Market Overview

Chesapeake CEO Irks Shareholders by Borrowing a Billion Dollars for Gas Wells


With the great power associated with the position of CEO comes great responsibility. Now, call us old fashioned, but part of that responsibility means not spending $1 billion on natural gas oil wells without mentioning it first to your shareholders. You know - the people who have money invested in the company.

Somebody should mention that to Chesapeake CEO Aubrey McClendon, who did exactly that. Now, nobody is suggesting that McClendon, or any other CEO for that matter, should ask permission before making every single move, but this was hardly a minor maneuver. This was a billion bucks. No matter who you are, that is a hell of a lot of money.

If any further proof is necessary that this move was inappropriate, a suit has been filed against McClendon by a shareholder. In fact, the lawsuit isn't just against McClendon, it's also against the board of directors and the company itself.

It took the Deborah G. Mallow IRA SEP Investment Plan just one day after reading about the $1.1 billion loan in Reuters to file the lawsuit. McClendon borrowed the money to buy a stake in the company's natural gas wells under its Founders Well Participation Program (FWPP), though CHK got rid of that perk on Thursday when the controversy started to erupt. Deborah G. Mallow is alleging that the loans were not made public until it was too late.

It doesn't look good for Chesapeake, with the company seeing shares drop a full 45% in the past 12 months, as natural gas prices have tumbled.

The lawsuit states that, "The company's proxy statements, its annual reports on Form 10-K and other SEC filings are required to detail all related party transactions, including all material details that may affect the FWPP, and all actual and potential conflicts of interest that may arise from McClendon's participation in the FWPP."

The suit adds that these loans "can easily cloud the CEO's judgment on key issues."

The question that comes out of all this is, how bright is Aubrey McClendon? Any arguments in his favor can quickly be countered by examples like the incident in 2008 when he was pressured to sell 33 million of his own CHK shares to cover margin calls. That saw shares plummet from $67 per share in July of that year to $16 per share in October. McClendon lost $2 billion of his own money as a result of that ridiculous move.

No matter - CHK gave him a $75 million bonus. For what, you ask? Nobody knows, but the shareholders are increasingly annoyed by the unconventional relationship between McClendon and the board.

Follow me @BCallwood.

Posted-In: News Legal Management


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