Yesterday evening, Reuters reported that the SEC had initiated an “informal inquiry”:
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.
This “program,” known as the Founder Well Participation Program, has been in place since 2005, however, the information just recently surfaced that CEO Aubrey McClendon had been borrowing money using the stakes in wells gained from the program as collateral. The Pittsburgh Post- Gazette notes that mere hours separated the announcement from Chesapeake Energy that it was terminating the Founder Well Participation Program in 2015 and the announcement of the SEC investigation:
Chesapeake Energy said Thursday it was ending a criticized investment program that allowed its top executive to mortgage personal stakes in company wells, ending the controversial arrangement just hours before the Securities and Exchange Commission took preliminary steps to open an investigation into the practice.
The Founders Well Participation Program affords Chesapeake CEO and founder Aubrey McClendon a 2.5 percent stake in each well that his company drills. The program, approved by shareholders in 2005, came under scrutiny in recent weeks when it was reported Mr. McClendon had taken out more than $1 billion in loans and mortgages against those personal stakes to cover his share of drilling costs.
CNN.com, in their Money section, noted back on 4/18 that Chesapeake stocks had downward pressure, experiencing over 20% drop in value on the news of McClendon’s previously undisclosed loans:
The fact that the loans were not disclosed to shareholders raised concerns that McClendon may be compromising his fiduciary duty, or legal and ethical obligations as CEO, according to Reuters, which said it had more than a dozen academics, analysts and attorneys review the loan documents.
Shareholders are not simply rolling over on this. The Oklahoman (NewsOK) reports that “at least” two lawsuits have been filed in Oklahoma, in addition to a class action suit filed in New York:
The lawsuit, filed on behalf of two shareholders in Queens, New York, alleges Chesapeake and CEO Aubrey McClendonfailed to disclose material facts about the well program and loans taken out against McClendon’s interests in the wells. The lawsuit said shareholders lost money once news of the loans was made public and the stock declined in value.
All while the glut of natural gas threatens to overwhelm US capacity to store the stuff, driving the price yet lower. Comparisons to speculative investment in the housing market before and during the crash are obvious. Some wealth will be lost, certainly.