Reuters has a fantastic piece of enterprise reporting on natural gas giant Chesapeake Energy, reporting on serious conflicts of interest in investments by its founder and CEO Aubrey McClendon.
Yesterday, the report helped send Chesapeake shares down 10 percent at one point.
The Pittsburgh Post-Gazette broke the news last month that McClendon was borrowing against his share of Chesapeake mineral-rights leases.
Reuters advances the story considerably, reporting that those loans total more than a billion dollars—as much as or more than McClendon is worth—and that they come from a private-equity fund that does business with Chesapeake.
The Reuters piece sent Chesapeake shares plunging yesterday. At one point the stock was off 10 percent before settling down 6 percent. When a news story sends a $15 billion company’s stock down that much on a day when its peers aren’t moving much, it’s a very big story.
The snippy reaction of Chesapeake’s lawyers and flacks is another tell that Reuters is on to something. Chesapeake posted the questions Reuters sent over, as well as its answers. Here’s a compilation of the first sentence of Chesapeake’s responses:
The question is improper on a number of levels…
This quote is duplicative of question number 1 and suffers from the same defects…
This quote is duplicative of questions 1 and 2 and suffers from the same defects, if not more so…
Not only does this question make vague and ambiguous allegations that Mr. McClendon might do something wrong without specifying what that might be, it ends up contradicting the central thesis of every one of your questions by asserting either that Mr. McClendon does not have any debt or that his lenders don’t charge interest…
This question is duplicative and has previously been answered…
Etc. It’s worth posting the full text of the first Reuters question and Chesapeake answer just to show how arrogant Chesapeake is:
(Reuters) Q: More than a dozen academics, attorneys, Wall Street analysts and corporate governance experts who have reviewed the loan agreements say that the mere existence of as much as $1.1 billion in loans taken out by Mr McClendon against his share of the company’s wells raises the potential for conflict of interest in multiple ways. As a result, they say the loans should be disclosed in more detail than is currently provided by the references to “financing transactions” in the annual proxy. What is Chesapeake’s response to this view?
(Cheseapeake answer): The question is improper on a number of levels. First, it does not specify the supposed conflict of interests nor does it include any analysis that reflects the information reviewed by the speaker, the information the speaker considered important, the speaker’s experience in the oil and gas industry or what assumptions were made by the speaker. Thus, one cannot tell if the conclusion was based on a short email with a leading narrative (as we have seen from your emails that have been provided to us), incomplete information or a thorough review of the pertinent information. Second, the concept of an “expert” is that the individual’s reputation and training supports a conclusion that the person’s opinion on a given topic is worthy of respect. That is inconsistent with hiding one’s identity, analysis or bias. Third, disclosure is an intricate regulatory scheme of multiple laws and rules that can be made unworkable by adding multiple disclosures of transaction details just because a small group of shareholders might think it is helpful. This is exacerbated where there are multiple small groups, each with their own special data request to fit their own special agendas.
Notwithstanding the foregoing, we believe that there are no conflicts of interest arising from the “mere existence of the loans.” Loans secured by oil and properties are standard in the industry, and even Chesapeake has substantial loans and obligations that are secured or supported by oil and properties. As a result we do not believe the “mere existence of the loans” changes Mr. McClendon’s alignment with the Company.
Look, if you can’t grasp the conflicts of interest inherent in the CEO of a company being personally in hock to a major investor in the company for a billion dollars, leveraging company assets the company has given him, you’re not even trying. This in a notoriously boom and bust industry and with an executive who crashed the company stock in 2008 when he got caught overlevered and had to sell almost all of his considerable pile of Chesapeake stock. The Chesapeake board rewarded him a couple of months later with a $75 million bonus and a sweetheart deal to buy his antique maps for $12 million, so you can imagine what kind of oversight it offers.
Here’s how Reuters, without directly saying so, gets to the worst-case implications these kind of ill-disclosed transactions brings to mind:
In the past, major Wall Street banks formed separate companies – or special purpose vehicles, just as McClendon has – to allow select employees to borrow from the employer and make investments. The WorldCom accounting scandal was, in part, fueled by more than $1 billion in loans taken out by former chief executive Bernard Ebbers that were secured by his shares of company stock. And energy giant Enron used off-balance-sheet entities to hide debt from investors.
If I’ve got a quibble with the piece, it’s with how it’s set up. When you’ve got a really good investigation, you should give be able to come up with a better lede than this:
Aubrey K. McClendon is one of the most successful energy entrepreneurs of recent decades. But he hasn’t always proved popular with shareholders of the company he co-founded, Chesapeake Energy Corp., the second-largest natural gas producer in the United States.
Contrast that with the lede of the Journal‘s follow today, which gets right to the crux of the matter:
Firms controlled by Aubrey McClendon, the high-profile founder and chief executive of Chesapeake Energy Corp., CHK -0.33% were in debt to a private equity group for as much as $1.4 billion while Chesapeake was negotiating with the same firm to sell it hundreds of millions of dollars of assets.
And Reuters doesn’t get to McClendon’s undisclosed dealings with the private-equity investor until the eleventh paragraph of its piece.
Fortunately, it didn’t dampen the impact of this story, which overall is just excellent.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.