Chesapeake Energy: Accounting Theory of Financial Misreporting

8/12/2019 Chesapeake Energy: Accounting Theory of Financial Misreporting

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See Appendix A for all candidate company summaries.

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Chesapeake Energy Corporation is the second largest producer of natural gas and the

most active driller of new wells in America. The Companys operations are focused on

discovering and developing unconventional natural gas through horizontal drilling and oil fields

onshore in the U.S. The Company also offers marketing, drilling, and other oilfield services, and

holds interests in various natural gas resources. Chesapeake has a market capitalization of over

10 billion USD ($13.04 billion as of Feb 7th, 2013) (About Chesapeake). Headquartered in

Oklahoma City, it was formed in 1989 with just 10 employees by former CEO Aubrey

McClendon and former President and COO Tom. L. Ward. The Company has been a natural gas

producer ever since, with up to 99% of revenues coming from the sale of natural gas (Meerten,

2012). In 1993, the company completed its IPO at a split-adjusted price of $1.33 per share and

shortly thereafter in 1995, moved from the NASDAQ to the NYSE, changing its stock symbol to

CHK (NYSE Euronext).

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On February 25, 2009, shareholders of Chesapeake Energy Corp filed a proposed securities

class action lawsuit against Chesapeake in regards to a July 2008 secondary public stock offering

of over 25 million shares. The Company is accused of issuing materially false and misleading

Registration Statements (Stanford Law School). Chesapeake failed to address numerous required

facts, including:

1. A substantial increase in its hedge position, from 20% to 80%.


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2. Failure to report that a significant portion of the hedging contracts created to protectagainst falling prices were made with the underwriters at Lehman Brothers, despite the

fact that Lehmans was experiencing rapidly declining financial conditions at the time.

3. Unreported knockout provisions that eliminated the counterpartys financial obligationonce the price of natural gas fell below a certain benchmark (Understated Financial

Obligation).

4. Failure to report proper write-down of impaired goodwill on the assets it was acquiring,resulting in artificially inflated balance sheet information.

5. Failure to report lease and royalty agreements with its lease brokers, causing unnecessarylease transactions above par price.

As these omitted facts were revealed to the market throughout 2008 and early 2009, the price of

Chesapeakes stock declined to less than $12 per share, 80% below the offering price, creating

substantial damage to investors finance.

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The presentation of the event analysis is separated into 3 main periods: the pre-class

period (January 15to July 14, 2008), the class period (July 15, 2008 to January 27, 2009), and

the post-class period (January 28 to July 27, 2009). Chesapeakes business model and operations

are similar to 3 of its competitors: British Petrolium (BP), Anadarko (APC) and Encana (ECA),

where the latter company also exclusively focuses on natural gas exploration.

,7&?1%#.. 3&78'=From January 15, 2008 to July 15, 2008, Chesapeakes stock price appreciated by

50.46% (Appendix B-1). During this period, CHKs stock experienced a steady increase well

above the market, from $39.54 to $59.49, while trade volume remained relatively stable.

Competitors APC, BP, and ECA were not far behind CHK, though stock price for all 3 more


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day of the class period, Chesapeake completed a secondary public offering of 28.75 million

shares at $57.25 per share. Subsequent to the release of this new information, share price fell by

17% in one week. During the period leading up to the Q2 earnings report, average increase in

analyst estimates was $0.004 per share (Appendix B-3). Competitors returns in the same week

validate that a portion of the drop was an industry trend caused by falling natural gas and oil

prices (See Appendix B-4). While ECA and APC had only suffered a 10% loss in stock price

from the reduction in commodity prices, BPs diversified structure allowed the company to

report a 1% increase in stock price. This leads to the conclusion that the portion of CHK's falling

share price above the industry average was due to the release of new information regarding the

firms issuance of shares to the market. Evidently, this dilutes future earnings amongst the new

ownership pool and signals CHKs inability to borrow with debt tools.

Chesapeake released its earnings for the period ending June 30 th, 2008, only a penny a

share above average analyst estimates (Earningsprice.com, 2013). A major part of the losses

incurred during this quarter stemmed from a decrease in the mark-to-market hedge value of $3.4

billion, although Chesapeake was able to report a gain by July 25th. At this point, natural gas

prices were still in decline due to "...growth in onshore production and robust storage

inventories, as well as a declining economy" (Teller, 2013). Such information initiated the

markets expectation of negative growth throughout the industry, devaluing the stock price by

9.78% over the weekend following the announcement.

At the Lehman Brother's Energy Conference on September 2nd, 2008, Chesapeakes CEO

clarified the use of hedging instruments, specifically knockout swaps, that rendered hedging

contracts null if the price of natural gas fell below a given level. Although the knockout

derivatives were quantified and valued in all previous 10-Q and 10-K filings with the SEC (SEC

10-Q filings, p. 36), analysts only reacted to the knockout price as it drew dangerously close.


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Investors limited attention caused a bias to such risks in the quarterly earnings reports prior to

this news, thus an under reaction to the implications of the knockout provision in CHK's

information system (Scott, Financial accounting theory, p. 201). Investors then factored this

news into CHK's share price, resulting in a 23% decrease in value. The stock was

underperforming the industry for 2 weeks following the conference, while APC and ECA lost

approximately 16% and 13% respectively (Appendix B-2).

On September 23rd, 2008, a conference call was held to update investors on Chesapeakes

operational and financial situation, wherein analyst Bradley Tease raised concerns regarding

hedging counterparties credit worthiness. The conference call was 6 days after Lehman Brothers

had declared bankruptcy, while a slew of other financial institutions were potentially facing the

same situation. The question prompted Chesapeakes CEO to answer that he was quite

confident, and ended the call abruptly (Audio call 2). With natural gas prices at an ultimate low,

analysts recognized the inefficiencies of CHKs hedges and as a result, foresaw poor future firm

performance. The conference call also unveiled Chesapeake's plan to reduce capital expenditures

and sell off a portion of assets due to ongoing liquidity issues. The markets were also on a

downward slope, attributable to an economy-wide credit crunch that was limiting growth. As a

result, there were "...increasing fears of a prolonged economic downturn that could sharply

curtail energy demand" (Jacobs, 2008). The DJI went from 11022 points on September 25 th to

8451 on October 10th, 2008. Essentially, the market's overall performance was part of investors

downward stock price revision, as well as CHK's inability to properly protect itself against

natural gas price volatility.

