| Special Report: Inside Chesapeake, CEO ran $200 million hedge fund
Behind the scenes, a Reuters investigation has found, McClendon also ran a lucrative business on the side: a $200 million hedge fund that traded in the same commodities Chesapeake produces. McClendon held oil contracts worth another $240 million, the CFTC data showed. Of 300 banks, hedge funds, energy companies and other traders identified in the CFTC survey, only four held larger bullish bets in natural gas. Oil fell by more than 75 percent between July and December. It is not clear how McClendon and Ward's investments fared. Ward said he could not recall the outcome of his own trades in 2008. McClendon suffered a well-documented personal cash crunch later that year, however. In early 2008 McClendon held a big position in Chesapeake stock purchased with borrowed money. His selling contributed to an 88 percent fall in Chesapeake's share price from its all-time high of $74 that year. An SEC spokesman declined to comment. UNANSWERED QUESTIONS It remains unclear whether McClendon received permission from Chesapeake's board to run a hedge fund and actively trade in the commodities markets for himself, or whether his trading continues. The arrangement isn't illegal. Business directories including Dun ld continue. 3 billion apiece, according to Reuters calculations based on closing futures prices as of June 30, 2008. Peter Cirino, who helped trade natural gas for the hedge fund, also said he knew of no discussions about what Chesapeake was doing in energy markets: "They were much too smart as individuals," Cirino said of McClendon and Ward. Today, McClendon leads the three-man team that oversees Chesapeake's trading in oil and gas for the purposes of hedging, or offsetting the risk of unfavorable price swings. I'm part of Chesapeake's hedging committee. Heritage also shared at least one employee with Chesapeake: John D. Garrison, an accountant listed as executive business manager for Chesapeake Energy in federal election campaign donation filings and as a Chesapeake employee since 2004, handled the hedge fund's bookkeeping, Cirino said. The SEC and the Internal Revenue Service have begun probes in the wake of the loans report. Chesapeake shares rose more than 7 percent on Tuesday on the news that McClendon is being replaced as chairman. Its shares fell 5 percent in after-hours trading and are down almost 20 % this year. BIRTH OF HERITAGE A search of Chesapeake's public filings turned up no disclosure of McClendon's hedge fund, Heritage. But for at least four years, from 2004 to 2008, McClendon's attention extended well beyond his job at Chesapeake. During that time, said a veteran trader who helped run McClendon's private hedge fund, the Chesapeake executive engaged in "near daily" communications and "exhaustive" calls to help direct the fund's trading. The fund, Heritage Management Company LLC, was started by McClendon and Chesapeake co-founder Tom Ward. It told investors in a presentation that it doesn't expect natural gas prices - near 10-year lows - to continue falling. The company's own trading has been a big success. Chesapeake has since restricted "leveraged" trading in the company's shares by its executives. Months later, McClendon became one of the highest paid CEOs in America for the year, receiving a total compensation package worth $112 million. Thomas Mulholland, a risk-management consultant to oil and gas producers for Golden Energy Services in St Louis, said such matters are "taken very seriously by energy companies, and there are strict codes against it. The commodities markets are less regulated than equity markets, where corporate executives are prohibited from trading stock in their own companies based on undisclosed financial information. Nonetheless, personal dealing in energy markets is typically forbidden by oil and gas companies for a wide variety of reasons. In Chesapeake's case, McClendon would of been aware of major decisions that could affect natural gas prices before that information became public. At Heritage, all the money from external investors was returned by 2008, Cirino said. A Heritage phone number listed in several business directories was answered "Chesapeake Energy" by a person who said she hadn't heard of the fund. "A reasonable investor would want to know that the CEO could be in a situation where he's betting against the interests of the company personally," Nowicki said. In response, U. natural gas futures surged by 8 percent the same day. "If the company needs to make an operating decision which might move the market against the CEO's positions, there's a risk which will influence the decision-making at the top of the company," said Jeff Harris, former chief economist at the market's U. regulator, the Commodity Futures Trading Commission, and now professor of finance at Syracuse University. Heritage's staff included an accountant who was simultaneously employed by Chesapeake. The fund also earned McClendon and Ward management fees and a cut of profits from outside investors. natural gas production, Chesapeake holds tremendous sway over markets. On January 23, the company announced sharp output curbs in response to low rates. Reuters traced its roots to Delaware, where it was registered in 2004 by Corporation Trust Company, a firm that helps companies incorporate. Chesapeake also declined to say whether employees would be prohibited from operating such a hedge fund or trading their own cash in oil and gas markets. Two Chesapeake board members contacted by Reuters declined comment. Special Report: Inside Chesapeake, CEO ran $200 million hedge fund |
Tuesday, 8 May 2012
Special Report: Inside Chesapeake, CEO ran $200 million hedge fund
