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Chesapeake shareholders sue McClendon, board over loan report

At least two Chesapeake Energy Corp. shareholders have asked a federal judge to shut down a program that lets CEO Aubrey McClendon buy a stake in all of the company's wells after a wire service reported McClendon had secured up to $1.1 billion in personal loans to fund the purchases since 2008. .
BY JAY F. MARKS Business Writer Modified: April 21, 2012 at 1:41 am •  Published: April 21, 2012

/> Shareholders M. Lee Arnold and James Clem are not sure the settlement is fair, according to their appeal.

Their civil cases in federal court in Oklahoma City have been stayed, pending a resolution of their appeal.

The shareholders who have sued McClendon and Chesapeake’s other board members are not the only ones dissatisfied with their leadership.

Argus Research analyst Phil Weiss on Friday suggested replacing them all, questioning the “financial engineering” the company has used to obscure its true financial position.

“When we consider the full financial picture at Chesapeake, including its high debt levels (both on- and off-balance-sheet), its use of financial engineering, the relatively low quality of its financial data, the questionable nature of some of the CEO’s transactions with the company, and the apparent unwillingness of the board to put a stop to at least some of these practices, we believe the best thing for investors would be to replace the board and/or the CEO,” Weiss wrote in a note to his clients. “We have long maintained our view that the company has a strong asset base (though it could be less attractive than we have believed if natural gas prices don’t rise to more profitable levels).

“However, we think that investors are likely to keep the company in the penalty box without a real change in its financial practices. Such change needs to start at the top.”

Standard & Poor’s on Friday questioned McClendon’s personal deal with EIG Global Energy, The Wall Street Journal reported, saying the loan “heightens the potential for problematic conflicts of interests, or the perception thereof.”

Program details

Chesapeake broadened its disclosures about the well program Friday in its preliminary proxy statement.

The company notes the program does not prohibit McClendon from sales or financing transactions involving his stake in Chesapeake wells.

“From time to time, Mr. McClendon has sold FWPP interests separately and concurrent with sales by the company of its interests in the same properties,” according to the regulatory filing.

The proxy statement has blank spots to show McClendon’s investment and earnings from the program.

“Over the life of the FWPP, Mr. McClendon has typically mortgaged his interests acquired under the FWPP with one or more lenders, some of which also have lending, investment or advisory relationships with the company. Mr. McClendon’s mortgages with these lenders secure loans used in whole or in part to fund Mr. McClendon’s well costs,” according to the statement. “The company does not extend loans to Mr. McClendon for participation in the FWPP or any other purposes. The company does not review or approve financings of Mr. McClendon’s personal assets, including his FWPP interests.

“In addition, the company has no obligation to repay any loans Mr. McClendon may obtain nor are any of the company’s interests in any assets exposed to such loans or the mortgages securing them.”

April 20: Power Play blog - Read the lawsuit


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