For at least four years, Chesapeake Energy’s CEO had a side business.
From 2004-2008, Aubrey McClendon ran a $200 million private hedge fund the founded with Chesapeake co-founder Tom Ward, now CEO of SandRidge Energy, Reuters reports.
Here’s the rub: the hedge fund traded commodities Chesapeake produces.
“If correct, these disclosures would be even more alarming than the personal loans,” Tim Rezvan, oil and gas industry analyst at Sterne Agee in New York, tells Reuters.
McClendon wouldn’t comment to Reuters, and Ward said there was nothing wrong with the arrangement. And there’s no evidence that either used inside knowledge from Chesapeake in their hedge fund trading.
“We did not use any proprietary knowledge of (Chesapeake) trades to make our own individual decisions,” Ward said.
But the fund, Heritage Management Company LLC, wasn’t exactly independent of Chesapeake, Reuters reports:
During that time, said a veteran trader who helped run McClendon’s private hedge fund, the Chesapeake executive engaged in “near daily” communications and “exhaustive” calls to help direct the fund’s trading.
The hedge fund listed Chesapeake’s headquarters in Oklahoma City as its mailing address, documents show. Heritage’s staff included an accountant who was simultaneously employed by Chesapeake. The fund also earned McClendon and Ward management fees and a cut of profits from outside investors.
In equity markets, executives can’t trade their corporate stock based on undisclosed financial information. But you have to prove price manipulation for insider trading to be illegal in commodities markets.
Still, most oil and gas companies forbid personal dealing in energy markets, Reuters reports:
In Chesapeake’s case, McClendon would have been aware of major decisions that could affect natural gas prices before that information became public. Accounting for 5 percent of U.S. natural gas production, Chesapeake holds tremendous sway over markets.
Front-running is another issue:
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.
A securities law expert told Reuters a Securities Exchange Commission investigation is likely, but an SEC spokesman wouldn’t comment.
On Tuesday, the company said it would replace McClendon as chairman of the board. Chesapeake also said it was ending a controversial perk that allowed McClendon a personal stake in every well the company drilled. Shares of the company had been battered on news that McClendon had used his well stakes as collateral for $1.1 billion in personal loans.
“There’s been enormous and unprecedented scrutiny of our company, and of me personally. And a great deal of misinformation has been published, and uncertainty created,” he said on this morning’s conference call about first-quarter earnings.