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Archive for the ‘Chesapeake’ Category

Corporate ethics news the past few weeks has been just like a soap opera.  Here we go.

Walmart:  Two congressmen announced that they will launch an investigation into the bribery allegations reported by The New York Times. The Washington Post reported that the federal Department of Justice has been investigating this case since last December. And a major pension fund has filed a suit against the company, claiming “gross misconduct” by the board of directors and executive officers.

BP’s Deepwater Horizon Gulf of Mexico Oil Spill: A former BP engineer was arrested for obstruction of justice. I believe this is the first BP (ex) employee placed under arrest in connection with the oil spill.

News Corp. Phone Hacking Scandal: Testifying under oath, Rupert Murdoch dismissed phone hacking as a “lazy way of reporters not doing their job properly.” He apparently didn’t comment on whether or not it was illegal too.

Chesapeake Energy: One hardly knows where to start on this matter as it is far more complicated than a simple case of allegedly violating the Foreign Corrupt Practices Act. Chesapeake Energy’s co-founder and CEO, Aubrey McClendon, was found to have taken out loans against his personal interest in the company’s various oil and gas wells, as reported by Reuters. We are not talking about borrowing money to buy a house – this was about $ 1.1 Billion with a B over 3 years. This in itself raises various questions, not the least of which is how much does one have to spend per day to need $1.1 Billion in only three years. But the more important questions are how did the board allow this to go on? Where was the oversight? Chesapeake was no longer a privately held Oklahoma based oil-catter where co-founder loans against interest in well sites are just part of the glamour. It became a Publicly Held company, with stock traded on a major exchange.

But the story gets more juicy by the day. First the company argued that there was no conflict of interest as the company had first lien on the wells and McClendon’s loans were his own problem. Sure. So I am the CEO making decisions every day as to which wells to invest more money in and which to shut down and the fact that I have over a BILLION dollars of personal debt collateralized against my ownership interest in those same properties is not a conflict of interest? Holy Muckraker!

Then it also turned out that

  • McClendon ran a separate business of his own, a $200 million hedge fund that, guess what, traded in the very same commodities that are produced by Chesapeake.
  • McClendon sold $88 million of his interests in company wells to Wachovia for use as investment vehicles only a few weeks after committing (with his CEO hat on) to a similar deal with Wachovia for $600 million of company well interests.

Of course none of these activities were conflicts of interest either.  Now the company has taken some action with respect to its co-founder and CEO. They have removed him from the Chairman of the Board position and they have eliminated the program under which the two co-founders could participate in direct investment in company wells.  In the meantime, the company has announced that the SEC has begun an “informal inquiry” with respect to both McClendon and the company.

Commentary: If I had ever done anything like this at any company I have worked for I would have been out the door that very day. Where is the board? If I had ever spent as much time running an outside business from my employer’s office as McClendon allegedly did with his hedge fund, I would have been dismissed immediately. He even had the hedge fund’s mail coming to his Chesapeake office. Where is the board?  I’ll tell you where they are going to be – spending lots of hours in their attorneys’ offices.   As a dear departed friend of mine used to say, “It’s better than TV.”

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