On November 27th, 2009, CHK deposited another filing with the SEC to raise close to

$1.8 billion by issuing shares. The stock price suffered a 44% decline to hit its lowest mark in 5

years at $11.32 on December 5th (Appendix B-2). Thus, the market factored in the dilution as


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soon as the registration was filed (Gammel, Wilson, & Shilpa, 2008, p. 2), confirming the

market's concerns over CHK's liquidity. The perspective of lower production volumes that would

be generated by the reduced capital program effectively drove analysts to revise estimates

downwards (Gammel, Wilson and Shilpa 1). All the while, the DJI and Chesapeakes industry

peers fell by only 1% during the same period (Appendix B-2).

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On February 26th, 2009, Chesapeake restructured its Eastern Division headquarters by

unexpectedly announcing job cuts of 80%, amounting to approximately 215 employee positions

(Price, 2009). As tightening credit markets and declining energy prices dictated a reduction in

capital spending, CHK consolidated the Divisions management with the companys corporate

offices in Oklahoma City. The public recognized the negative effects of the announcement, as

CHK saw a 3.62% drop in share price.

Chesapeakes Q1 earnings announcement on May 4th, 2009 reported impairment charges

of more than $6 billion as a result of the sharp decline in energy prices. Net losses to common

shareholders were over $5 billion, operating cash flows $1 billion, and EBIDTA at a loss of $8.7

billion. The Q1 report, together with an announcement to cut capital expenditures by 8%, caused

CHKs stock to experience declining demand, resulting in a depreciation of 10.64% in share

price (Appendix B-5).

On April 1st, 2009, the New Alternative Transportation to Give Americans Solutions

Act was passed for review to Congress in support of efficient natural gas transportation. This

particular bill introduced tax credits for manufacturers and buyers of Natural Gas Vehicles

(NGV) as well as for businesses that build natural gas refueling infrastructure, in order to

incentivize installation of natural gas facilities and promote production of NGVs. As such news


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encouraged optimism in regards to US demand for natural gas, CHKs stock increased by 13%

(Boren, 2009).

Chesapeake signed a 15-year contract on January 7th, 2009 with Energy Transfer Partner

(ETP) to build a pipeline at a cost of $1 billion. Its purpose was to create significant

transportation capacity and a system of natural gas produced from the Haynesville Shale. ETP

announced two binding contracts to transport natural gas via its proposed Tiger Pipeline system

on May 8th, 2009. At the time, Chesapeake believed the Haynesville Shale play to have the

potential to become the largest producing field in the country, as it was one of the fastest

growing natural gas fields. This new contract with ETP made a positive impression on investors

in regards to Haynesvilles future prospects (ETP Chesapeake, 2009). Following the

announcement, the share price increased by 23% (Appendix B-5).

On May 28th2009, US energy information administration reported lower inventory than

expected. Despite ample supplies and a forecast of favourable weather, traders were viewing the

storage data as a facilitator to increase prices that had plunged due to the recessionary impacts of

weak demand. After the report was released, CHKs stock increased by 17% over a period of 3

days (Dow Jones Newswires, 2009).

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concern, as shareholders fear that the company could fall into the danger zone, resulting in the

classification of CHK as a risky company.

For the growth component, Chesapeake scored a total of 12, with 4 in pressure for

performance, 4 in rate of expansion and 4 in inexperience of key employees. Explaining

this is the fact that Chesapeake is planning on continuing to grow and to outperform competitors:

What will drive Chesapeakes strong growth in the future? It will be our industry-leading

position in the Big 6 major natural gas shale plays in the U.S.the Barnett,

Fayetteville, Haynesville, Marcellus, Bossier and Eagle Ford shalesplus our emerging

unconventional oil plays. (Chesapeake Annual report 2009 p.5)

Furthermore, Chesapeake employees are distinctive, in that they are much younger than the

industry average, with 50% of the Oklahoma City-based headquarters employees being under the

age of 35. According to the 2009 Annual Report, their enthusiasm and willingness to learn

creates an atmosphere of vitality and energy at Chesapeake, important ingredients of

[Chesapeakes] unique culture (p.11). Implied by this is that firm is not able to retain its

employees for a long period of time and as a result, employee turnover must be high. A company

with a majority of young employees can be cause for concern, as employees are generally less

experienced.

For the culture component, Chesapeake scored a total of 11, with 4 in rewards for

entrepreneurial risk taking, 4 in executives resistance to bad news and 3 in level of internal

competition. Even during the financial crisis of 2008, Chesapeake executives did not adjust

their way of doing business, as the goal remained to maximize year-end bonuses. With this in

mind, management strove to report high earnings, resisting and effectively, hiding the

implications of any bad news (Chesapeake Annual reports, 2009).


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The company scored a 9 for the information management component of the calculator,

with 4 in transaction complexity, 3 in gaps in diagnostic performance measure and 2 in

degree of decentralized decision-making. As the company is consistently growing and merging

with other companies via joint ventures, transactions can be very complex. Also, since the

performance of the company is based on estimates of reserves, numbers are subject to a high

degree of manipulation. In terms of decentralization, Chesapeakes executives only have

decision-making power at the top. That is, authority to influence the companys future prospects

remains centralized at higher-level management (Chesapeake Annual Report 2009).

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The companys financial reports show that since 2002, revenue has been growing

consistently. Since then, the greatest increase was in 2009, where the company experienced a

49% increase in revenue. However, these same financials show that net earnings are not

persistent (Appendix C-1). The percentage change in net earnings, gross profit and EPS between

2007 and 2008 show decreases ranging from 40% to 70%. Given the effect of the financial crisis

on the price of gas, these decreases are most likely a result of overall market performance. The

following year, the company experienced exacerbated abnormal decline of almost 1000% in each

of net earnings, gross profit and EPS. The impairment charge recorded in 2009 certainly had an

impact on the numbers, but regardless, such substantial changes demonstrate Chesapeake's low

earnings quality. The $11 billion impairment loss increased operating costs for the year and in

turn, decreased gross profit and net earnings for 2009. There were 2 types of impairment

involved that had an impact on the value of natural gas and oil properties, as well as investments.

