Moonlighting

The rules never apply to the 1%, of course. And after all, they keep telling us no one’s rigging energy prices, nope, not here, must be your imagination. Ryan Chittum at CJR reports:

Reuters unloads another outstanding scoop on the sketchy doings of Chesapeake Energy Aubrey McClendon, reporting that the CEO ran a hedge fund inside Chesapeake from 2004 to 2008 that bet on natural gas.

While Reuters notes up high that insider trading isn’t illegal in commodities, McClendon’s moonlighting as a fund manager was never disclosed to investors and perhaps not even to the company’s overly friendly board of directors.

In Chesapeake’s case, McClendon would have been aware of major decisions that could affect natural gas prices before that information became public. Accounting for 5 percent of U.S. natural gas production, Chesapeake holds tremendous sway over markets. On January 23, the company announced sharp output curbs in response to low prices. In response, U.S. 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 that will influence the decision-making at the top of the company,” said Jeff Harris, former chief economist at the market’s U.S. regulator, the Commodity Futures Trading Commission, and now professor of finance at Syracuse University.

Another potential problem is known as “front-running.” That’s when a trader buys or sells a commodity in advance of a client’s or his company’s orders. In theory, McClendon’s first-hand knowledge of Chesapeake’s own plans to trade would enable him to profit by trading ahead of Chesapeake – a move that could raise costs for the company.

 

I’d imagine the CFTC is going to want to take a very close look at this latest McClendon mess. And you’d have to guess Chesapeake shareholders would like to have known that the guy they were paying $112 million to run their company in 2008 was also “engaged in ‘near daily’ communications and ‘exhaustive’ calls to help direct the fund’s trading.”

This story follows closely on the heels of another one Reuters helped turn into a major headache.

After The Pittsburgh Post-Gazette very good scoop in late March that McClendon was borrowing against his share of Chesapeake’s wells, Reuters expanded the story in a major way, reporting that the CEO had borrowed more than a billion dollars against the assets from lenders that included a private-equity fund that was purchasing Chesapeake assets. Chesapeake’s top lawyer said that the company’s board was “fully aware” of the deals, something the directors themselves later disputed (check out the company’s snippy PR response too.)

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