Ousted Chesapeake CEO indicted on conspiracy charges

By Ellen M. Gilmer, Mike Lee | 03/02/2016 08:03 AM EST

The former CEO of shale pioneer Chesapeake Energy Corp. has been indicted by a federal grand jury on charges of rigging oil and gas leasing in Oklahoma.

The former CEO of shale pioneer Chesapeake Energy Corp. has been indicted by a federal grand jury on charges of rigging oil and gas leasing in Oklahoma.

The Department of Justice announced last night that Aubrey McClendon — the ousted CEO known for his aggressive leadership style — is facing conspiracy charges for a yearslong scheme that allowed Chesapeake and another driller to pad profits at landowners’ expense.

According to the indictment, filed in the U.S. District Court for the Western District of Oklahoma, McClendon arranged with another company to manipulate competitive bidding processes by agreeing not to bid against each other. Then, the winning bidder would assign an interest in the new leases to the other company — effectively keeping bids low for both. DOJ says the conspiracy ran from December 2007 to March 2012. The agency did not identify the other driller.


"While serving as CEO of a major oil and gas company, the defendant formed and led a conspiracy to suppress prices" paid to landowners, Assistant Attorney General Bill Baer, of DOJ’s Antitrust Division, said in a statement, adding that "executives who abuse their positions as leaders of major corporations to organize criminal activity must be held accountable for their actions."

The agency noted that each Sherman Antitrust Act violation carries a maximum penalty of 10 years in prison and a $1 million fine.

The indictment is part of an ongoing DOJ investigation into price fixing and bid rigging in the oil and gas industry. It comes after years of probing by DOJ and several states, which have looked into both McClendon’s individual actions and companywide practices at Chesapeake.

Chesapeake paid $25 million last year to settle similar antitrust charges in Michigan and has also faced scrutiny from public officials and plaintiffs’ lawyers in Pennsylvania, Ohio, West Virginia, Louisiana and Texas.

Spokesman Gordon Pennoyer said in an email that Chesapeake has been cooperating with DOJ throughout the investigation and does not expect to face its own criminal charges.

"Chesapeake has been actively cooperating for some time with a criminal antitrust investigation by the Department of Justice regarding past land leasing practices and has received conditional leniency under the Antitrust Division’s Leniency Program," he said. "Chesapeake does not expect to face criminal prosecution or fines relating to this matter."

‘I never trusted the guy’

News of McClendon’s indictment for the Oklahoma leasing practices quickly traveled to other states where he’s been viewed with suspicion.

Don Young, an anti-drilling activist in Fort Worth, Texas, started raising concerns about the shale industry’s tactics — and McClendon’s approach in particular — as far back as 2005. That’s when Chesapeake and other companies first began to drill in the Barnett Shale formation beneath densely populated neighborhoods in Fort Worth.

"I never trusted the guy," Young said in an interview yesterday.

Young, who runs a stained-glass business, said he first learned about the potential for urban drilling when Chesapeake leased land near a park on the east side of downtown Fort Worth. His biggest concern at the time was the idea that a company could force homeowners to accept drilling in their neighborhood.

As drilling continued, Young said he watched as McClendon and Chesapeake executives courted the mayor of Fort Worth and others in powerful positions. Since those early days, the city of Fort Worth and other local governments have sued Chesapeake, claiming the company underpaid their share of the proceeds from drilling on public land.

A lot more has come to light, too, about the environmental impacts of drilling, including air pollution and the potential for earthquakes from waste disposal.

"We knew they were unsavory — we didn’t know the extent of it at that time," Young said.

The criminal case could have big implications for the companies involved, said Jim Bradbury, an environmental attorney who was on a task force that wrote Fort Worth’s drilling ordinance.

"If this is true and it was fairly widespread, Chesapeake made a bunch of money that it probably shouldn’t have made," he said. "Every nickel the royalty owner didn’t get, the company owner did get."

Pennoyer, the company spokesman, said Chesapeake has made significant improvements in legal and regulatory compliance within the company and has worked to address "legacy issues."

Those issues have plagued the company since McClendon led relentless expansion during the early years of the shale drilling boom. The aggressive leasing campaign and subsequent lease management have left a trail of lawsuits from royalty owners and others who say Chesapeake cheated them (EnergyWire, Sept. 4, 2014).

Chesapeake launched its own litigation against McClendon last year, saying he stole trade secrets when he was ousted in 2013. That dispute is now in closed-door arbitration (EnergyWire, May 6, 2015).