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Here’s Why Caesars Shares Are Plunging Today

Ceasar's Palace in Las VegasCeasar's Palace in Las Vegas

Shares of Caesars Entertainment tumbled on Wednesday after a court-ordered investigation found the casino company could face billions of dollars in potential damages related to the bankruptcy of its operating unit.

Shares of Caesars (CZR) fell as much as 18% in early trading on Nasdaq and were down 8% at $6.64.

An examiner’s report on Tuesday found Caesars and its private equity backers could face up to $5.1 billion in legal claims for their efforts to keep the struggling casino empire afloat, which ended with last year’s bankruptcy of Caesars’ operating unit.

Examiner Richard Davis and an army of lawyers investigated claims by creditors that the operating unit was plundered for the benefit of the parent company and Apollo Global Management and TPG Capital, which control Caesars.

Shares of Apollo (APO) were up slightly at $16.86 on the New York Stock Exchange.

“The report’s scope was much broader than expected and it was much more creditor-friendly than expected,” said Alex Bumazhny, who follows Caesars for Fitch Ratings, a credit rating agency.

The report is non-binding.

Both TPG and Apollo said in statements they disagreed with the findings and that they acted in good faith to help Caesars cut its debt. Both said the deals involving the operating unit were reviewed by independent experts and outside law firms.

(Read Fortune feature on Caesar’s Bankruptcy: A Private Equity Deal Goes Bust)

Davis found that the operating unit was insolvent as far back as 2008, soon after the close of the $31 billion leveraged buyout of the Harrah’s Entertainment casino company by TPG and Apollo.

As a result of its insolvency, the operating unit owed additional fiduciary duties to its creditors, not just its parent company owner, according to Davis. The examiner found the operating unit breached its duties to creditors in numerous deals such as the transfer of the Linq Hotel & Casino to another Caesars affiliate, putting it beyond the reach of operating unit creditors.

A hearing in the U.S. Bankruptcy Court in Chicago, which is overseeing the operating unit’s Chapter 11, is scheduled for later on Wednesday.

Caesars has proposed injecting $1.5 billion into its operating unit in return for settling the asset-stripping claims. Junior creditors have said they wanted to see the examiner’s report before supporting the parent company’s proposal.

The parties are currently participating in mediation aimed at finding a way out of the complex bankruptcy.