A Chesapeake Energy Corp. shareholder has filed a federal lawsuit against the Oklahoma City company, CEO Aubrey McClendon and members of the board of directors after it was revealed that McClendon took out up to $1.1 billion in personal loans to buy a stake in the company's natural gas wells.
The Deborah G. Mallow IRA SEP Investment Plan filed the lawsuit Thursday in U.S. District Court in Oklahoma City, alleging board members didn't disclose all material facts about the loans.
Reuters first reported Wednesday that McClendon borrowed the money to participate in the Founders Well Participation Program, which allows him to take a 2.5 percent stake in the company's wells.
"The company's proxy statements, its annual reports on Form 10-K and other SEC filings are required to detail all related party transactions, including all material details that may affect the FWPP, and all actual and potential conflicts of interest that may arise from McClendon's participation in the FWPP," the lawsuit stated.
Such loans "can easily cloud the CEO's judgment on key issues," according to the lawsuit, which also names as defendants the company and members of the board, including former Oklahoma Gov. Frank Keating, former U.S. Sen. Don Nickles and Oklahoma State University President Burns Hargis.
Earlier in the week, Chesapeake Energy's general counsel Henry Hood said the terms of the company plan that allow McClendon to take a stake in the wells ensures that the CEO's interests are aligned with those of the company.
Michael D. Kehs, vice president of Strategic Affairs and Public Relations for Chesapeake Energy, said officials don't believe it is appropriate to discuss matters related to the lawsuit.
"We are aware of the litigation and will vigorously defend the allegations," Kehs said.
Kenyatta Bethea, an attorney for the plaintiff, didn't immediately return a message left after hours on Saturday.
Shares of Chesapeake Energy, the second-largest natural gas producer in the nation, fell $1.47, or 7.7 percent, to $17.65 in trading on Wednesday, the day the story about the loans was published. The shares hadn't closed below $18 since July 2009.
In October 2008, McClendon was forced to sell millions of Chesapeake shares that he owned to cover margin loan calls after the energy industry plummeted during the recession. Chesapeake's shares fell from about $69 a share on July 2, 2008, to $16.52 per share on Oct. 10, 2008, the date when McClendon completed his sales.
Among other things, the lawsuit is asking a judge to declare that the defendants have violated federal proxy laws and breached their fiduciary duties. It wants the defendants to disclose all material facts relating to McClendon's loans, establish a method of independent oversight regarding McClendon's borrowings and to rescind the well participation program "as the purpose approved by the shareholders has been frustrated."