Aubrey McClendon – the Chairman and CEO of Chesapeake Energy – ran a $200 million hedge fund on the side trading in the same commodities that Chesapeake Energy produced. Chesapeake Energy is the 2nd largest producer of natural gas in the U.S. accounting for 5% of all production. Running the hedge fund on the side would give him the ability to make purchases of commodities BEFORE Chesapeake thus creating a conflict of interest with shareholders; this could also constitute insider trading. After the revelations – Mr. McClendon has said that he will step down as Chairman at Chesapeake Energy as well as removing the conflict of interest; I say he should be in jail.
Reuters has the story:
Behind the scenes, a Reuters investigation has found, McClendon also ran a lucrative business on the side: a $200 million hedge fund that traded in the same commodities Chesapeake produces.
On Tuesday, two weeks after Reuters reported that McClendon has taken up to $1.1 billion in loans against his stakes in Chesapeake oil and gas wells, the company stripped McClendon of the chairmanship and reiterated that it’s reviewing details of the loans.
Another potential problem is known as “front-running.” That’s when a trader buys or sells a commodity in advance of a client’s or his company’s orders. In theory, McClendon’s first-hand knowledge of Chesapeake’s own plans to trade would enable him to profit by trading ahead of Chesapeake – a move that could raise costs for the company.
“Advance knowledge of Chesapeake’s activities could be perceived as having insight into the movement of commodities prices, which certainly raises conflict-of-interest issues as well as ethical issues about the ability to enrich himself on non-public information,” said Tim Rezvan, oil and gas industry analyst at Sterne Agee in New York.
“If correct,” Rezvan said, “these disclosures would be even more alarming than the personal loans.”
The L.A. Times says the SEC is now investing this – story HERE:
Chesapeake said the SEC notice, received Wednesday, states that an inquiry “should not be construed as an indication that any violation of the federal securities laws has occurred.” The company said it and McClendon “intend to cooperate with the SEC.”
McClendon’s well investment program, which dates to 1993 when Chesapeake went public, gained prominence last month amid new reports that McClendon took out more than $1 billion in loans to cover his well investments. Some of those loans came from a group that was planning to buy Chesapeake assets.
Chesapeake has opened its own review of the program, and the Internal Revenue Service is also looking into it. The company’s board said last week that it will end the well-investment program in June 2014. And this week, the company said it will remove McClendon as chairman of the board and seek a nonexecutive candidate to lead the board. McClendon will remain CEO.
60 Minutes actually interviewed Aubrey McClendon regarding Chesapeake Energy and the use of the controversial method of “fracking” which is providing a boon to energy resources in the U.S. but also is creating environmental hazards.
