Chesapeake Shows Why Lawyers Shouldn’t be Communicators

The board of Chesapeake Energy (NYSE: CHK) just released a statement in which it denied knowing of CEO Aubrey McClendon’s borrowings related to his stakes in the company’s wells, contradicting a statement made by the company’s general counsel earlier in the week:

“Chesapeake also wishes to clarify a statement appearing in its April 18, 2012 press release captioned “Chesapeake Energy Corporation General Counsel Henry J. Hood Issues Statement.” The statement that “the Board of Directors is fully aware of the existence of Mr. McClendon’s financing transactions” was intended to convey the fact that the Board of Directors is generally aware that Mr. McClendon used interests acquired through his participation in the FWPP as security in personal financing transactions. The Board of Directors did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions.”

Details of McClendon’s borrowings first came to light in a Reuters article on April 18.  Chesapeake quickly mounted a stern rebuttal, creating a webpage with a statement, links to regulatory disclosures and a lengthy Q&A with Reuters as the story was being developed.

Unfortunately, while the strategy to use a purpose-built website and shine light on the reporting process was good, the company’s responses were lawyerly, defensive and at times needlessly combative. Here’s an example:

Question [from Reuters]: More than a dozen academics, attorneys, Wall Street analysts and corporate governance experts who have reviewed the loan agreements say that the mere existence of as much as $1.1 billion in loans taken out by Mr McClendon against his share of the company’s wells raises the potential for conflict of interest in multiple ways. As a result, they say the loans should be disclosed in more detail than is currently provided by the references to “financing transactions” in the annual proxy. What is Chesapeake’s response to this view?

Answer: The question is improper on a number of levels. First, it does not specify the supposed conflict of interests nor does it include any analysis that reflects the information reviewed by the speaker, the information the speaker considered important, the speaker’s experience in the oil and gas industry or what assumptions were made by the speaker. Thus, one cannot tell if the conclusion was based on a short email with a leading narrative (as we have seen from your emails that have been provided to us), incomplete information or a thorough review of the pertinent information. Second, the concept of an “expert” is that the individual’s reputation and training supports a conclusion that the person’s opinion on a given topic is worthy of respect. That is inconsistent with hiding one’s identity, analysis or bias. Third, disclosure is an intricate regulatory scheme of multiple laws and rules that can be made unworkable by adding multiple disclosures of transaction details just because a small group of shareholders might think it is helpful. This is exacerbated where there are multiple small groups, each with their own special data request to fit their own special agendas.

Ugh.  There’s more where that came from, and it’s just as unhelpful.  As a result, Chesapeake reinforced the impression that the CEO had a lucrative deal that was obscured from shareholders.  And with today’s disclosure, we now know the response wasn’t truthful, either.



2 thoughts on “Chesapeake Shows Why Lawyers Shouldn’t be Communicators

  1. You are possibly being too kind here….. this is graded an “F” for full fiasco. Looks clumsy, evasive and disingenuous…. since when does “fully aware” mean “generally aware”?

  2. Pingback: Reuters Scores a Big Win on its Chesapeake Coverage | Risk Matters

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