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Chesapeake and shareholders have butted heads before

Chesapeake and McClendon: Recent revelations about Aubrey McClendon’s finances aren’t the first time shareholders have complained about Chesapeake Energy’s corporate governance practices.

by Don Mecoy Modified: May 6, 2012 at 9:17 am •  Published: May 6, 2012

Chesapeake Energy Corp. has dealt with disgruntled shareholders before.

The Oklahoma City company, founded in 1989 by Aubrey McClendon and Tom Ward with a $50,000 investment, has grown into the nation’s second-largest producer of natural gas — trailing only corporate behemoth ExxonMobil Corp.

Chesapeake’s remarkable expansion during the past two decades has been anything but a smooth rise. In public appearances, McClendon sometimes thanks longtime shareholders for staying with the company through difficult times.

“He doesn’t hide the fact that he is a big risk-taker,” said Jake Dollarhide, a Tulsa money manager who bought Chesapeake shares during one of those past tough times. Dollarhide, CEO of Longbow Asset Management, said many shareholders support McClendon’s autonomy and penchant for risk.

“There’s a core group of longtime shareholders who are saying if this is news to you, then you really haven’t been paying attention,” he said. “That’s the wildcatter’s spirit.”

Potential conflicts

Revelations by Reuters about McClendon operating a hedge fund and taking out huge loans using his stake in company wells as collateral again have roused some shareholders, with at least 11 lawsuits filed in the wake of those disclosures. The company’s largest investor last week notified regulators that it will be taking a more active role in the company’s matters.

Tulsa money manager Fred Russell said shareholders deserve more accountability from Chesapeake’s directors.

“When you have a situation like Chesapeake, you have the most cynical exploitation of public shareholders in today’s publicly traded markets,” said Russell, whose Fredric E. Russell Investment Management Co. holds no Chesapeake stock.

Chesapeake has reacted to the latest controversies, stripping McClendon of his role as chairman of the company, a post he has held since co-founding the firm more than two decades ago. The board of directors also will halt an executive perk that allows McClendon to personally invest in every well the company drills.

The SEC has launched an informal inquiry, and the IRS is examining the well participation program.

Bruce Day, director of securities litigation for Crowe & Dunlevy and a former administrator of the Oklahoma Securities Department, said the SEC inquiry is a “long way” from a full-blown investigation.

Day, who once served in SEC’s enforcement division, said the agency likely is reacting to the recent Reuters reports.

“There’s a long process ahead. That’s the takeaway,” Day said.

Shareholder anger

In 1997, just four years after Chesapeake became publicly traded, more than a dozen shareholder lawsuits were filed against the company when the stock nose-dived on reports of disappointing drilling results in Louisiana.

The suing shareholders claimed Chesapeake stock prices remained artificially high because company officials improperly withheld information about the drilling results. (The lawsuits were consolidated and, in 2000, dismissed.) McClendon promised to reverse the company’s fortunes.

“We do not anticipate, nor will we tolerate, continued erosion in the value of this company,” he said in August 1997. “We will sell the company before we will allow that to occur.”

Oil and gas prices dropped in 1998, forcing Chesapeake to take write-downs in the value of its properties, contributing to a net loss for the year of $934 million. At mid-1998, Chesapeake’s board authorized management to explore alternatives for the company, including the potential for a sale or merger.

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by Don Mecoy
Business Editor
Business Editor Don Mecoy has covered business news for more than a decade after earlier working on The Oklahoman's city, state and metro news desks, including a stint as city editor. He has won state and regional journalism awards for business,...
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