trending Market Intelligence /marketintelligence/en/news-insights/trending/thBTokrPcy0PWVa_1vETCg2 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Contact Us
In This List

McClendon indictment spurs lawsuits against Chesapeake, SandRidge

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


McClendon indictment spurs lawsuits against Chesapeake, SandRidge

The federalcase into alleged bid-rigging in Oklahoma by Chesapeake Energy Corp. and SandRidge Energy Inc. may have ended with the , but lawsuitsfrom angry landowners have piled up in federal court.

McClendon,a former CEO of Chesapeake, was indictedMarch 1 on charges that he helped rig the bidding between Chesapeakeand SandRidge, run at that time by friend and fellow Chesapeake co-founder Tom Ward,between December 2007 and March 2012. McClendon died in a single-car crash the nextday. The McClendon indictment was dropped, and the investigation against SandRidgewas also later closed by the government. Chesapeake said it had been cooperatingwith the U.S. Department of Justice throughout the investigation.

McClendon'scriminal indictment spawned the civil cases as landowners became aware of allegationsthat the two companies had colluded to depress prices.

"Defendantsallocated among themselves the leasehold interests for particular parcels of landacross the various counties comprising the relevant area … agreeing thereby notto compete in acquiring the affected leasehold or property interests," saidone suit, filed against both companies and Ward on behalf of James Van Meter andJohn Wright, who negotiated lease agreements with Chesapeake during the period inquestion. "Defendants furthered their conspiracy by regularly meeting and communicatingto not only allocate among themselves the various parcels of land that they wouldlease (and therefore not compete for their acquisition), but also agreeing amongthemselves the prices for which they would pay class members for leasehold interestroyalty and bonus payments," the suit alleges.

The suitalso claims that both executives knew of the effort to keep bid prices and otherpayments down. "Following Chesapeake's 'Monday morning board meetings,'Chesapeake and SandRidge both made artificially suppressed bonus and royalty paymentsto class members and capped these payments at the same prices," the lawsuitalleges. "These meetings were common knowledge among landmen for both companiesand dictated the offers they would make for the given week."

The suitclaims that McClendon and Ward benefited personally from the lower prices. It pointedto Chesapeake's now-infamous Founder Well Participation Program, which gave McClendona 2.5% stake in all wells drilled by the company, provided that he paid 2.5% ofthe costs, and a similar program at SandRidge, which gave Ward a 3% interest inthat company's wells.

"Inaddition, Ward and his family benefited extensively from the conspiracy throughtheir participation in a large-scale pattern of conflicted related-party transactions,"the suit claims. "TPGAxon, a hedge fund that was SandRidge's third-largestshareholder with nearly 7% of its stock, released reports in January and February2013 revealing that almost 200 entities controlled by Tom Ward substantially benefitedfrom SandRidge's leasing activity in the Mississippian Lime."

The lawsuitalso claims that Chesapeake has a "history of uncompetitive schemes,"citing the company's alleged agreement with EncanaCorp. to suppress bidprices in Michigan in 2010, which led to criminal charges filed by thatstate in 2014. Chesapeake and Encana eventually both settled with thestate.

In spiteof the detailed complaints against the companies, an analyst who has followed bothfor some time believes the suits will probably yield little.

"Likely,there is nothing that happens to the company in these matters, especially Chesapeake,as the DOJ already said the company cooperated fully, and I would assume SandRidgehas done the same, given they kicked Tom Ward out," Wunderlich Securities VicePresident of Equity Research Jason Wangler said. "If anything, it could bea bit embarrassing and their names could be part of the story, but likely nothingmonetary."

Evenif there is a significant award as a result of the suits, the SandRidge may not be around topay it.

"ForSandRidge, it likely doesn't matter. They clearly are going to have to restructureor possibly go into bankruptcy," Wangler said.

At least11 lawsuits have been filed in federal court, and a judge is working to combinethem, according to court records. No date has been set to hear the consolidatedcase.

Chesapeakespokesman Gordon Pennoyer said the company has no comment on the suits. A messageseeking comment from SandRidge was not returned.