A stunning report by Reuters published this morning reports on the existence of a private hedge fund run by Chesapeake Energy CEO Aubrey McClendon that traded in the same commodities upon which Chesapeake’s business is based.The investigation, by Joshua Schneyer, Jeanine Prezioso and David Sheppard, says McClendon ran a $200 million fund that traded in oil and natural gas, in addition to other commodities.
The news comes two weeks after a separate Reuters team reported that McClendon had taken up to $1.1 billion in loans against his stakes in Chesapeake oil and gas wells.
The company has already stripped McClendon of his chairmanship and said it was reviewing details of the loans.
Among the Reuters investigation’s findings:
- McClendon’s involvement in the fund ran from 2004 to 2008
- Heritage racked up “stellar” returns of between 15 to 25 per cent a year
- Heritage’s shared a mailing address with Chesapeake’s — and a Heritage telephone number listed in several business directories was answered “Chesapeake Energy” by a person who said she hadn’t heard of the fund.
- By June 2008 – as natural gas and oil prices were peaking, and just before the financial crisis – McClendon and Ward both held huge positions in natural-gas derivatives, according to confidential trading data disclosed last year by U.S. Senator Bernie Sanders, an independent from Vermont
- A failure by McClendon and Chesapeake co-founder Tom Ward to disclose their fund to Chesapeake’s shareholders may constitute a “material omission” that could draw SEC scrutiny, according to a securities law professor
Insider trading in commodities is not illegal, and there is no evidence McClendon used information gleaned from his management position to advance his interests in the fund, Reuters reports.
But during his involvement, according to a veteran trader who helped run the fund, McClendon engaged in “near daily” communications and “exhaustive” calls to help direct the its trading, the team finds.
Thomas Mulholland, a risk-management consultant to oil and gas producers for Golden Energy Services in St Louis, told Reuters such potential conflicts are “taken very seriously by energy companies, and there are strict codes against it.”
” ‘Even if there is just a whiff of impropriety,’ he said, ‘it can be enough to lead to a termination.’ ” Reuters reports.
Ward told the team he saw nothing wrong with the arrangement, though he added he doesn’t know whether Chesapeake’s board knew of the hedge fund he ran with McClendon.
But he said he saw “no conflict of interest.”
“We did not use any proprietary knowledge of (Chesapeake) trades to make our own individual decisions,” Ward said.
Chesapeake and McClendon declined to comment, Reuters says.
The company’s Q1 earnings teleconference takes place at 9 am.