In 2009, impairment loss on oil and gas properties accounted for more than 66.7% of the total


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operating costs in that year (Appendix C-3). Chesapeake stated, natural gas prices were dressed

throughout 2009, [] reflecting an impairment of approximately $6.9 billion, net of income tax,

of our natural gas and oil properties. We also had an after-tax non-cash impairment charge to

certain investments and fixed assets of approximately $183 million in 2009, as a result of lower

asset valuation estimates (Chesapeake 10K report 2009, p.28). The impairment also had an

impact on the gross profit and the net income percentage for 2009 (Appendix C-4), given that the

percentage change in gross profit was -116% compared to 12.5% in the year prior. As

production, reserves and resources continued to grow at a constant rate through 2008 and 2009,

we can conclude that the volatility in net earnings was largely due to large impairment losses

(Chesapeake 2009 annual reports).

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Appendix C-2 demonstrates that Chesapeake does not have substantial accrual accounts

relative to other large firms in the industry. The main accruals are Accounts Receivable,

Inventory, Accounts Payable, Accrued Liabilities and Deferred Income Taxes. The accruals-to-

cash flow from operations ratio of 0.09 in 2007, 0.12 in 2008 and -0.21 in 2009 indicate effective

accruals quality in Chesapeakes financial reporting. According to Scott, "Earnings quality

depends primarily on the quality of working capital accruals, since cash flow from operation is

relatively less subject to errors and manager bias, and therefore is of reasonably high quality to

start with" (p. 166). Thus, Chesapeakes low level of accruals ensures that the company has a

substantial amount of cash transactions and in turn, higher earnings quality. Although there is a

relative volatility in the aforementioned ratios, the absolute values are not significant relative to

the industry average.


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The intent to disclose proved reserves in financial statements is primarily to provide

investors with more relevant information about the company's future cash flows (Scott, 2011).

CHK's stock value is greatly pegged to its capacity to extract natural gas, and thus is intrinsically

related to its proved reserves. Methods to evaluate proved reserves were elaborated by 5

different consultants firms, where volumetric calculations were based on data and maps provided

by Chesapeake (Chesapeake 2009 Annual report). As such, the valuation of proved reserves

stemmed from to data that could be manipulated by CHK management.

In this case, the issue of moral hazard is prevalent. In particular, management is in a

position to present distorted figures on proved reserves, while shareholders are not aware of the

true value of the assets. Increases in proved reserves show that volumes in 2009 were greater by

18% than the year prior, while Chesapeake was actively selling assets in order to meet liquidity

needs (Appendix C-5). This in itself is contradictory and validates that managers were artificially

increasing proved reserves (Reserve And Economic Evaluation Of Proved Reserves Of Certain

Chesapeake Energy Corporation Eastern Division Oil And Gas Interest, 2001, p.1).

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Hydraulic fracturing, commonly known as fracking, is Chesapeakes method of drilling

for natural gas, where large volumes of water, sand and chemicals are injected into gas-rich rock

formations miles underground in order to extract the resource. The process has introduced a

tension between environmental and economic objectives, in that increased public attention has

unlocked billions of dollars of gas reserves, leading to prosperity in production, jobs, and profits,

as well as concerns about pollution and public health (The Associated Press, 2012).

As the price of natural gas had risen and its use as an alternative to oil had grown, natural

gas companies were attracting more attention. Consequently, energy companies have gone on


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the offensive to shore up the public image of fracking (Politics & Economics, 2013).

Chesapeake might have engaged into earnings management to reduce reported profits by

booking write-downs, and make the company seem less profitable as to reduce the risk that

governing bodies regulating CHK's activities might be tempted to tax "frackers" or to restrict

their rights to engage in polluting activities (Scott, 2012, p. 425). This would indeed explain such

drastic write-downs of capital assets of $6.9 billion in Q1 of 2009, shortly after reporting a 15-

year record high EPS in Q2 of 2008.

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that reserve valuation is highly volatile and is not an effective reflection of employee efforts to

the company, in that "...using the price of natural gas on a daily basis to estimate oil and natural

gas reserves for financial reporting purposes [] fails to reflect a fair representation of reserve-

base value" (ChesapeakeDEF14A, 2008). Additionally, the long-term success and profitability of

the company depends on its capacity to explore and discover new sources of oil and natural

gasa high-risk and expensive process. In order to foster and motivate the exploration and

discovering activities, executive compensation is designed to avoid direct linking to drilling

results in the short-run. CHK firmly believes that objective performance criteria cannot

differentiate executives contribution, due to external factors beyond the companys control, such

as lack of predictability and high volatility experience in natural gas and oil prices. Due to the

highly contingent nature of the incentive program, the Compensation Committee does not set

pre-determined target performance metrics on an annual basis (ChesapeakeDEF14A, 2008, p.

36), but rather value the subjectivity it retains in its review of executive compensation.

Chesapeake believes that long-term incentive compensation for executives should be tied

to equity compensation to encourage a longer-term decision horizon and ensure that interests are

aligned with the long-term growth of the company. This incentive plan motivates executive

officers to make decisions that will benefit the firms long-term financial performance, attract

new employees and encourage employee retention, since they have a stake in the business.

Employees with significant influence in long-term strategies of the company receive long-term

equity based compensation in order to align their interests to maintaining long-term growth and

profitability of the firm. For example, McClendon received approximately 80% of his

compensation in the form of equity, since the company values the CEO as the most influential

and instrumental to shaping the vision of the company. He is also highly respected for his role in

the companys evolution to one of Americas leading natural gas producers


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(ChesapeakeDEF14A, 2008, p. 36). Having significant ownership of approximately 33 out of

546 million shares of CHK's common stock as of July 15 th, 2008, the proxy statement proudly

stated that McClendons substantial portion of personal wealth is tied directly to stock price

performance. McClendon also had a reputation as a continuous purchaser of shares in the open

market, not selling a single share of the companys stock up until October 10 th, 2008. This

implies that his compensation provided direct alignment with shareholder interests, ensuring

long-term interest of the company. The 2008 Compensation Summary illustrates that all other

executives received the majority of compensation in the form of stocks (Appendix C-6).Overall,

as executives responsibilities increase, the trend shows that compensation is increasingly

weighted toward the equity incentives, reinforced by CHKs compensation philosophy.

