How Much Did Chesapeake Board Know About McClendon’s Activities?

Chesapeake (NYSE:CHK) gave CEO Aubrey McClendon explicit license to play the markets in its latest employment contract, according to a Reuters exclusive, in one of corporate America’s most generous compensation plans. McClendon was granted the permission after he had already begun trading commodities for himself.

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Normally, oil and gas producers prohibit such trading by executives because of potential conflicts of interest, but Reuters found that McClendon was granted greater leeway to participate in external ventures than were his top lieutenants.

Reuters is calling it an “extraordinary incentive” that “reinforced the unique treatment afforded to McClendon by Chesapeake,” and begs the question, what did Chesapeake’s board know of McClendon’s personal investments? Could the board have known whether his dealings might be at odds with his fiduciary responsibilities as head of the nation’s second-largest natural gas producer?

At the very least, some lawyers and commodity-trading analysts contend that McClendon could be distracted from his job at Chesapeake by his own outside business activities. He could have also used privileged Chesapeake information to advance his own trading.

The board stripped McClendon of his chairmanship last week after Reuters reported that he had taken $1.1 billion in personal loans against his stakes in Chesapeake wells over the last three years, but McClendon remains on as chief executive. The loans hadn’t been disclosed to shareholders. The Securities and Exchange Commission and the Internal Revenue Service have launched inquiries.

Reuters later reported that McClendon partially owned and helped run a $200 million private hedge fund from within Chesapeake’s Oklahoma headquarters between 2004 and 2008. The fund traded McClendon’s own cash in markets including natural gas and oil, both of which Chesapeake produces. On Friday, Senator Bill Nelson (D-Fla.) asked U.S. Attorney General Eric Holder to investigate McClendon’s private commodity trading for potential fraud, insider trading, or commodity price manipulation.

McClendon’s 2009 contract, which expires in 2014, is his first to include a specific mention of hedge funds or commodity market investments, part of a section governing the types of investments he could pursue. The fact that Chesapeake made the changes to his contract could indicate they were aware of his personal hedge fund and worried about how it would be viewed by shareholders.

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