Bloomberg News

Chesapeake Hired Lawyer With Stealth Record in CEO Probes

June 20, 2012

Chesapeake Energy Corp. CEO Aubrey McClendon

Shareholders have criticized Chesapeake’s board for failing to rein in what they’ve seen as Chief Executive Officer Aubrey McClendon’s risk-taking and overspending at the company. Photographer: F. Carter Smith/Bloomberg

The lawyer Chesapeake Energy Corp.’s (CHK:US) audit committee hired to investigate possible conflicts of interest in its chief executive’s loans has a record of managing probes with minimum publicity about himself or his client.

Craig Weinstock, a Houston-based attorney with Locke Lord LLP, has handled more than a dozen internal investigations of alleged corporate malfeasance since 2002, including one for a company run by Chesapeake’s lead director Merrill A. “Pete” Miller Jr., a member of the audit committee, a person familiar with Weinstock’s work said.

The U.S. Securities and Exchange Commission began an investigation after the company disclosed more than $800 million in loans made to its chief executive, with some involving company financiers. Weinstock tends to resolve such matters with little fanfare, keeping his own role a secret in most cases, according to a rival Houston lawyer.

“He said his reports are submitted to the government or the board, and no one hears of it,” said Lance Lubel, a Houston-based plaintiffs’ lawyer who has litigated cases against Weinstock.

Weinstock, 54, has handled internal reviews for other oil and gas companies, such as Nabors Industries (NBR:US) Ltd., according to Lubel. The Vanderbilt University law graduate represented Nabors in a 2006-2007 probe of allegations that the oil-drilling company may have backdated stock options for executives, according to the person familiar with Weinstock’s work.

The SEC announced in May 2007 that it had ended its review of Nabors’s stock-option practices without penalizing the company, according to a regulatory filing. Laura Doerre, a spokeswoman for the Hamilton, Bermuda-based energy company, declined to comment on Weinstock’s work.

‘Real Quiet’

Lubel said Weinstock, a native of Queens, New York, is known in Houston legal circles as a workaholic who has carved out a niche handling internal reviews for oil and gas companies.

“He’s a big guy, but real quiet,” Lubel said. “He does not have the reputation as a gunslinger.”

“He strikes me as a guy who does this kind of work in a quietly competent manner,” Steven Roberts, a Houston-based lawyer who represents energy companies, such as Transocean Ltd., and has litigated against Weinstock in the past. “He’s not flashy and doesn’t seek out the spotlight.”

Chesapeake announced in May that the audit committee had hired outside counsel to probe loans made to Chief Executive Officer Aubrey McClendon, the natural-gas company’s founder. Reuters had reported that he’d borrowed as much as $1.1 billion over several years against his personal stakes in company wells, including from a firm that does business with Chesapeake. McClendon said in April that as of Dec. 31 he had $846 million in outstanding loans tied to the company’s well-participation program.

Shares Dropped

Oklahoma City-based Chesapeake’s shares have dropped about 16 percent this year amid falling gas prices and growing investor mistrust of directors’ lax oversight of McClendon. The energy explorer is facing an estimated $22 billion cash-flow shortfall by the end of 2013 after natural-gas prices touched a decade low earlier this year. Chesapeake agreed to sell pipeline assets for more than $4 billion this month and is in talks to raise billions more by divesting oil and gas prospects.

Chesapeake officials have said McClendon will step down as chairman once a replacement is chosen. Earlier this month, the company agreed to replace almost half its board under pressure from its two largest shareholders, billionaire Carl Icahn and Southeastern Asset Management Inc.

Miller, the chief executive of Houston-based National Oilwell Varco (NOV:US) Inc., has remained as lead outside director on Chesapeake’s board. He recommended that his colleagues hire Weinstock to handle the McClendon loan probe, the person said.

