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A Brief Summary of the Caesars

Entertainment Examiners Report
April 20, 2016
Ben Begleiter
1014 Atlantic Ave
Atlantic City, NJ 08401
(609) 344-5400 x 111
bbegleiter@unitehere.org

Recently, a court-appointed Examiner has raised significant questions about

private equity sponsor Apollo Global Managements numerous conflicts of
interest with respect to casino company Caesars Entertainment, including the
degree to which its fiduciary duties to Caesars equity partners may be at odds
with its fiduciary duties to CEOC and its creditors. How these issues are
ultimately resolved will have a direct impact on the value limited partners can
expect to realize from their partnership interests.
The Examiner wrote:

It appears that the Sponsors past success in successfully negotiating

resolutions involving financially troubled companies was a factor in their
assuming they could do so here without the need to pay adequate attention to
the requirements associated with being fiduciaries of an insolvent entity.

[With regard to the so-called Four Properties Transaction] the Examiner

concludes that a court would likely find that Apollo, acting primarily
through [Apollo Senior Managing Director Marc] Rowan and [Apollo
Partner David] Sambur, knowingly participated in the breaches of fiduciary
duty discussed above that were committed by CEOCs directors and CEC
[Caesars].

There exist strong claims that the CERP Transaction (i.e., the transfer of the
LINQ and Octavius from CEOC) constituted both a constructive and actual
fraudulent transfer, that the CEOC Board of Directors and CEC [Caesars] (as
CEOCs controlling shareholder) are liable for breach of fiduciary duty, and
that the Sponsors and individual members of the CEC Board of Directors
affiliated with Apollo aided and abetted this breach of fiduciary duty.

For more, read on...

UNITE HERE is the hospitality workers union that represents workers in the gaming industry across the country. The
Research Department provides research on the gaming industry from the perspective of those who work in the industry.

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In 2008 Apollo and TPG Capital, the other private equity owner of Caesars, engaged in one of the largest
ever LBOs, the $31 billion buyout of Caesars Entertainment Company (CEC or Caesars).1 The Leveraged
Buyout (LBO) occurred right before the financial crisis of 2008 and in the midst of a massive expansion
of gaming that increased competition. These combined forces led to declining revenue and ultimately a
Chapter 11 proceeding that is currently playing out in the courts at the largest of the Caesars
subsidiaries, Caesars Entertainment Operating Company (CEOC).
Before arriving at the bankruptcy court, Apollo, TPG and Caesars engaged in a series of financial
transactions. The bankruptcy court appointed an independent examiner to answer the question whether
in structuring and implementing these transactions assets were removed from CEOC to the
detriment of CEOC and its creditors.
The Examiner reviewed over 8 million documents and interviewed 100 people before releasing his report
in mid-March. His answer to the question was unequivocal:
The simple answer to this question is yes. As a r esult, claims of var ying str ength ar ise out
of these transactions for constructive fraudulent transfers, actual fraudulent transfers (based on
intent to hinder or delay creditors) and breaches of fiduciary duty by CEOC directors and officers
and CEC [Caesars]. Aiding and abetting breach of fiduciary duty claims, again of varying
strength, exist against the Sponsors and certain of [Caesars] CECs directors. None of these
claims involve criminal or common law fraud.
The potential damages from those claims considered reasonable or strong range from $3.6 billion
to $5.1 billion.2
One of the central issues of the report is the issue of CEOCs insolvency and the legal obligations that
forced on CEC and Apollo/TPG. According to the Examiner, CEOC was insolvent from at least
December 31, 2008. As he explained, this should have created certain legal obligations for Apollo and
others:
Once an entity is insolvent the fiduciary obligations of officers, directors and controlling
shareholders change. While their obligation r emains to the entity, the r esidual beneficiar ies
of an insolvent entity are no longer limited to its equity holders, but also include its creditors.
Thus, how particular actions impact creditors should become a core consideration.3
And further:
Once CEOC became insolvent there thus was the potential for conflict between CEC [Caesars],
the equity owner of CEOC, and CEOC itself. CEC, and its officers and directors, owed their
duties to CECs equity holders, but that was not the case for CEOCs officers and directors.
Actions that might have been beneficial to CEC [Caesars] might have been less clearly, or
potentially not, in the interest of CEOC and its creditors. Those who were officers and
directors of both entities were in an inherently conflicted position. CEC, the Sponsor s and
2

