As Chesapeake Energy Reveals Department of Justice Investigation, Other Lawsuits Piling Up

1-DSC09675
on

Earlier this month, Chesapeake Energy Corp. revealed that it has been subpoenaed by the U.S. Department of Justice, along with multiple states, over alleged wrong-doing in the company’s businessย dealings.

Federal prosecutors and state attorneys have demanded that the company turn over documents, provide information, and give testimony in cases centering on the royalty payments that Chesapeake Energy pays to landowners who allow them to tap the shale oil and gas beneath the surface of theirย land.

Separately, the company said, it has received subpoenas from both federal and state attorneys general over potential violations of anti-trust laws, the laws designed to protect against abuse of monopoly power or collusion betweenย competitors.

This is hardly the first time the company has found itself in legalย trouble.

Across the U.S., Chesapeake faces a large number civil lawsuits from angry landowners, investors and other business partners. In Pennsylvania and Michigan, it faces racketeering counts, under the same law often used to convict members of organized crime. In Texas and Oklahoma, dozens of landowners have sued the company for shortchangingย them.

The new Department of Justice investigations come after federal attorneys dropped their investigation into the financial misdeeds of former CEO Aubrey McClendon, which were the subject of a year-long investigation by Reuters in 2012 that roiled the company and led to his ouster. State authorities have continued to investigate,ย however.

โ€œThe suits against us allege, among other things, that we used below-market prices, made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL,โ€ Chesapeake, the country’s second largest producer of natural gas, said in its quarterly filing. โ€œThe Company also has received DOJ and state subpoenas seeking information on the Companyโ€™s royalty paymentย practices.โ€

The news comes at a time when Chesapeake is still trying to recover from the financial misdeeds of former CEO Aubrey McClendon. While on Wall Street say that the company has turned around, with one Sterne Agee analyst calling the company’s balance sheet โ€œclose to being fully healed,โ€ the news of the Department of Justice investigations represent yet another skeleton in Chesapeake’sย closet.

The company’s erratic performance has led to losses for some of its most high-profile investors, including one of Wall Street’s legendary billionaires, who made headlines for his attempts to reform Chesapeake. โ€œActivist investor Carl Icahn โ€ฆย  lost seven times as much money on them Thursday as heโ€™s made on Apple Inc.โ€™s stock,โ€ Bloomberg reported last month, calculating that the legendary investor, whose net worth is estimated at $20 billion, had lost $75 million by investing in Chesapeakeย Energy.

Cheasapeake shrugged off the civil suits in its quarterly filing, saying that โ€œits remaining loss exposure for these claims will not have a material adverse effect on our consolidated financial position, results of operations or cashย flows.โ€

But the suits against the company are striking both in their number and for the broad variety of ways that small landowners and large companies alike allege that Chesapeake swindledย them.

In Michigan, the company’s legal troubles include a criminal anti-trust complaint brought by the state Attorney General, which charges that Chesapeake colluded with Encana Corp. in a bid-rigging scheme for drilling leases in the state’s Collingswood shale region. That charge is headed to trial, a district court judge ruled in July, and carries a maximum fine for the company of $1 million. In May, Encana Corp. settled with the state, agreeing to pay $5 million and to plead no contest to its antitrustย violations.

The company is also facing felony racketeering charges in Michigan for cancelling lease offers to landowners in violation of criminal enterprises and false pretences statutes, after prosecutors filed charges in June of this year. Chesapeake directed its landmen to lock up leases in the region by offering big signing bonuses, but then canceled the deals for bogus reasons when its competitors lost interest, Attorney General Bill Schuette charged. The racketeering charge is punishable by a fine of up toย $100,000.

In Pennsylvania, meanwhile, the company also faces counts of racketeering, conspiracy and underpaying royalties to mineral owners. It also is defending two class actions in the courts and a third inย arbitration.

Many of the charges against it center on how the company deducts expenses incurred after the gas is produced from its royaltyย payments.

โ€œI have received complaints from my constituents and your leaseholders regarding practices of Chesapeake Energy which strike many as unfair and perhaps illegal,โ€ Pennsylvania Governor Tom Corbett wrote to Doug Lawler, CEO of Chesapeake Energy. โ€œIt defies logic that, in some cases, landowners are being advised that they may actually owe money, rather than receive the fair and just royalty to which they areย entitled.โ€

State law demands that landowners receive at least 12.5 percent of the value of the oil and gas drillers produce โ€“ but companies like Chesapeake have aggressively looked for loopholes and found ways to pay outย less.

Pennsylvania State Rep. Jesse White explains how companies sought to reduce royalty payments using post-production deductions. ยฉ 2014 Lauraย Evangelisto

Chesapeake told investors in its filing that, although it is โ€œreasonably possibleโ€ that the company will lose in court, โ€œwe are currently unable to estimate an amount or range of loss or the impact the actions could have on our future results of operations or cash flows.โ€ One of the lawsuits was settled for $7.5 million, but that figure could change as more landowners join theย lawsuit.

Another suit alleges that the company engaged in self-dealing and shorted landowners by roughly $4.76ย billion.

