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Shame on Aubrey McClendon (Chesapeake Energy)



May 02, 2012 – Comments (0) | RELATED TICKERS: CHK

Aubrey McClendon has a taste for leverage. Lots of leverage.

He levered his company up. He also levered himself up, buying company stock on leverage, only to be forced to unload all of it due to margin calls in 2008 as the market tanked. That really gave the stock a hit. In fact, I owned Chesapeake then, and it was very nerve racking even after the explanation came out.

Chesapeake recently ousted McClendon as chair, after revelations surfaced that he had again borrowed massively under a program allowing him, as a person, to co-invest in wells alongside Chesapeake. And even more recently, Reuters has unearthed revelations that McClendon was also running a commodities hedge fund on the side. Even worse, he was trading in the same commodities that Chesapeake was.

If you are the CEO of a company, as an outside shareholder, I want you working full time on the company that I own a piece of - our company. I do not want you to even be in a position where your personal economic interests could diverge from shareholders' economic interests. McClendon says that he never bet against Chesapeake. However, to me, this is the difference between you should be fired vs. you should be fired and the Feds should send you to prison.

It doesn't sound like what McClendon did was illegal, as the commodities markets are less regulated than regular securities. I'm not sure if it would be illegal if McClendon had actually bet against Chesapeake. But that doesn't matter: he is poor steward of capital. Given his greed, I strongly suspect he would have eventually done something illegal.

I sold Chesapeake at a significant loss. In a previous post, I alluded to the fact that I strongly preferred management teams that were capable (or at least not poor) stewards of shareholder capital. This is how I learned the lesson.

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