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their advisors, however, at least until late June 2014, never acted as if this were the case.
Decisions on behalf of CEOC were effectively made by CEC and the Sponsors, and in none of
the investigated transactions prior to August 2014 did CEOC have independent directors or
advisors looking out for its interests.4
As one reads through the 1,787 page report, it is clear that Apollo was instrumental in many of those
decisions. As the Examiner reports:
During the relevant period Apollo was the de facto chief financial officer of CEOC. In the
transactions at issue, the Chief Executive Officer of CEC [Caesars] and CEOC and other
senior management also deferred to the Sponsors on key issues, including the selection of
which CEOC properties should be sold to other affiliated companies controlled by CEC and
the Sponsors. Indeed, it appears that the Sponsors past success in successfully negotiating
resolutions involving financially troubled companies was a factor in their assuming they
could do so here without the need to pay adequate attention to the requirements
associated with being fiduciaries of an insolvent entity.5
For example with regard to the so-called Four Properties Transaction:
The Examiner concludes that a court would likely find that Apollo, acting primarily through
[Apollo Senior Managing Director Marc] Rowan and [Apollo Partner David] Sambur,
knowingly participated in the breaches of fiduciary duty discussed above that were committed
by CEOCs directors and CEC [Caesars].6
In fact, as the Examiner reports:
Notably, as with the Growth Transaction, Apollo structured the Four Properties Transaction so
that the transferred assets were removed from CEOC and put into other entities controlled by
Apollo (as well as TPG and CEC [Caesars]), thus allowing Apollo to effectively retain
possession and/or control of these assets.7
He concludes:
Based on the evidence above, the Examiner concludes that there is a reasonable aiding and
abetting claim against [Apollo Senior Managing Director Marc] Rowan and [Apollo Partner
David] Sambur individually, given their active involvement in the Four Properties Transaction
(and, especially in Samburs case, the creation of CES on behalf of Apollo).8
In another transaction, the so called CERP Transaction, the Examiner concludes:
There exist strong claims that the CERP Transaction (i.e., the transfer of the LINQ and
Octavius from CEOC) constituted both a constructive and actual fraudulent transfer, that the
CEOC Board of Directors and CEC [Caesars] (as CEOCs controlling shareholder) are liable
for breach of fiduciary duty, and that the Sponsors and individual members of the CEC Board
of Directors affiliated with Apollo aided and abetted this breach of fiduciary duty.9
3

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He elaborates:
As for the third element of an aiding and abetting claim knowing participation in the
breachthere is little doubt that Apollos conduct qualifies. It was Apollo that conceived of
the CERP Transaction. It was Apollo that chose to use the LINQ and Octavius to fill the
equity gap, rejecting other alternatives that would not have involved CEOC assets. It was
Apollo that unilaterally set the price that CEOC would receive, and worked actively to ensure
that price was as low as possible. And it was Apollo who provided Perella with the faulty
assumptions which led Perella to dramatically overvalue the consideration being received and
sign off on that price.10
The Financial Timess blog, FTAlphaville, describes the Examiners report:
For anyone who has followed the machinations at Caesars, the blow-by-blow accounts
behind all the deals makes for an incredible read the first 100 or so pages of executive
summary has plenty of dirt. And even if you have not, just reading the lengths private
equity firms will go to salvage bad investments is mind-blowing.11
We encourage you to examine the full report which we have posted at www.pecloserlook.org/wpcontent/uploads/Caesars-Examiners-Report-03152016.pdf.

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1

Goldfarb, Jeffrey, Caesars blinds market with science. New York Times, April 24, 2013. http://
dealbook.nytimes.com/2013/04/24/caesars-blinds-market-with-science/.
2

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, p. 1. Emphasis
added
3

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, p. 8.

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, p. 8.

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, pp. 2-3. Emphasis
added.
6

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, p. 662.

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, p. 662.

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, p. 663.

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, p. 486.

10

Davis, Richard J., Final Report of Examiner, March 15, 2016. Case 15-01145, Document 3401, p. 502.

11

http://ftalphaville.ft.com/2016/04/11/2158973/liquidity-v-solvency-caesars-edition/. Emphasis added.