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Thursday, April 26, 2012

As SEC investigation begins, Chesapeake ends executive's controversial loan program

From Pittsburgh Post Gazette  April 26, 2012 By Erich Schwartzel / Pittsburgh Post-Gazette


Chesapeake Energy said today it was ending a controversial investment program that allowed its top executive to borrow and mortgage against personal stakes in his company's wells.
The announcement was made just hours before word came that the Securities and Exchange Commission was investigating the program.
The program, called the Founders Well Participation Program, had afforded Chesapeake chief executive officer Aubrey McClendon a 2.5 percent stake in each well his company drills. The program has allowed Mr. McClendon's compensation to skyrocket to the highest of nearly any CEO across any industry, but came under scrutiny in recent weeks when it was reporting he was taking loans and mortgages out against those personal stakes.
The existence of the loans -- first reported by the Pittsburgh Post-Gazette -- drew the ire of shareholders who said the borrowings weren't explicitly disclosed.
Analysts in recent weeks have called for Mr. McClendon's resignation, at least five shareholder lawsuits have been filed and company stock has fallen and taken more than $1 billion in market value with it.
Oklahoma City-based Chesapeake Energy is the second-largest producer of natural gas and has moved quickly to establish dominance in the Marcellus Shale region. The mortgages under scrutiny have been taken out against property in West Virginia and Pennsylvania.
Mr. McClendon's total borrowings is believed to have exceeded $1 billion.
The company claims the mortgages are an everyday practice. Although the mortgages are not disclosed to the landowners whose property it concerns, notification of them is filed in local courthouses.
The Chesapeake board first said directors were "fully aware" of Mr. McClendon's dealings, but today said it had never approved the mortgages.
Reuters reported today that the SEC had opened an informal inquiry into the Founders Well program from the federal agency's Fort Worth offices.
The inquiry is the first step toward launching a full investigation.
Erich Schwartzel: eschwartzel@post-gazette.com or 412-263-1455.

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