All you have to do to unlock Luigi is run to the star statue, do 15 backflips WITHOUT TOUCHING THE JOYSTICK. Then do all Red coin stars from every level without touching a single gold coin. From there, hit reset on the N64, then go to the star statue again. Go behind it, in the water, and move the camera as close as you can to the statue.
Then, while holding L on all 4 controllers, hold the reset button while immediately flipping the on/off switch to off then back on. Quickly let go of L in reverse order (controller 4 -> 1).