Stock as of such date as determined by an investment bank of nationally recognized standing selected jointly by the Holder and the Company. If the Company and the Holder cannot agree on a mutually acceptable investment bank, then the Company and the Holder shall each choose one such investment bank and the respective chosen firms shall jointly select a third investment bank, which shall make the determination. The Company shall pay the costs and fees of each such investment bank (including any such investment bank selected by the Holder), and the decision of the investment bank making such determination of Appraised Value shall be final and binding on the Company and the Holder. No discount shall be applied on account of (i) any Warrants or Warrant Shares representing a minority interest, (ii) any lack of liquidity of the Common Stock or the Warrants, or (iii) the fact that the Warrants or Warrant Shares may constitute “restricted securities” for securities law purposes.

“ Board of Directors ” means the Board of Directors of the Company.

“ Business Day ” means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

“ Commencement Date ” means the earlier of (i) the first Business Day immediately following the special meeting of stockholders of the Company to approve the issuance of the Common Stock in connection with the exercise of the Warrants and (ii) January 15, 2010.

“ Common Stock ” has the meaning ascribed to such term in the preamble of this Warrant.

“ Company ” has the meaning ascribed to such term in the preamble of this Warrant.

“ Competitor ” means a person that engages in the business of operating, licensing, franchising or managing a hotel brand or group of hotels, provided, that, for the avoidance of doubt, an investment fund or other person or entity that engages in any such business primarily for investment purposes shall not constitute a “Competitor” hereunder.

“ Cumulative Invested Funds ” means the sum of, without duplication, (a) the cumulative amount of investments made by the Fund on or prior to the fifth anniversary of the date hereof, plus (b) the cumulative amount of follow-on investments made by the Fund after the fifth anniversary of the date hereof in connection with investments held by the Fund as of the fifth anniversary of the date hereof, plus (c) the cumulative amount of expenses paid by the Fund in accordance with the Fund Constituent Documents, provided , that, the amount described in the foregoing clause (c) shall exclude any expenses paid for the primary purpose of obtaining vesting of this Warrant under Section 4.

“ Exchange Act ” means Securities Exchange Act of 1934, as amended.

“ Exercise Cap ” has the meaning ascribed to such term in Section 3(a)(i).

“ Exercise Date ” has the meaning ascribed to such term in Section 2(a).

“ Exercise Notice ” has the meaning ascribed to such term in Section 2(a).

“ Exercise Period ” means the period commencing on the date the Warrant becomes vested in accordance with Section 4 (but not earlier than the Commencement Date) and ending on the Expiration Date.

“ Exercise Price ” has the meaning ascribed to such term in the preamble of this Warrant.

“ Expiration Date ” has the meaning ascribed to such term in Section 6.

“ Extraordinary Distribution ” means a distribution by the Company to holders of shares of its Common Stock of securities, evidences of indebtedness, assets, cash, rights or warrants provided that the fair market value (as reasonably determined by the Board of Directors) of the property distributed exceeds 10% of the Fair Market Value of such shares on the applicable record date.

“ Fair Market Value ” of a Warrant Share means, as of any date:

(i) if the Common Stock is traded on a securities exchange or quoted on the Nasdaq Stock Market, the Fair Market Value of a Warrant Share shall be deemed to be the average of the closing prices over the five Business Day period ending on the Business Day immediately prior to such date; or

(ii) if clause (i) immediately above is not applicable, the Fair Market Value of a Warrant Share shall be determined in reasonable good faith by the Board of Directors; provided , that, the Company shall give the Holder prompt written notice thereof following any such determination, together with reasonable data and documentation to support such determination; provided , further , that, for purposes of Sections 2 and 3 only, if the Holder objects to any such determination within two Business Days after receiving notice of the same, the Fair Market Value of a Warrant Share shall be the Appraised Value thereof.

“ Fund ” has the meaning ascribed to such term in the REF Agreement.

“ Fund Constituent Documents ” means the constituent documents of the Fund, including, without limitation, the limited partnership agreement or other equivalent or related governing agreements of the Fund.

“ Gaming Approval ” means any approval or consent required under Gaming Laws to be obtained from any Gaming Authority, including, without limitation, any registration, finding of suitability or approval of an acquisition of control.

“ Gaming Authority ” means any governmental entity with regulatory control, authority or jurisdiction over casino, pari-mutuel, lottery or other gaming activities and operations within the State of Nevada, including, without limitation, the Nevada Gaming Commission, the Nevada State Gaming Control Board, the Clark County Liquor and Gaming Licensing Board and the City of Las Vegas.

“ Gaming Event ” means a Gaming Approval requirement arises for the Holder, an Other Holder or a Licensed Affiliate to hold or exercise this Warrant or any Other Warrants as a result of circumstances primarily caused by the Company or any of its subsidiaries.

