(CN) - SandRidge Energy's board of directors let the CEO use company money to buy his family mineral rights on land right next to company leases, "front-running" the company's own rights, "behavior [that] is highly unethical and outrageous," shareholders say in a derivative complaint.
The complaint states: "The company has allowed the Chairman of its Board of Directors and its Chief Executive Officer, defendant Tom L. Ward ('Ward'), among other things, to usurp the company's corporate opportunities by front-running the company and acquiring mineral rights through multiple leaseholds immediately next to the company's leaseholds, thereby allowing Ward to enrich himself at the expense of the company and its shareholders. Worse yet, Ward acquired those mineral rights through the use of the company's assets, including its proprietary information and business strategy.
"Frankly, this behavior is highly unethical and outrageous. It is astonishing that the chairman and CEO of a company would engage in behavior that directly competes with his shareholders' interests for his own personal benefit, and it is just as astonishing that the board would allow or even aid and abet him in doing so.
"Since the company remains under the control and/or influence of the primary wrongdoers, namely the company's Board and executives, who are beholden to Ward and are implicated in the wrongful conduct alleged herein, SandRidge is unable to protect itself or remedy the wrongs inflicted upon it. Thus, this derivative action is necessary prosecuted to protect and vindicate SandRidge's rights.
"Among other things, this action seeks restitution to SandRidge from defendants for their breaches of fiduciary duty, their ultra vires acts that contravene SandRidge's Code of Business Conduct and Ethics, and their failure to protect against the misuse and misappropriation of the company's assets, and for the costs and expenses that have, and will be, paid by the company because of defendants' wrongdoing."
Lead plaintiff Rocky Romano sued Ward, six other directors and officers, and Sandridge itself, in Oklahoma County Court, Oklahoma City.
Romano claims Sandridge is buying oil and gas rights in the Mississippian Play in Kansas.
"In northwest Kansas, within the counties of Sherman, Thomas, Sheridan, Wallace, Logan, and Gove, SandRidge has leased the mineral rights to no less than 223 sections," the complaint states. "In the same counties, and often adjoining or adjacent to SandRidge's sections, WCT Resources - an investment vehicle Ward purportedly established for the benefit of his children - has leased the mineral rights to no less than 403 sections, almost twice the number as SandRidge. Put another way, SandRidge has leased 142,720 acres while WCT Resources has leased 257,920. Many of WTC Resource's sections are directly contiguous to SandRidge's sections, and some WCT Resources sections are completely surrounded by SandRidge's sections. Shockingly, according to deed records in the pertinent counties, SandRidge and WTC Resources acquired their lease holdings in near simultaneous transactions.
"Consequently, Ward has usurped, and continues to usurp, the company's corporate opportunities in the Mississippian Play by front-running the company and acquiring mineral rights through multiple leaseholds immediately next to the company leaseholds or in anticipation of the company's acquisition of mineral rights, thereby allowing Ward to enrich himself at the expense of the company and its shareholders. Worse yet, Ward acquired those mineral rights through the use of the company's assets, including its proprietary information and business strategy.
"Additionally, in past SEC filings, the company has disclosed that Ward is a large ranchland owner in Kansas, and that the company has leased mineral rights from him. The company has also disclosed - obscurely - in some filings that the company had made payments to WCT Resources for some mineral rights. These disclosures, however, fail to represent the true, and appalling, nature, of the activities in which Ward and his son are engaged, including the usurpation of SandRidge's corporate opportunities."
Romano claims that Ward has done this brazenly, right before the board's eyes.
"Defendants have allowed Ward to engage in behavior driven by self-interest and not with the best interests of the Company and its shareholders in mind. It is well known to the board that Ward and his son, Trent Ward, actively compete with the company's acquisition of mineral interests," the complaint states.
The Oklahoman newspaper reported last week that private equity/hedge fund Mount Kellett Capital Management asked the Sandridge board to suspend Ward and hire independent attorneys and accountants to investigate.
The TPG-Axon Capital Management hedge fund last week launched a website, shareholdersforSandRidge.com, it which it demands changes to company bylaws and removal of directors. It echoed Mount Kellett in calling for an investigation.
"Entities affiliated with Tom Ward's family, such as TLW Land & Cattle, WCT Resources and 192 Investments, have been active in acquiring acreage and mineral rights ahead of the Company, and in many instances 'flipping' the rights to SandRidge just weeks or months later," the firm said on the website. "More worryingly, it appears that those affiliated entities have also acquired acreage in advance of purchases by SandRidge in the same areas, and then either sold it to third parties or kept it."
The Sandridge board denied the allegations, in a statement to The Oklahoman.
"The board has reviewed issues related to these allegations several times over the company's history and has found no wrongdoing to have taken place," the board said.
"While the board's perspective on these and other issues may diverge from TPG-Axon's, the company's directors continue to value the input of its stockholders," the board said in its statement. "As part of its continuing oversight duties, the independent members of the board will consider the requests of TPG-Axon and Mount Kellett for the appointment of independent counsel and other investigative measures concerning the activities surrounding their allegations."
SandRidge, based in Oklahoma City, focuses on drilling low-risk and conventional oil wells with a high rate of return in shallow carbonate reservoirs, according to its website.
It was founded in 2006 when Ward, a former co-founder and chief operating officer of Chesapeake Energy Corp., bought a controlling interest in Riata Energy and renamed it. The company is developing wells in the Mississippi Lime formation, the Permian Basin and Gulf of Mexico.
The Mississippi Lime formation is more than 17 million acres, including parts of north Oklahoma, all of Kansas and sections of Nebraska. SandRidge has more than 40 percent of the rigs drilled in the Mississippi Play, according to the complaint.
Romano seeks damages for self-dealing, usurpation of corporate opportunities, misappropriation of company assets, breach of fiduciary duty, aiding and abetting and corporate waste.
He is represented by Mark Josephs with Jackson Walker in Dallas.
Named as defendants along with Ward are Jim J. Brewer, Everett R. Dobson, William A. Gilliland, Daniel W. Jordan, Roy T. Oliver Jr., and Jeffrey S. Serota.
Follow @davejourno
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