There are similarities and differences between the compensation philosophy of CHK and

its top three competitors within the industry. ECA, APC, and BP are all natural gas exploring and

producing companies and use similar compensation structures, such as mix of base salary, short-

term cash incentives, and long term equity incentives. As required by the NYSE, all competitor

also use an independent compensation committee that semi-annually reviews compensation-

related structures and designing.

ECA, for example, utilizes the peer-benchmarking method to take into account

marketplace trends (Encana Corporation, p. 27). Compensation benchmarking occurs when a

CEO's pay depends on the compensation of other CEOs within the firms peer group. To create a

more accurate set of peer group definitions, the firms follow federal law requiring an unbiased

list of primary market competitors, similar in size and scope, in their annual filings. Every year,

the Committee sets targets for future performance periods within each compensation program,

using the primary peer group. The key factor that distinguishes ECA from CHK is that

compensation is highly results-oriented, and due to the cyclical nature of the natural gas


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business, the movement of commodity prices influences ECAs total compensation. This

compensation philosophy encourages market completion to attract and retain the top leadership

talent necessary to execute strategic objectives.

BP also uses similar methods, settingperformance measures and targets at the beginning

of each year, based on their annual target plan. For example, the target level bonus is designed to

exceed the base salary by 120% and superior performance extends the threshold up to 150% (BP,

p. 80). Under this method, the company can estimate potential bonuses in the beginning of the

year, effectively setting the upper limit on annual short-term compensation. The key factor that

distinguishes BP from CHK is that BP compensates its executives mostly in the form of an

annual performance bonus rather than in the form of equity (Appendix C-8).

APC also uses the industry peer group method to establish a reference point for assessing

compensation values. The level of each element of direct compensation is generally targeted

between the 50thto 75thpercentiles of the industry peer group. APCs new API bonus plan is

also unique in that, if the target performance hurdle is not achieved, the executive earns no API

bonus at all for the year (Anadarko, p. 104). The performance-based unit awards incentive

program is also unique since cash bonuses and the vesting of the units are solely dependent on

companys total shareholder return for the year, relative to the total shareholder return of a

predetermined group of peer companies. This helps the incentive system to be in line with

increasing shareholder returns, taking into an account the peer groups that reflect the overall

market condition. The key factor that distinguishes APC from CHK is the annual target bonus

plan, which calls for full achievement, where failing to do so results in the elimination of a cash

bonuses for the given year.


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Quantitative analysis showed that CHK has the highest compensation risk among its top

3 competitors (Appendix C-14). It also showed inconsistent patterns in short-term and long-term

ratio from year to year. Chesapeakes compensation risk ratio is 96.59% in 2008, a 4.56%

increase from 92.03% in the previous year. Its short-term ratio increased by 43.82% from the

previous year, whereas the long-term ratio decreased by 43.82%. The long-term ratio decline in

2008 is due to an unusual $75 million short-term cash bonus awarded to McClendon during the

year. The high compensation risk ratio of 96.59% experienced in 2008 is significant and raises

concern for high risk of moral hazard from shareholders viewpoint.

Overall, in comparison to its competitors, the key distinction is that CHKs compensation

valuation is highly subjective. The compensation package analysis and process involves highly

subjective consideration of each executive, therefore amounts are usually difficult to estimate

and predict. Unlike its top three competitors, CHK does not set annual performance targets or

designate peer groups, and considers industry the peer-benchmarking method unfit in their nature

of the business.

H'7#% I#J#7=

Moral hazard is one manifestation of the owner-agency problem arising from information

asymmetry, where employees and executives manage the business on behalf of shareholders.

Chesapeake and its competitors compensation mix, as stated in the proxy filings, are designed to

mitigate risk of moral hazard and promote appropriate risk-taking. However, moral hazard risk is

very difficult to detect and involves comprehensive understanding of not only the companys

internal operations and finance, but also external publicity, such as presses releases, analyst

outlooks, and other information regarding key executives financial welfare. During the year of

2008, the company granted a $75 million bonus plan, a so-called Well Cost Incentive Award,

to invest in the companys wells. McClendons 2008 compensation package included a one time


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$75 million bonus, a $975,000 base salary and 32.7 million in stock, even as the companys

stock price tumbled (Appendix C-6). In 2008, the Top CEO Compensation survey named

McClendon as one of the seven highest paid CEOs in 2008, despite poor firm performance. This

eventually led to a compensation scandal faced by CHK, where the firm defended the

controversy by stating that the bonus was designed to keep McClendon from abandoning the

company. That is, the bonus was a means of retaining the CEO in the form of incentive pay, due

to the effects of other entrepreneurial opportunities that exist in the industry and Mr.

McClendons reduced company stock holdings (CNN Money, 2009).

Numerous events took place throughout 2008 in relation to McClendons transaction

activities with outside parties and as a result, the level of information asymmetry between

Chesapeake and its shareholders became more apparent. On April 21st, CHK disclosed its

CEOs compensation via proxy statement, reporting McClendons $100 million compensation

package, despite a 60% fall in stock performance and 50% drop in the companys profit for that

year. The company also agreed to purchase McClendons personal art collection for $12.1

million. It was further revealed that McClendon managed a $200 million hedge fund for natural

gas trading and had a personal borrowing of $1.1 billion against his stake, Founder Well

Participation Program (FWPP), in the companys oil and gas wells (Reuters, 2012). The FWPP is

a special program that provides the rights for the CEO to take up to a 2.5% stake in the wells

working interest for those drilled during that year (ChesapeakeDEF14A, 2008, p. 16). The

rationale for this special incentive was that the CEO would use the proceeds to invest in the

companys wells, which would align his economic interest with the companys long-term

business plan. McClendon was the only executive to participate in this program and have

consistently acquired stakes in the companys wells since 2005. With Chesapeakes shares

tumbling along with commodity prices, McClendon received margin calls and was forced to sell


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33.4 million shares, approximately 90% of his stake in the company, at a price ranging from $15

to $22 over three days, a stake that was worth $1.9 billion at the time (Forbes, 2008).

