Duke alum, Chesapeake CEO McClendon under IRS and SEC investigation

A major Duke benefactor is facing scrutiny for controversial business practices.

Aubrey McClendon, CEO and chairman of Chesapeake Energy Corp. and Trinity ’81, is currently under investigation by the Securities and Exchange Commission and the Internal Revenue Service. The informal investigation follows an April Reuters report that McClendon had allegedly taken out approximately $1.1 billion in loans against his personal stakes in Chesapeake’s oil and gas wells, facilitated by a controversial corporate incentive program—the Founder Well Participation Program, which allowed him to purchase up to a 2.5 percent of each company well.

McClendon has agreed to end the Founder Well Participation Program by June 2014—18 months earlier than he had planned, with no compensation for the early termination, according to a Monday Chesapeake press release. The company’s board of directors plans to name a new external chairman in the future, at which point McClendon will relinquish his chairmanship. But he will retain his CEO position and will not lose any of the well stakes he has accumulated over the past two decades. McClendon has held the chairman position since co-founding the company in 1989.

A shareholder filed a lawsuit against McClendon, Chesapeake Energy and members of the company’s board of directors in the U.S. District Court of Oklahoma City April 19.

Additionally, McClendon co-founded and managed a private hedge fund from 2004 to 2008, Heritage Management Company LLC, which traded the same commodities that Chesapeake produces, Reuters reported Wednesday. It is unclear whether he received permission from the Chesapeake board to run the hedge fund, and there is currently no evidence that McClendon used inside knowledge from Chesapeake in his trading at Heritage.

Chesapeake is currently the second-largest natural gas enterprise in the United States, accounting for 5 percent of U.S. natural gas production, giving the corporation significant influence over the market.

“Advance knowledge of Chesapeake’s activities could be perceived as having insight into the movement of commodities prices, which certainly raises conflict-of-interest issues as well as ethical issues about the ability to enrich himself on non-public information,” said Tim Rezvan, oil and gas industry analyst at Sterne Agee in New York, in an interview with Reuters.

McClendon and fellow Chesapeake co-founder Tom Ward were able to reap massive amounts of cash from Heritage by charging investors a 2 percent management fee and taking home 20 percent of the hedge fund’s profits.

As of Wednesday, Chesapeake stock had dropped 15 percent in value since Monday, in wake of the controversy.

Since graduating, McClendon and his wife—Katie McClendon, Trinity ’80—have donated more than $16 million to the University. The donations have contributed to several major projects including McClendon Tower, the Bryan Center Plaza and the Divinity School Chapel.

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