Secret Hedge Fund Violates McClendon’s Fiduciary Duty To Chesapeake

//Secret Hedge Fund Violates McClendon’s Fiduciary Duty To Chesapeake

Secret Hedge Fund Violates McClendon’s Fiduciary Duty To Chesapeake

Aubrey with Kate Upton

From 2004 to 2008, Aubrey McClendon ran a lucrative $200 million hedge fund that traded in natural gas without disclosing that activity to investors in Chesapeake Energy, where he ran the company’s commodity trading operations.
As Former CEO of a major natural gas producer, McClendon presumably would have a unique window into the production of the commodity that he through his hedge fund was betting either for or against.

A tip of the hat to the seven Reuters’ reporters who uncovered this latest story on the $200 million hedge fund that McClendon and co-founder Tom Ward were running inside Chesapeake offices between 2004 and 2008.
Secret hedge fund appears to be a violation of their fiduciary duty to Chesapeake. “Fiduciary duty” is a term you hear a lot, but what does it mean? Read below

A lot of that explication seems to apply to Ward and McClendon’s Heritage Management Company hedge fund. The fund was not disclosed to shareholders. Its operation was not undertaken for the benefit of shareholders. Its profits were neither shared with shareholders nor disclosed to shareholders. Why not?
It’s not like Chesapeake was a stranger to trading — the company has booked profits of $8.4 billion on its corporate oil and gas hedging in recent years. If the co-founders of the company identified new ways to profit from trading natural gas, why didn’t they present that opportunity to the company instead of keeping it for themselves?
This has raised a host of questions. Did they profit off of non-public information about Chesapeake’s trades? Were they front-running? Did the hedge fund pay rent to Chesapeake for being allowed to operate from a Chesapeake building?
The company naturally says there was nothing improper going on and has assured me that McClendon and Ward only ever took long positions on natural gas. That is, they only bet that the price would go up. The company, on the other hand, being naturally long on gas (very, very long), would only have reason to enter into what’s effectively short positions.
Not sure it matters what the hedge fund’s positions were. But let’s assume that indeed the hedge fund was always long. Given that the company’s positions are always net short, could this mean that McClendon and Ward might have been acting as counterparties to their company’s own hedging (even if through an intermediary)? That would be a colossal conflict of interest.

Read More: Forbes

2012-05-03T07:06:06+00:00

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