Chesapeake also restructured its CEO employment agreement, lowering the number of

shares required to hold a stake in the company to approximately 200% of McClendons salary

and bonus, the same time of the year he received margin calls (NY Times, 2009). This temporary

restructuring term allowed him to sell 94% of his shares in the company and use the proceeds to

cover his margin calls, amounting to $569 million (Business Insider, 2013), causing stock

performance to depress even further. By flooding the markets with sell orders, Chesapeake sent

prices even lower, creating a disadvantage to common shareholders holding CHK stock.

When shareholders learned of the CEO obtaining loans backed by his stakes through

FWPP, CHK responded that the nature of transaction was a personal transaction and therefore

not qualified to be reviewed under the companys management and requiring no obligation to

disclose the information (Reuters, 2011). Although the SEC transaction rule required companies

to disclose when executives use corporate stock as collateral for loans, McClendons personal

loan transaction backed by his stake in the company was not covered by the SEC rule since his

stake in the company through FWPP was a personal asset. This is a classic example of

managements strategic movement in circumventing SEC rules to disguise financial information,

even though the underlying nature of the transaction called for shareholders approval. As such,

the loans should have been disclosed by Chesapeake, effectively creating a situation where there

was a conflict of interest. The CEOs outside transactions backed by his stake in the companys

wells intensified the potential for unmanaged and unmonitored conflicts of interest, and FWPP

practices were severely criticized by the public.


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In order to gain insight into the companys moral hazard problem, compensation risk

ratios of Chesapeakes top 3 competitors were compared to assess the risk-taking level of the

firm (Appendix C-14). In 2008, despite the financial turmoil and poor market conditions, CHK

paid out total compensation amounting to approximately $153.51 million, a 129% increase from

2007s $66.96 million (Appendix C), supporting that the compensation payout is volatile and

difficult to predict. ECA and BPs use of benchmarking ensures reasonable and fair evaluation of

compensation, taking into account the peer group and the market conditions at the time.

However, CHK experienced negative publicity post-announcement of executives compensation

in 2008, due to over-payment relative to the industrys overall market performance. The

subjective nature of Chesapeakes compensation raises concern for the risk of moral hazard due

to the Committees ability to manipulate or easily influence the payouts.

Overall, the moral hazard assessment of CHK suggests that the firm is highly subject to

conflicts of interest between managers and shareholders. The fact that McClendons personal

hedge fund traded oil and gas contracts indicated the potential for the CEO to take advantage of

his role at Chesapeake to leak market-moving information. The companys lack of transparency

in the CEOs fiduciary duties and subjective compensation practice is concerning for the publics

interest in the firm. Ultimately, moral hazard is a major issue faced by CHK, leading to

enormous loss of credibility and reliability from shareholders perspective.

1#38+#% H#7C&+ K*)&*+86&.

On March 25th

, 2008, CHK revealed its progress in the Haynesville project, which had

been kept secret beforehand. At this point, the project was being openly discussed in the

industry, thus acreage values were likely to escalate, requiring Chesapeake to accelerate leasing

and drilling activities accordingly (Chesapeake, 2008, p. 2). This triggered a race to the leases

per se, where getting the working capital to exploit the resources was essential to success in the


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industry. CHK had planned to fund 2008 and 2009 capital expenditures through cash flow from

operations, borrowings from their revolving credit facility and asset monetization, but

"...considering the increasing number of opportunities available, [CHK] expects to fund some or

all additional capital expenditures through public capital market transactions" (Chesapeake,

2008, p. 25). Since CHK was now going to fund growth through share issuance, the firm had

motivation to increase share value in order to raise enough capital and get ahead in the industry.

On that note, CEO McClendon was signaling strongly to the market an undervaluation of

the stock by buying 1.6 million shares in the month prior to the public offering (Appendix C-11).

CHK's stock price outgrew competitors by nearly 30% and the market by nearly 40% between

June 4th

and July 2nd

of 2008 (Appendix C-12). The consensus on CHK's adjusted EPS grew

from 0.822$/share on March 22nd

to 0.972$/share on July 18th

. Such EPS outlook growth

reflected the good news from the company's announcements of growth opportunities with new

shale plays, as well as the CEO's share acquisitions, but could also be the result of earnings

management.

From Q1 2002 to Q1 2008, with the exception of 1 quarter in 2004, analyst estimates

were consistently below actual reported figures (Appendix C-13). Throughout this period,

Chesapeake earnings had average abnormal returns of 13.5% above estimated EPS values.

Analyst consensus, composed of 25 to 30 analysts during that period, was almost always beneath

reported figures, leading to the conclusion that there was earnings management done to help

consistently report above expected results. This put high pressure on CHK management to beat,

or at least meet expectations for Q2 of 2008. As the CEO held 33 million shares of CHK, some

recently acquired, he had a strong incentive to ensure earnings expectations were met, knowing

that "the market penalizes firms that fall short of expectations by more than it rewards firms that

exceed them" (Scott, Financial accounting theory, 2012, p. 434).


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The Q2 earnings release on May 1st, 2008, showed adjusted EPS of $0.89, while estimate

consensus just below at $0.88, thus abnormal returns of only 1%. As earnings were only slightly

above consensus, it is plausible that Chesapeake engaged in earnings management in order to

ensure that actual were above expected returns.

B&3'7+8*E '( +-& "7#*.#)+8'*. 8* +-& G8*#*)8#%


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noncash charges were excluded from the calculation of Chesapeakes debt-to-capitalization ratio

pursuant to a March 2009 amendment to the credit agreement (Mobley, 2009). In the case of

such flexible debt contracting, there is less incentive for Chesapeake management to engage in

earnings management, since covenant violation can be avoided through negotiations rather than

playing with financial ratios. Nonetheless, management tried to conceal the effects of the

impairment by not disclosing it, knowing that the inclusion of a significant write-down would

have a negative impact on share price and debt ratios. Due to the information asymmetry

between management and investors, CHK stock was trading at an inflated price and the company

was able to meet its debt-to-cap and debt-to-EBITDA credit facility covenants.

