SEC starts probe of Chesapeake CEO Aubrey McClendon well stakes

When I first heard about the SEC probe last night I figured I would get all the details in The Oklahoman this morning but I was wrong.   Since Chesapeake is headquartered in Oklahoma City, it seemed a logical conclusion.  Here is what I got back in search:

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I tried SEC investigates Chesapeake, SEC investigates Aubrey McClendon, SEC investigates local oil and gas company and all searches to no avail.  It is sure to be on there later today.  Could it be because the Arena where the NBA OKC Thunder play is called the 'Chesapeake Arena' since Chesapeake bought naming rights?  McClendon is a partner in the Thunder which is owned by Clay Bennett, husband of one of the Gaylord sisters who recently sold The Oklahoman.  Draw your own conclusions.

One of the investors in Chesapeake Energy has a scathing commentary on the practices of Aubrey McClendon and the Board of Directors who serve as a rubber stamp.  Devon Shire, who is a hedge fund manager had this to say:

I thought this topic was a perfect for the daily headlines we are now seeing for a company that I own, that company being Chesapeake Energy (CHK). 

Of course you likely already know the details of the Reuters special report on Chesapeake CEO Aubrey McClendon's Founders Well Participation program and how McClendon has financed this participation with a massive amount of debt borrowed from a company that Chesapeake also deals with. 

Over the past several years I have written several times about the mental tug of war I've had over whether or not to invest in Chesapeake. My interest in investing in Chesapeake related to the massive portfolio of unconventional resource acreage the company had compiled. My hesitation related solely to whether I wanted to entrust my investment dollars to the stewardship of CEO McClendon and Chesapeake's Board of Directors. 

(snip)   

It isn't a surprise because of the history of this company and its CEO. The map collection purchase, the margin calls and the ridiculous 2008 bonus. This billion dollars in debt that may or may not be a conflict of interest is just more of the same. 

And more of the same is a Board of Directors and CEO who either do not understand what it means to be stewards of shareholder interests or simply do not care. 

(snip) 

It doesn't take someone with the business ethics of Warren Buffett to figure out that Chesapeake has been spending a lot of time close to (maybe over, maybe not) that line that separates right and wrong. 

As a small shareholder of Chesapeake I'd like to send a message to the Board of Directors.
I admire the company that McClendon has built. I think the collection of assets that he has assembled is incredible and are worth multiples of the current share price. But you (Board of Directors and CEO) have lost my (as a shareholder) trust and I'm not sure I want you running this company for me anymore. No matter how great a job a CEO has done, a publicly traded company is owned by its shareholders. It is not wealth creation vehicle for its CEO even if that CEO founded the company. 

It seems pretty clear to me that in the minds of this Board of Directors the interests of the CEO are put well in front of the interests of the people who actually own the company. And those people are the shareholders like me. 

On behalf of myself and the shares I represent, I would like to request that we have a change in both the Board of Directors and CEO so that we can be certain shareholder interests become priority number one. 

Because that is what the job of the Board of Directors was supposed to be. 

Disclosure: I am long CHK.

Will Aubrey McClendon and his Board of Directors survive this probe?  Probably but bet the Board puts a lot of new rules in place.  This is not coming at a good time as people are looking at profits of oil and gas and wondering why all the tax breaks when an owner like McClendon just gets richer.

SEC starts probe of Chesapeake CEO's well stakes
Ernest Scheyder and Brian Grow Reuters7:15 p.m. CDT, April 26, 2012

NEW YORK (Reuters) - The Securities and Exchange Commission has opened an informal inquiry into Chesapeake Energy Corp's controversial program that granted Chief Executive Aubrey McClendon a share in each of the natural gas producer's wells, a source familiar with the matter said on Thursday. 

That inquiry, being led by the SEC's office in Fort Worth, Texas, comes after Reuters reported about loans McClendon had obtained on those wells that raised concerns about a potential conflict of interest by the company's CEO. 

Chesapeake said it would end the program that gives McClendon a 2.5 percent stake in every one of the company's thousands of wells in 2015, when the shareholder approval of the program that started  in 2005 expires. 

The company said in a statement earlier on Thursday that its directors had never reviewed or approved McClendon's mortgages on stakes in those wells, reversing its prior assertions that its board of directors was "fully aware" of McClendon's financing transactions around the well ownership stakes. 

"The board of directors did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions," the company said.
Ratings agency Standard & Poor's said on Thursday the turmoil surrounding the well ownership program and McClendon's personal transactions could hamper the company's ability to meet "massive external funding requirements stemming from its currently weak operating cash flow." 

S&P lowered its credit rating for Chesapeake - which has been junk grade for some time - one notch to "BB" from "BB-plus" and said another cut could occur within a few months.
Chesapeake shares ended Thursday down 3.1 percent at $17.56 on the New York Stock Exchange, bringing the decline so far this year to about 20 percent. 

The company's recently issued 6.775 percent note due March 15, 2019, the most active issue on Thursday, was down 0.5 to 0.75 point following the S&P downgrade, according to traders. 

Reuters reported on April 18 that McClendon, who founded the company, had borrowed as much as $1.1 billion in the last three years against his ownership stakes in wells that he received under the company's "Founder Well Participation Program." 

The majority of the borrowing came from an investment management firm that is also a major financier of Chesapeake itself. 

On Thursday, McClendon disclosed that as of the end of 2011, he owed $846 million on loans taken out against his well stakes. But the company did not disclose the total amount McClendon has borrowed, or whether his outstanding debt has risen since the end of last year.
The loans had been previously undisclosed to shareholders, analysts and academics said, raising concerns that McClendon's personal financial deals could compromise his fiduciary duty to Chesapeake. 

An informal inquiry is the first step taken by the SEC before it launches any full investigation into potential wrongdoing by a company.   

(snip) 

McClendon founded Chesapeake in 1989 and quickly built the company into one of the nation's fastest-growing producers of natural gas. It is now the second-largest U.S. natural gas producer behind Exxon Mobil Corp.  

Excerpt:  Read More at the Chicago Tribune