Chesapeake Energy Corp CEO Aubrey McClendon has been sued by a shareholder over potential conflicts of interest on the same day that a Wall Street analyst urged leadership changes at the company.
Reuters reported on Wednesday that McClendon has borrowed as much as $1.1 billion against his interest in wells the company has granted as a perk.
The loans, taken out over the past three years, were previously undisclosed to shareholders, analysts and academics said, raising concerns that McClendon's personal financial deals could compromise his fiduciary duty to Chesapeake.
The story drew a swift reaction from investors, who pushed the stock down 5 percent the day it was published. The stock has since recovered some losses and was down 3.1 percent at $17.44 on Friday afternoon on the New York Stock Exchange.
McClendon and the company have said there is no conflict. Chesapeake did not return calls seeking comment on Friday.
Pressure on the company is growing. Phil Weiss, an oil analyst at Argus Research who has had a sell rating on Chesapeake, said in a note to clients on Friday that it was in the best interest for McClendon, the board of directors, or both to step down.
When we consider the full financial picture at Chesapeake, including its high debt levels, its use of financial engineering, the relatively low quality of its financial data, the questionable nature of some of the CEO's transactions with the company ... we believe the best thing for investors would be to replace the board and/or the CEO, Weiss wrote in a note to clients.
A Chesapeake bondholder said McClendon's financial transactions raise questions about whether the company's management is serious about reform.
What we're really hoping comes out of this is that there's a significant movement at the higher levels of the company to either significantly improve corporate governance or put people in who actually take it seriously, said the bondholder, who spoke on condition of anonymity.
On Wednesday, shareholder David Dreman, chairman of Dreman Value Management LLP, said the company's management has to be cleaned up.
McClendon and several Chesapeake directors are the target of a lawsuit by a shareholder over potential conflicts of interest over his loans.
McClendon's biggest personal lender, EIG Global Energy Partners, has also been a big financier to Chesapeake, and the lawsuit says that some analysts believe EIG's investors have been given favorable terms from the company on financing deals.
Court documents showed that the lawsuit, filed in the U.S. District Court of Western District of Oklahoma, was brought by Deborah Mallow IRA SEP Investment Plan.
This action is brought to address material disclosure violations permitted by the board of directors and to ensure that any damages suffered by Chesapeake by reason of these violations are borne by the individual defendants, and not by Chesapeake and its innocent shareholders, the lawsuit says.
Noting that the company's market value fell by more than $500 million on the day Reuters published its report on Wednesday, the lawsuit says it is possible that the defendants have exposed the company to class-action securities fraud liability.
The plaintiff is seeking to require that the CEO and other board members disclose all material facts relating to the McClendon loans, arrange independent oversight for the borrowings to identify any threats to the company, and to rescind the plan under which McClendon was able to invest in the wells.
The case is In re: Deborah G Mallow IRA SEP Investment Plan vs Aubrey McClendon, et al., U.S. District Court, Western District of Oklahoma. No: 5:12-00436
(Additional reporting by Tanya Agrawal and Swetha Gopinath in Bangalore and Ernest Schneyder in New York; Editing by Patricia Kranz and Matthew Lewis)