“ Gaming Laws ” means all laws, regulations, rules, ordinances or other pronouncements pursuant to which any Gaming Authority possesses regulatory, licensing or permit authority over casino, pari-mutuel, lottery or other gaming activities in any jurisdiction, including all rules and regulations established by any Gaming Authority.

“ Gaming Trigger ” means a Gaming Approval requirement for the Holder, an Other Holder or a Licensed Affiliate to hold or exercise this Warrant or any Other Warrants that does not arise as a result of circumstances primarily caused by the Holder, an Other Holder, or a Licensed Affiliate.

“ Holder ” has the meaning ascribed to such term in the preamble of this Warrant.

“ Issue Date ” has the meaning ascribed to such term above the preamble of this Warrant.

“ Licensed Affiliate ” means a person who is associated or affiliated with the Holder, an Other Holder or any of their respective Affiliates and is required under Gaming Laws to obtain a Gaming Approval for the Holder or an Other Holder to hold, or to exercise in full, the Warrants and the Other Warrants.

“ Other Holders ” means the holders of the Other Warrants (other than the Holder).

“ Other Warrants ” means the warrants issued pursuant to the Purchase Agreement that are held by Affiliates of the Holder and the warrants issued pursuant to the REF Agreement (other than this Warrant).

“ Preferred Securities ” means the Preferred Stock, par value $0.01 per share, of the Company designated as Series a Preferred Securities issued to Affiliates of the Holder pursuant to the Purchase Agreement.

“ Purchase Agreement ” means the Securities Purchase Agreement, dated as of the Issue Date, by and among the Company and the Other Holders.

“ Redemption Date ” has the meaning ascribed to such term in Section 3(b)(iii).

“ Redemption Price ” means, with respect to any portion of the Warrant being redeemed pursuant to Section 3(b) as of a Redemption Date, the number of Warrant Shares underlying such portion of the Warrant multiplied by an amount equal to (A) the Fair Market Value as of the Redemption Date less (B) the Exercise Price as of the Redemption Date.

“ REF Agreement ” means that certain Real Estate Fund Formation Agreement, dated as of the Issue Date, by and between the Company and the Holder.

“ Securities Act ” has the meaning ascribed to such term in Section 13(a).

“ Section 409A ” means Section 409A of the Internal Revenue Code of 1986, as amended from time to time, and the regulations of the United States Department of the Treasury and other administrative guidance issued thereunder.

“ Seventh Anniversary ” means the seventh anniversary of the Issue Date.

“ Third Anniversary ” has the meaning ascribed to such term in Section 13(b)(i).

“ Warrant Shares ” has the meaning ascribed to such term in the preamble of this Warrant.

2.  Method of Exercise .

(a) This Warrant may be exercised by the Holder at any time and from time to time during the Exercise Period, subject to the vesting requirements of Section 4, for all or any portion of the number of Warrant Shares purchasable hereunder. In order to exercise this Warrant, in whole or in part, the Holder shall deliver this Warrant, together with a duly executed copy of the form of notice of exercise attached hereto as Attachment A (together, the “ Exercise Notice ”), to the Company at its principal offices prior to 1:00 p.m., New York City time, on a Business Day, which Exercise Notice shall specify the number of Warrant Shares subject to such Exercise Notice (the date on which such delivery shall have taken place being referred to as the “ Exercise Date ”). The Exercise Date for any Exercise Notice delivered to the Company after 1:00 p.m., New York City time, on any Business Day shall be the next succeeding Business Day.

(b) Upon each exercise of the Warrant, the Company shall issue to the Holder a number of shares of Warrant Shares computed using the following formula:

(c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which the Exercise Notice shall have been delivered to the Company as provided above. As soon as practicable after each exercise of this Warrant, and in any event within three Business Days thereafter, the Company shall execute (or cause to be executed) and deliver (or cause to be delivered) to the Holder a certificate or certificates representing the aggregate number of full Warrant Shares issuable and issued upon such exercise, together with cash in lieu of any fraction of a share (as provided in Section 2(d) below). The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as the exercising Holder shall reasonably request in the Exercise Notice or otherwise and shall be registered in the name of the Holder or, subject to Section 13, such other name as shall be designated in the Exercise Notice. Unless the applicable Exercise Notice is revoked as provided in Section 3(a)(i), this Warrant shall be deemed to have been exercised, and such stock certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of the shares of Common Stock evidenced by such stock certificate or certificates for all purposes, as of the Exercise Date.

(d) No fractional shares of any security will be issued in connection with any exercise hereunder. As to any fraction of a share that would otherwise be issuable, the Company shall pay cash equal to such fraction multiplied by the Fair Market Value as of the applicable Exercise Date.

(e) If this Warrant shall have been exercised in part, the Company shall, not later than the time of delivery of the certificate or certificates representing the Warrant Shares being issued pursuant to such exercise, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unexercised Warrant Shares subject to this Warrant. Such new Warrant shall in all other respects be identical to this Warrant.