Officials from the state, which has taken a laissez-faire approach to environmental and economic problems related to shale gas, expressed surprise that this approach had not worked. โ€œWe had hoped there would be a voluntary self-policing,โ€ Lieutenant Governor Jim Cawley told StateImpact. โ€œI think that was the governorโ€™s original intent in reaching out to the company, but it didnโ€™tย happen.โ€

Governor Tom Corbett was voted out of office in November, becoming the first incumbent governor to lose a re-election bid in the state since its constitution was amended inย 1968.

In neighboring West Virginia, former Chesapeake CEO Aubrey McClendon first faced trouble over revelations by the Pittsburgh Post-Gazette that McClendon was taking out loans against its mineral leases โ€“ part of what Reuters later revealed to be a $1 billion in lending that was never disclosed toย investors.

But the company’s legal troubles extend far past the east coast. The company has set aside $100 million to cover claims from a class action in Oklahoma over royalty payments, it disclosed in its quarterly filing, part of a case that, as of July 2014 headed back to trial following a failed attempt to block the class action byย Chesapeake.

But it may just be Texas where the company faces the broadest number of legalย claims.

โ€œI canโ€™t tell you how dishonest these people are. The dishonesty is breathtaking,โ€ Texas lawyer Dan McDonald told a crowd of landowners, according to the Star-Telegram, which is seperately suing the company. โ€œThey have stolen our money. They have cheatedย us.โ€

The attorney hired the same landmen who originally helped oil and gas companies find mineral rights owners โ€“ and used their information to send leaseholders a letter inquiring about how they felt they had been treated. He was inundated with replies from landowners who had seen checks unexpectedlyย plummet.

โ€œThey were getting $3 [mcf, or per 1,000 cubic feet] from XTO and less than a dollar from Chesapeake,โ€ McDonald said. โ€œThese people didnโ€™t have to be convinced they had beenย cheated.โ€

Large institutions in Texas have sued as well. Chesapeake has already agreed to pay $700,000 to the city of Arlington and another $1.8 million to Tarrant County’s water district. The Fort Worth school system, housing corporation and even the city’s newspaper, the Star-Telegram, have all filed suit against the company. One prominent family, the Hyder family, won an award of $1 million for its lease of 1,000ย acres.

These claims could run aground in state court, after a ruling by the 5th Circuit Court of Appeals that blocked royalty claims. Although the federal court’s ruling is not binding on Texas state judges, it could prove persuasive, legal expertsย say.

โ€œIt really hurts the ability to have one of these cases,โ€ said Robert Oโ€™Boyle, the Austin attorney representing landowners in one of the cases. โ€œThey [the federal judges] donโ€™t care how hard [landowners] tried to contract around this. Big oilย wins.โ€

The federal government itself has been shortchanged by Chesapeake. In one case, the company was hit with a $765,000 fine for โ€œknowing or willful submission of inaccurate informationโ€ that led to underpaid royalties for drilling on federalย lands.

The company’s federal filing also makes clear that it considers liability for environmental damage and fines a part of doing business, and that it has set aside funds to cover these costs. โ€œEnvironmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable,โ€ Chesapeake Energy said in itsย 10Q.

Of course, while Chesapeake faces an unusually high number of claims, landowners who’ve signed with other oil and gas companies have also felt like they were treatedย unfairly.

In 2007, the National Association of Royalty Owners hired a forensic accountant to check the books on various drillers โ€“ and the resulting report found that nine out of ten of the top producers in western states like Colorado and Texas hadย  โ€œused affiliates and subsidiaries to reduce income to royalty owners and taxingย authorities.โ€

โ€œEvery company has been involved,โ€ Jeffrey Matthews, a vice president and forensic accounting expert at Charles River Associates said, according to ProPublica, which investigated what it called a $5 billion shuffle made by Chesapeake in May of this year. โ€œIf youโ€™re dealing with related parties, the costs can be double, or triple. You donโ€™t know if you are paying for something two to three timesย over.โ€

1-DSC09675
Sharon Kelly is an attorney and investigative reporter based in Pennsylvania. She was previously a senior correspondent at The Capitol Forum and, prior to that, she reported for The New York Times, The Guardian, The Nation, Earth Island Journal, and a variety of other print and online publications.

Related Posts

on

PA-based CEO Toby Rice hobnobbed with Donald Trump at Mar-a-Lago. Now heโ€™s poised for pipelines, exports, and profits.

PA-based CEO Toby Rice hobnobbed with Donald Trump at Mar-a-Lago. Now heโ€™s poised for pipelines, exports, and profits.
on

Longtime DeSmog reporter and author of The Petroleum Papers will play a key leadership role as we investigate a global resurgence of climate obstruction.

Longtime DeSmog reporter and author of The Petroleum Papers will play a key leadership role as we investigate a global resurgence of climate obstruction.
on

Victoria Hewson called the 2050 ambition a โ€œhuge own goalโ€ while working for a Tufton Street think tank.

Victoria Hewson called the 2050 ambition a โ€œhuge own goalโ€ while working for a Tufton Street think tank.
on

Ahead of a city council vote, Resource Works launched an influence campaign with stock submissions for restaurant owners, hospitality workers, and residents.

Ahead of a city council vote, Resource Works launched an influence campaign with stock submissions for restaurant owners, hospitality workers, and residents.