As funding gaps grew, Chesapeake became more prone to complex and convoluted deals,

including joint ventures and volumetric production payments (VPP). Chesapeake made a number

of long-term commitments to Wall Street banks that required the firm to deliver specific amounts

of oil and natural gas each month, through to 2022, in exchange for upfront cash. These deals,

known as volumetric production payments, are essentially debts, with payment made in fuel

rather than cash. Chesapeake told investors how much the unusual deals have brought in for the

company$6.4 billion since 2007but did not provide details about the costs to fulfill the

contracts, such as pumping and delivering the oil and gas.

CHK accounts for the proceeds of the VPPs in reduction of their full cost pool. These

transactions are treated as loans for tax purposes, thus a great way to monetize assets effectively.

In this case, due to poor reporting of the liabilities that were associated with these transactions,

the VPPs were in fact a means of off-balance sheet financing. Analysts and investors have

criticized CHK for the controversy involved in reporting the VPP transactions, "...because they


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effectively move future obligations to opaque off-balance sheet structures. Once a well is moved

off the books, it can be difficult for investors to track production" (Reuters 2012).

B&%&6#*)& #*= B&%8#$8%8+4 1'*)&7*.

As a public company, Chesapeake is required by the SEC to fully disclose financial

information and faithfully represent its current economic condition. According to Scott, relevant

information provides financial statement users with an indication of the firms future economic

prospects, while reliable information implies a correspondence between the accounting valuation

of an item and the real item that information represents (p. 36). However, Chesapeake failed to

disclose substantial impairment on natural gas and oil properties, as well as the fact that the

majority of its hedge contracts were bound with a firm experiencing severe financial distress.

These omissions served to overstate the balance sheet and distort shareholders predictions of

future firm performance. As a result of the foregoing material misstatements, the information

provided regarding CHKs asset valuation and credit counterparty risk was irrelevant and

unreliable to investors. Ultimately, financial statement users could not accurately evaluate the

risks associated with the purchase of CHKs overpriced stock.

,-#.& L

1'*(&7&*)& 1#%%M ,'.+?1%#.. ,&78'=

The first conference call following the revelation of Chesapeakes impairment charges

and subsequent 73% share price decline in 2009 was held with 11 analysts, shortly after the class

period on May 5th, to discuss the first fiscal quarter of the year (Audio call 3). CEO McClendon

only briefly mentioned the ceiling test impairment in his introduction, instead emphasizing the

recent media coverage regarding his revised employment agreement, as well as the operational

observation of natural gas pricing and production. CFO Marcus Rowland later shed positive light

on the full cost ceiling test, stating that the PV10% at March 31 [] computes to a value for


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accounting purposes of only $0.75 per thousand cubic feet equivalent (p. 9). He also mentioned

that CHK would be more profitable going forward, as impairment charges reduce capitalized

costs and thus, as mentioned, the firm will record fewer depreciation, depletion and amortization

expenses in future reporting periods.

There was little interest from analysts during the Q&A to inquire about the ceiling test,

nor the resulting impairment charges. During the call, analysts had concerns relating to the

change in Chesapeakes cost trends and falling natural gas prices, knockout swaps, production

levels of certain wells, joint venture progress and prospects, leasing and acquisition

arrangements, as well as fluctuations in quarter-to-quarter capitalized interest expense. Notably,

analysts consistently returned to the topic of Chesapeakes hedge positions, restructuring, and

forecasting. More specifically, analysts were concerned about future expectations for gas

demand and the effect it had on pricing, given that the economy [was] probably in a process of

bottoming (p. 15). However, McClendon had little more to say in terms of macro predictions

than the information provided to analysts by the market.

Most unexpected about the Q1 earnings conference call was that analysts comments and

concerns did not center around the issues introduced by the litigation, particularly the substantial

impairment charge revealed by the ceiling test. Given that the call was the first to be held after

the class period, it is surprising that analysts were not more interested in the specifics of the test

itself. However, according to Investopedia in 2009, investors in the energy sector should get

used to hearing the term noncash ceiling test impairment charge, as a result of the sharp decline

in commodity prices (Fox, 2009). If the impairment charge is not necessarily a firm-specific

event, but rather a signal of future economic consequences on industry players, it is

understandable that analysts did not spend much time on the issue.


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1-#*E& 8* N:2$&7 '( >*#%4.+.

During the pre-class period, the variance in the number of Chesapeakes number of

analysts was insignificant. On January 15th, 2008, 26 analysts were covering CHK, growing to

29 during the financial crisis in October and finally ending with 28 in Q1 of 2009 (Appendix D-

1). The lawsuit did not affect analysts desire to continue to follow the company. Given analysts

recommendation to buy, sell or hold shares at the time, we can see there remained confidence in

Chesapeakes performance. In particular, the majority continued to buy while only a small

amount were selling and approximately 1/3 were holding.

Appendix D-2 shows that during the class period, an average of 1 analyst suggested to

sell CHK shares, indicating that analysts had high confidence in the long-term profitability of the

company, even as the price fell (Bloomberg data).

1#38+#% H#7C&+ B&.3'*.&

Throughout the class period, the target price set by analysts consensus was consistently

above CHKs actual share price. Furthermore, in July 2008, the beginning of the class period,

analysts target price was continuing to increase while share price was severely decreasing. It

was only in September that analysts started to decrease their target price, though still

significantly above actual price. Therefore, analysts estimated that the stock was undervalued.

However, efficient securities market theory suggests that all publicly available information is

reflected in stock prices, thus the market identified Chesapeakes financial difficulties before the

analysts (Appendix D-2). It is possible that analysts continued to give a high estimate for CHK

due to the fact that several analysts were holding CHK stock. That is, a price increase would

ultimately benefit the shareholders (i.e. the analysts). There were 16 of the 26 analysts following

Chesapeake who held a portion of the companys shares, which totaled 35M shares, with

Goldman Sachs leading the group at 16.5M shares as of July 15th 2008. Goldman Sachs, 5th


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biggest shareholder in the first part of 2008, lost confidence in Chesapeakes management and

began divesting in Q2 of 2008, liquidating almost all shares by the end of 2009, and reducing the

spread between their target price and actual price from 35.24$ to 2.23$ above actual price.

