Textbook Case in Corporate Shenanigans,|Shareholders Say in Suing Oil & Gas Firm

OKLAHOMA CITY (CN) - Shareholders say the board of Chesapeake Energy Corp. granted CEO Aubrey McClendon "an unjustified and unearned $75 million cash bonus" after McClendon, the company's founder and chief shareholder, used Chesapeake tock "as collateral for hundreds of millions, if not billions, of personal loans."

Chesapeake owns interests in more than 41,000 natural gas and oil wells in the United States, and has a market capitalization of $12.5 billion, according to the complaint in Oklahoma County Court.

Shareholders complain: "Despite Chesapeake's dismal performance in 2008, and unbeknownst to Chesapeake shareholders, the company's CEO and largest individual shareholder, McClendon, monetized virtually his entire position in Chesapeake stock by using it as collateral for hundreds of millions, if not billions, of personal loans. As Chesapeake's stock value plummeted in the second half of 2008 from a high of $74 per share in July 2008 to a low of $9.84 in December 2008, McClendon's self-interested practice of using Chesapeake stock to borrow backfired when on October 8, 9, and 10, 2008, the CEO received three consecutive margin loan calls. In total, these three margin loan calls forced McClendon to sell 94% of his overall position in Chesapeake stock - approximately 31.5 million shares, or nearly 6% of the company, worth over $640 million at the time and over $2 billion at their peak."

And, shareholders say, in the four days before McClendon's massive stock sales became public, three defendant directors - Charles T. Maxwell, Donald L. Nickles and Frederick B. Whittemore - sold more than $5.2 million of their own Chesapeake stock.

Then, according to the complaint, "In order to help their CEO dig himself out of his financial hole stemming from the October margin calls, the director defendants 'renegotiated' McClendon's employment contract, despite the fact that it was still in the first [year] of a five-year term. On Jan. 7, 2009, Chesapeake announced that the director defendants granted their financially troubled CEO a new five-year employment contract which included a staggering $75 million bonus. ... By comparison, McClendon received a bonus of only $1.83 million for his achievements in 2007, when the company performed far better."

Shareholders want the bonus rescinded, punitive damages for inside trading and breach of duties, and an order enjoining the company from pulling such a stunt again. They are represented by John Walkup.

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