(f) The Company hereby represents and warrants to the Holder that all Warrant Shares issuable and issued upon the exercise of this Warrant pursuant to the terms hereof will be validly issued, fully paid and nonassessable, issued without violation of any preemptive rights and issued free and clear of any lien, encumbrance, security interest, pledge, mortgage, hypothecation, charge, adverse claim, title retention agreement of any nature or kind, or other encumbrance, except as provided for under applicable securities laws and Gaming Laws. The Company shall pay all of its expenses in connection with, and all issuance, transfer, stamp and other similar taxes and other governmental charges that may be imposed upon it with respect to, the exercise of this Warrant or the issue or delivery of Warrant Shares hereunder.

3.  Exercise Cap; Redemptions .

(a)  Exercise Cap .

(i) Subject to Section 3(a)(ii), the Holder shall not be entitled to exercise its rights to purchase Warrant Shares hereunder to the extent, and only to the extent, such exercise would cause such Holder, together with its Affiliates, to become the beneficial owner of more than 9.9% of the issued and outstanding shares of the Common Stock, as determined pursuant to Section 13 of the Exchange Act. (the “ Exercise Cap ”) The Company shall, within one Business Day of delivery by Holder of an Exercise Notice, notify the Holder in writing of (A) the number of Warrant Shares that would be issuable to the Holder if such exercise requested in such Exercise Notice were effected in full and (B) the number of issued and outstanding shares of the Common Stock (as determined pursuant to Section 13 of the Exchange Act) as of the most recent date such information is available to the Company, whereupon, notwithstanding anything to the contrary set forth herein, the Holder may within one Business Day of its receipt of the notice from the Company required by this Section revoke such Exercise Notice to the extent that it determines that such exercise would result in the Holder, together with its Affiliates, owning in excess of 9.9% of the issued and outstanding shares of Common Stock, as determined pursuant to Section 13 of the Exchange Act.

(ii) Notwithstanding anything to the contrary herein, Section 3(a)(i) shall not limit a Holder from exercising all or any portion of the Warrant if: (A) the Holder, the Other Holders and the Licensed Affiliates have obtained all Gaming Approvals necessary to hold, and to exercise in full, the Warrants and the Other Warrants, and the Holder has notified the Company in writing thereof and has not revoked such notification, or (B) none of the Holder, the Other Holders or the Licensed Affiliates are required under the Gaming Laws to obtain any Gaming Approval to hold, or to exercise in full, the Warrants and the Other Warrants ( e.g., the Company does not own or hold any assets or rights that subject it to the authority or jurisdiction of a Gaming Authority), and the Holder has notified the Company in writing thereof and has not revoked such notification. In connection with the foregoing, the Company shall use its reasonable best efforts to keep the Holder apprised of all material facts pertaining to the business and affairs of the Company which have, or would reasonably be expected to have, a bearing upon the determination of whether any such Gaming Approvals are or continue to be required, including, without limitation, information pertaining to any acquisitions or dispositions of assets by the Company or any of its Affiliates that are subject to regulation under Gaming Laws, and shall, upon request from the Holder from time to time, provide any documents and records in its possession or in the possession of its Affiliates (to the extent available to the Company) that the Holder reasonably requests in order to determine whether such Gaming Approvals are required; provided , that, prior to receiving any documents and records, the Holder shall agree to comply with the Company’s insider trading policies as in effect and shall agree to keep the information contained therein confidential, including to the extent required so that the Company’s provision of such documents and records does not cause the Company to breach any confidentiality agreement to which it is a party.

(b)  Redemption .

(i) In the event that the stockholders of the Company do not duly approve (including, without limitation, approval pursuant to the corporate governance requirements and listing rules promulgated by the Nasdaq Stock Market, including Rule 5635 thereof) the issuance of Common Stock in connection with the exercise the Warrants and the Other Warrants, on or prior to January 15, 2010, the Holder shall thereafter have the right, at any time and from time to time during the Exercise Period, subject to the vesting requirements of Section 4, to cause the Company to redeem at the Redemption Price all or any portion of this Warrant (subject to adjustment on the same basis as is the number of shares for which this Warrant is exercisable as a result of an event specified in Section 8(a), 8(b) or 8(c)).

(ii) In the event of a Gaming Event, the Holder shall thereafter have the right, at any time and from time to time during the Exercise Period, to cause the Company to redeem at the Redemption Price a portion of the Warrant such that the Holder, the Other Holders and the Licensed Affiliates are not required to receive any Gaming Approvals to continue to hold the Warrant or to exercise the Warrant in the manner contemplated herein.

(iii) In order to exercise its redemption rights, in whole or in part, pursuant to this Section 3(b), the Holder shall deliver this Warrant, together with a written notice setting forth the portion of the Warrant being redeemed pursuant to such notice (designated by the number of Warrant Shares underlying such portion of the Warrant), whether such redemption is pursuant to Section 3(b)(i) or 3(b)(ii) and wi