B&.3'*.& '( K*.+8+:+8'*#% K*6&.+'7.In the first quarter of 2008, Chesapeakes CEO was the second largest shareholder of the

company with 30.7 million shares, just below Southeastern Asset Managements 36.5 million.

Other prominent shareholders were CHK co-founder Tom L. Ward, Wellington Management

and Goldman Sachs Group. Throughout the 2008 reporting period, the holdings of these 5 major

shareholders were subject to significant changes (Appendix D-3). Initially, McClendon was

forced to sell the majority of his shares in order to meet margin calls, ending the year with a mere

1.9 million shares. On the other hand, Southeastern began with 65.3 million shares in the pre-

class period, consistently increasing its stake through to the post-class period, ending with 74.2

million shares by mid-2009. The shareholders were divesting while the share price was

increasing and buying while the share price fell. Similarly, Wellington Management divested

while the share price rose, increasing their stake following CHKs stock price decline in the third

quarter of 2008. By the end of the class period, Wellington held approximately 10 million shares

(Bloomberg data).

O&$+ B#+8*E >E&*)8&.

CHK debt rating agencies are aligned with the trend of the financial crisis, as the

likelihood of default was low until September 2008. The companys debt rating according to

Moody was Ba2 and BB according to S&P, which is the next rating down from the highest non-

investment grade rating, regarded as speculative. It is assigned to less creditworthy securities and

investors face a higher risk of default. Furthermore, during 2008 and 2009, Chesapeakes


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liquidity reached a long-time low. The company was struggling to sell assets and find investors

in their shale position in order to help meet drilling activity costs.

,-#.& P

It is now abundantly clear that Chesapeake's firm value was closely linked to natural gas

prices during the litigation. Although the firm repeatedly tried to demonstrate that operating cash

flows were protected against the volatility of these prices by engaging in significant hedging

activity, vulnerability was still an issue. Chesapeake was subject to declining natural gas prices

for two reasons: credit contract counterparties were insolvent and hedging was ineffective. The

company failed to report key elements in the financial statements regarding the hedging

contracts, which ultimately gave investors a distorted representation of Chesapeakes future

profitability.

Chesapeake sought to build an empire and gain advantage in the industry by

accelerating lease signing and drilling activitiesa strategy that required significant financing.

Chesapeake was already highly leveraged prior to raising the necessary capital via share

issuance. Evidently, maximizing reported profit to maintain a high share price until the issuance

of these shares was paramount. As such, in order to maintain high earnings and high asset values,

the company delayed impairment on several assets that were overvalued in the financial

statements at the time. It can be argued that CHK management timed the share issuance 2 weeks

before the Q2 announcement, reporting abnormal earnings that were uncharacteristically low

relative to the previous 6 years. In other words, Chesapeake was aware that the market would

react unfavourably in Q2, reducing demand and as a result, the stock price. Throughout the

following year, the company reported an impairment loss of $11.2 billion, wherein a $6.9 billion

portion was attributable to the market decline in natural gas prices. Thus, a $4.3 billion write-


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B?

down was related to the overvaluation of proved reserves. Since proved reserves are an estimated

component where most of the data required for computation is sourced internally from CHK

management, the result on the market is information asymmetry, further increasing shareholders

risk.

Finally, Chesapeakes compensation structure and the poor structure of the CEOs

employment contract lead to a serious issue of moral hazard. McClendon was involved in several

controversial deals that caused shareholders to lose confidence in his leadership. In fact, US

authorities are looking into the allegations regarding the Founders Well Program being financed

by personal loans granted by CHK creditors, as well as McClendons involvement in a Heritage

Fund trading in natural gas futures. Giving the CEO explicit license to play

the markets represented an extraordinary incentive that enhanced one of corporate America's

most generous compensation plans and reinforced the unique treatment afforded to McClendon

by Chesapeake (Prezioso, 2012). At a minimum, McClendon was distracted from his fiduciary

duties at CHK and further, his position as CEO gave him a strategic position to benefit in his

personal affairs (Schneyer, 2012).

An effective way to enhance the transparency of the firms financial reporting is to adopt

new guidelines for more accurate estimation of produced reserves. Given that this estimation is

subject to manipulation by Chesapeake management, regulations should be put in place to avoid

the possibility of artificial increases. As a result, investors can be confident that reserve valuation

is more reliable.

In order to mitigate the issue of McClendons compensation, the mix of short- and long-

term rewards should be restructured. More specifically, including a greater portion of long-term

incentive will put less focus on bonus rewards, better aligning his objectives with those of the


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shareholders. In doing so, a conflict of interest in terms of personal vs. corporate profit is

eliminated, as the CEOs interests will be better aligned with those of the firm. Further,

Chesapeake should integrate a peer-benchmarking method that makes the compensation program

competitive within the industry.


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BB

>33&*=8Q >M ,-#.& /

>33&*=8Q >?/

Company Name: Chesapeake Energy CorporationTicker: CHKShort Description of the company (location, what they do, age, size):

Chesapeake Energy Corporation is the second-largest producer of natural gas and the most activedriller of new wells in America. Headquartered in Oklahoma City, the company's operations arefocused on discovering and developing unconventional natural gas and oil fields onshore in theU.S. The company also owns substantial marketing and oilfield service businesses through itssubsidiaries.Date of Filing: Feb. 25, 2009Class Period related to lawsuit:July 15, 2008 - Jan. 27, 2009Value change over class period:July 15, 2008 (adj.close): $55.79Jan 27, 2009 (adj.close): $14.77Value change over class period: -0.735 or approx 74% decline in share value.

Are there any major one-day changes in value?September 30th 2008: -5.34What is the accounting issue?

On February 25, 2009, an investor of Chesapeake Energy Corporation filed a proposed securitiesclass action lawsuit against Chesapeake Energy Corporation, on behalf of purchasers ofChesapeake Energy Corporation stock issued pursuant to the registration statement and

prospectus filed with SEC in regard to July 2008 secondary public stock offering. On July15,2008, the public offering of 28.75 million shares were made at $57.25/share, resulting 1.65billion in gross proceeds. The complaint alleged that Registration Statement in regard to Offeringwas materially false and misleading because of its failure to disclose numerous facts requiredto be stated.

Who is the external audit firm, and is it being sued?PricewaterhouseCoopers No.


