Chesapeake Energy Corporation (NYSE:CHK) Investor Files Class Action Lawsuit Against Chesapeake Energy Over Alleged Securities Laws Violations In Connection With Loans To CEO
April 30, 2012 (Shareholders Foundation) -- An investor in NYSE:CHK shares filed a lawsuit in the U.S. District Court, Western District of Oklahoma, against Chesapeake Energy over alleged Securities Laws Violations in connection with certain loans to the CEO.
The lawsuit against Chesapeake Energy over alleged Securities Laws Violations follows a lawsuit filed by another investor against CEO and several other directors of Chesapeake Energy Corporation over alleged breaches of fiduciary duties. According to the complaint filed against Chesapeake Energy the plaintiff alleges on behalf of all persons who purchased Chesapeake Energy Corporation (NYSE:CHK) common stock between April 30, 2009 and April 17, 2012, that Chesapeake Energy Corporation violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
While Chesapeake Energy’s CEO Aubrey K. McClendon currently owns roughly 1.35 million shares of Chesapeake Energy Corporation (NYSE:CHK stock (presently worth approximately $24 million), this interest is dwarfed by McClendon's share of Chesapeake's oil and gas wells pursuant to Chesapeake Energy's Founders Well Participation Program (“FWPP”). Under that program, the CEO has the right to purchase 2 1/2% interest in each well drilled by Chesapeake Energy Corporation, must pay a proportionate share of related costs, and is entitled to a proportionate share of revenues generated therefrom.
The plaintiff alleges that the CEO has participated aggressively in this program, and amassed interests currently valued over $300 million. However, because of large up front development and operating costs, CEO's FWPP interests are significantly underwater and have yet to generate any positive cash flow.
The plaintiff claims that unbeknownst to investors, starting in 2009, McClendon leveraged all of his FWPP interests in order to pay up front development costs. The plaintiff says that he not only secured loans on his ownership interests in the wells, but also sold off revenue "participation rights" in the wells. Furthermore, so the plaintiff, the CEO also secured a personal loan in excess of $500 million from EIG Global Energy Partners, a hedge fund that engaged in financing transactions with Chesapeake.
As a result, by year end 2011, McClendon had amassed personal debt on Chesapeake Energy Corp. related wells, and from Chesapeake Energy Corp business partners, exceeding $1 billion. The plaintiff says that the size of the debt, and McClendon's leveraging of all his FWPP related interests, represented material undisclosed risks to Chesapeake Energy investors.
Then on April 18, 2012, media report was published concerning potential conflicts of interest created by personal loans to Chesapeake Energy’s chief executive officer, Aubrey McClendon. According to the article, during the past three years McClendon borrowed approximately $1.1 billion by pledging his personal stake in Chesapeake Energy's oil and natural gas wells as collateral for the loans, which were made through three companies controlled by McClendon that list Chesapeake Energy’s headquarters as their address. The article said that “The money is being used to help finance what could be a lucrative perk of [McClendon’s] job -- the opportunity to buy into the very same well stakes that he is using as collateral for the borrowings,” and raised concerns about “whether McClendon's personal financial deals could compromise his fiduciary duty to Chesapeake investors.”
Shares of Chesapeake Energy Corporation (NYSE:CHK) fell on April 18, 2012 to as low as $17.19 per share.
Then on April 26, 2012, Chesapeake Energy Corp abruptly terminated the FWPP program, while Board members disclaimed any knowledge of the size of the loans to the CEO.
Shares of Chesapeake Energy Corporation (NYSE:CHK) fell from over $25 per share in the end of March to slightly above $17 per share on April 18, 2012 and closed on Friday April 27, 2012 at $17.72 per share