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Chesapeake Board To End Controversial Well Program, Backtracks On Previous Statement

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Chesapeake CEO Aubrey McClendon Chesapeake CEO Aubrey McClendon
OKLAHOMA CITY -

The Board of Directors for Chesapeake Energy issued a statement Thursday morning announcing an agreement to end a controversial program through which CEO Aubrey McClendon could personally invest in the company's wells. The board  also back-tracked on an earlier statement regarding its knowledge of McClendon's participation in the program.

The nine-member board, which McClendon chairs, says it will negotiate an early termination of the Founder Well Participation Program (FWPP), which allows McClendon to invest in and claim a 2.5 percent stake in every well Chesapeake drills. The program was last approved by the board in 2005 and was scheduled to come up for renewal again in 2015.

4/18/2012 Related Story: Chesapeake Energy Stock Down Following Reuters Report

It was disclosed last week in a Reuters investigation that McClendon had taken out more than $1 billion in personal loans to fund his portion of the operating costs for the wells, using his share in well proceeds as collateral to obtain the loans. Although neither the FWPP nor the loans are illegal, the revelation raised questions of a potential conflict of interest and helped push Chesapeake stock down.

Read the original story from Reuters

In a separate story Thursday, Reuters reports that the Securities and Exchange Commission has opened up an "informal inquiry" into the well participation program. The inquiry is reportedly being pursued by the SEC's Fort Worth regional office.

In a statement from company attorney Henry Hood last week, the board declared that it was "fully aware of the existence of Mr. McClendon's financing transactions" and noted that they are disclosed in the company proxy.

In Thursday's statement, however, the board clarifies that it was only intending "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 statement goes on to say that the directors "did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions."

Read the statement from Aubrey McClendon

The statement also marks a change in the company's tone from last week, when Chesapeake officials rebuffed critics with an insistence that McClendon's participation in FWPP, in no way, compromised his fiduciary duty to shareholders; McClendon's interests, they said, were completely aligned with the company's interests, and therefore posed no corporate risk.

At least two shareholder lawsuits were filed against McClendon and company directors last week, in the wake of the loan disclosures.

This is not the first time that McClendon has faced criticism for financial dealings involving the Oklahoma City-based company over which he presides. In 2008, McClendon had to sell more than $500 million in company stock to cover margin calls; later that same year, the company gave him a $75 million incentive award. Also in 2008, McClendon sold an antique map collection to Chesapeake for $12 million; he bought it back last year as part of the settlement of a shareholders group lawsuit.

Thursday's statement from the Board of Directors says that it is reviewing financing arrangements between McClendon and any lenders that also do business with Chesapeake. The Reuters story disclosed that the majority of McClendon's loans came through EIG Global Energy Partners, which also has been a significant financier to Chesapeake.

The statement also makes clear that McClendon will separately release information regarding "the interests he has acquired through the company's Founder Well Participation Program as of December 31, 2011."

Read the full statement from Chesapeake's Board of Directors

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