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Chesapeake Energy

On January 30, 2012, Oklahoma County District Judge Dan Owens approved the proposed settlement, whereby CEO Aubrey K. McClendon will pay Chesapeake Energy ("the Company") $12.1 million plus interest. The settlement represents the value of an antique map collection McClendon sold to the Company in December 2008. In addition, the Company has agreed to adopt and implement a variety of corporate governance measures.

Case Summary:
Pomerantz LLP commenced a lawsuit on behalf of the Louisiana Municipal Police Employees' Retirement System ("MPERS") to recoup an extraordinary $75 million bonus awarded to Chesapeake Energy Corp's CEO and co-founder, Aubrey McClendon. McClendon's total compensation for 2008 was over $124 million, making him the highest paid executive in the country at a time when the company's earnings plummeted 50% and stock price tumbled 60%. Our lawsuit prompted the articles "Shareholders Who Act Like Owners" by Gretchen Morgenson in the New York Times; "Chesapeake Holders Denounce CEO's Pay" by Ben Casselman in the Wall Street Journal; and "Major CEOs Feeling the Recession . . . Somewhat" in The Associated Press. The circumstances of the bonus warrant the public attention and court scrutiny. The company claims that it granted the bonus - five times McClendon's average annual compensation, including both salary and bonus - to reward him for his role in selling off certain oil and gas properties during 2008. The real purpose of the bonus, we submit, was to bail out McClendon from his personal financial problems precipitated by the fall in the company's share price. In other words, Chesapeake used corporate funds to insulate its CEO from the consequences of the corporate meltdown, while shareholders got stuck with their losses. The bail out was even larger than at first appeared. After the lawsuit was filed, Chesapeake issued a Proxy Statement indicating that it also agreed to pay McClendon over $12 million for his personal art collection. In its opposition to our lawsuit, Chesapeake argues that if it weren't for the bonus, McClendon might have jumped ship in favor of other opportunities. This seems far fetched, given that McClendon founded the company and still has a sizable stake in its wells. Moreover, the Board had other ways to insure his retention, like lowering the share ownership requirement - which it did - and providing loans to help him meet his obligations. We began the litigation by serving a "books and records" demand on Chesapeake in an effort to compel production of materials considered by its Board of Directors when awarding the bonus. Analysis of these documents will enable us to recommend how best to proceed. This "books and records" strategy was used successfully at the start of the Disney/Ovitz excess compensation case, and is favored by Delaware courts.  Although Chesapeake is an Oklahoma corporation, that state follows Delaware corporate law. Thereafter, LAMPERS and other institutional investors filed a consolidated derivative action attacking the transactions as a "waste" of corporate assets and breach of fiduciary duties by Chesapeake's directors. We believe this case warrants support by other public pension funds concerned with corporate governance reforms, either by direct intervention or a letter to the court. If ever there was a time to draw the line on excess compensation, it is now.  If you are interested in doing so, please contact Marc I. Gross (migross [at] pomlaw [dot] com) at the firm. The Motion to Dismiss the derivative action was granted on February 26, 2010. The Court (Judge Gray) agreed with plaintiffs that Oklahoma's standard for adequately alleging demand futility is more liberal than some other states' standards. Our belief is that the Court misapplied that standard in dismissing the complaint. We are appealing the Court's decision. In an order dated September 2, 2009, the Court (Judge Owen) denied the request to inspect Chesapeake's books and records, asserting that the relevant materials had already been publicly disclosed (despite the absence of any release of board minutes.)

We have appealed the decision.