Weinstock’s Mission

The board asked Weinstock to review McClendon’s dealings with lenders with which the natural-gas company does business, including EIG Global Energy Partners LLC, a private-equity firm that arranged a $1 billion credit line for the CEO.

In addition to EIG, McClendon has also gotten personal financing over the years, either as an individual or through one of the companies he controls, from Goldman Sachs (GS:US) Group Inc., Wells Fargo & Co. (WFC:US), Bank of America Corp. (BAC:US), Wachovia Corp. and Mitsubishi UFJ Financial Group Inc.’s Union Bank, all of which have provided financing to Chesapeake, according to federal court and county property records and securities filings.

Investors have sued Chesapeake, questioning whether McClendon’s loans, obtained to cover his costs in the well program, created conflicts of interest and harmed the company.

Miller recommended hiring Weinstock because the lawyer has been handling a federal probe into allegations of sanctions violations involving Miller’s National Oilwell Varco, a drilling equipment maker, and its Ameron International Corp. unit, the person said. The probe’s focus is dealings involving Iran, the person said.

Subpoena

National Oilwell Varco said in a February regulatory filing that they had received grand jury subpoenas and inquiries from federal agencies, including the U.S. Justice Department and the U.S. Treasury’s Office of Foreign Assets Control about their “compliance with export trade laws and regulations.”

The company said it had “conducted our own review of this matter” without naming Weinstock or his firm or saying that the matter involved its Iranian operations. It said it was “negotiating a potential resolution with the agencies.”

National Oilwell Varco acquired Pasadena, California-based Ameron last year in a $772 million transaction. Weinstock’s law firm represented the drilling-supply company in the deal, according to the American Lawyer Magazine, a trade publication.

Iran Probe

Ameron officials said in a 2011 SEC filing that Treasury Department lawyers had asked the pipe maker in 2008 for information “regarding transactions involving Iran.” Ameron also said it “conducted an internal inquiry and continues to cooperate fully” with federal officials probing its Iranian dealings. Weinstock wasn’t identified in the filing as leading that review.

Miller, a graduate of the U.S. Military Academy at West Point who became National Oilwell’s top executive in May 2001, didn’t return calls for comment on Weinstock’s work for National Oilwell and Ameron or Chesapeake’s hiring of Weinstock.

Jim Gipson, a Chesapeake spokesman, declined June 14 to discuss Weinstock’s hiring or the lawyer’s work for the natural- gas driller.

Weinstock has an independent streak that may surprise clients, said David Warden, a Houston-based patent litigator who has served on a three-person arbitration board with the Locke Lord partner in 2010. Warden said he couldn’t discuss the specifics of the private arbitration, but it focused on a dispute “involving a large oil and gas company.”

Arbitration Panel

Two members of the panel were selected by the parties to the arbitration, and those two designees tapped the third member, Warden said. Weinstock was named by one of the companies.

“In some instances, lawyers feel they have to act as advocates for their clients even though they are supposed to be arbiters of a dispute,” Warden said.

“Craig showed absolutely no favoritism to either side,” Warden said. The panel came up with a 70-page decision that didn’t please either company that submitted their claims to arbitration, he said.

The patent litigator said Weinstock will impartially investigate McClendon’s dealings with lenders and give directors a comprehensive review of whether his well-participation loans created any conflicts for the company or its top executive.

“I think he’ll take the approach that he’ll investigate and let the chips fall where they may,” Warden said. “That’s the kind of guy he is.”

One of the investors’ lawsuits is Deborah G. Mallow IRA SEP Investment Plan v. McClendon, 12-cv-436, U.S. District Court, Western District of Oklahoma (Oklahoma City).

To contact the reporters on this story: Jef Feeley in Wilmington at jfeeley@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com;

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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Companies Mentioned

  • CHK
    (Chesapeake Energy Corp)
    • $19.71 USD
    • -0.13
    • -0.66%
  • NBR
    (Nabors Industries Ltd)
    • $12.82 USD
    • 0.40
    • 3.12%
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