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B3

Has there been a settlement? If so, when was the settlement? Who settled and for how

much money?Case status is still ongoing.What is the most surprising fact that you learned about this company and the litigation

case?

The company entered into significant proportion of hedge contracts with Lehman. LehmanBrother had a weak financial condition and faced high risk of insolvency at the time. Chesapeake

entered into a significant proportion of hedge action with a troubled firm, an additional risk thatshould have been specified in disclosure. How much was hedged with Lehman and how manyhedges are eliminated due to knock out provisions are important to understand the potential ofthe risk and effectiveness of the hedge contract. CHK was also incompetent in allowing the landbrokers to bid up on prices, leaving the firm with unnecessarily high LOE costs (overpaying forleases).

List any firm- or industry-specific web links that you used.www.chk.comwww.ca.finance.yahoo.com


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B4

>33&*=8Q >?0

Company Name: Miller Energy Resources, IncTicker:MILLShort Description of the company (location, what they do, age, size):Miller Energy Resources Inc operates as an exploration and production company that utilizesseismic data and other technologies for geophysical exploration and development of oil and gas

wells. Its headquarters are in Huntsville, Tennessee, and focuses its operations in Alaska,Tennessee.Date of Filing: August 12th 2011Class Period related to lawsuit:March 15th to August 1st 2011.Value change over class period: Drop of 0.50 USD

Are there any major one-day changes in value?Miller's stock price dropped from $7.04 per share on July 27, 2011, to a close of $3.37 per shareon August 2, 2011, a total drop of $3.67 or 52%

What is the accounting issue?Miller bought assets that it overvalued at 300 M USD. The valuation error of the asset was made

public two years after the acquisition by competitors, saying it was actually worth 25 to 30million, offset by 40 M USD in liabilities. Miller is accused of several mischief:1) over stating an asset value,2) Inappropriately recording revenue on a gross basis for overriding royalty interest rather thanrecording revenue on a net basis3) Failing to record sufficient compensation expense on certain equity awards4) Improperly calculating the liability for derivative instruments5) As a result of the above, their financial statements were misstated and not in accordance with


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BG

G.A.A.P.6) Lacked internal and financial controls and thus the financial statements were materially falseand misleading at all relevant timesWho is the external audit firm, and is it being sued? Sherb & Co prior to 2010, hereafterKPMG LLP. There are no litigation involving the auditors as of yet.Has there been a settlement? If so, when was the settlement? Who settled and for how

much money?No information regarding settlement is available.

What is the most surprising fact that you learned about this company and the litigationcase?They have consistently neglected to produce proper financial statements for a good full year anda half.List any firm- or industry-specific web links that you used.Seeking alphaYahoo financeS.E.C.Miller energy Resources


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BI

about $38.1 billion for spill costs and has paid more than $8 billion in compensation toindividuals, businesses and government entities so far. It has also agreed to plead guilty to 14counts, including 11 for felony seamans manslaughter, and pay $4 billion to the U.S. JusticeDepartment to resolve these criminal charges. Lastly, BP has agreed to pay $525 million to settlethe U.S. Securities and Exchange Commissions claim that the company misled investors aboutthe rate of oil flowing into the gulf.What is the most surprising fact that you learned about this company and the litigation

case?The extent of damage that BPs earnings management had on civilian lives is shocking,particularly the deaths of 11 victims. The fact that the firm went so far as manslaughter (thoughunintentional) to generate profit goes to show how narrow-minded executives become when theopportunity for growth arises.List any firm- or industry-specific web links that you used.

Yahoo FinanceFinancial PostBloomberg News


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BM

>33&*=8Q >?L

Company Name: Petroleum Development Corporation

Ticker:PDCE

Short description of the company ( location, what they do, age, size): PDC Energy ("PDC" or

the "Company") (NASDAQ: PDCE) is a 40-year old independent natural gas and oil company.

PDC is focused on organic growth and an increasing liquids portfolio through horizontal drillingwhile maintaining a solid balance sheet and ample liquidity. The Company is committed to

optimizing margins through efficient drilling operations, sound well management, and

environmental stewardship. PDC operates in Colorado within the liquid-rich Wattenberg Field,

Piceance Basin and Northeastern Colorado (NECO), and the Appalachian Basin including the

emerging liquid-rich Utica Shale play in Ohio and the Marcellus Shale in West Virginia. PDC's

strategy is simple: increase shareholder value through the growth of reserves and production,

while operating properties in an efficient manner to maximize the cash flow and earnings

potential of its assets.

Filing Date: 12/07/2011

Class period related to lawsuit: November 16th, 2011- December 7th, 2011

Value change over the class period: 2% increase

Are there any major one-day changes in value?

On November 25, there was a declined in value: 29.01

Accounting issues:Over a period of several years, the Company formed numerous limited

partnerships to raise funds to finance the acquisition and development of oil and gas properties,

and attracted thousands of investors who paid hundreds of millions of dollars for their limited

partnership interests.

The Company prepared and issued proxy statements to the limited partners. Those proxy


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statements, the plaintiffs claim, contained materially false and misleading statements and omitted

to state material facts relating to the value of the assets of the Partnerships and the units held by

the limited partners. The proxy materials portrayed the value of the partnerships' units to be,

under most measures, less than what would be paid to limited partners upon consummation of

the mergers.

Who is the external audit firm, and is it being sued? PricewaterhouseCoopers LLP No.

Has there been a settlement? If so, when was the settlement? Who settled and for how

much money?No settlement.

What is the most surprising fact that you learned about this company and the litigation

case?

When you look at the company website, it says that corporate governance is primordial for them

but still, the company gets sued for material misstating assets value which is one of the most

common frauds a company can make.

List any firm-or industry-specific web links that you used:

http://www.pdce.com/

http://securities.stanford.edu/1048/PETD00_01/www.finance.yahoo.com


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Company name: Anadarko Petroleum Corporation

Ticker: APC

Short description of the company ( location, what they do, age, size): Anadarko is among thelargest independent oil and natural gas exploration and production companies in the world, with

2.56 billion barrels of oil equivalent (BBOE) of proved reserves at year-end 2012.

The company's portfolio of assets encompasses premier positions in U.S. onshore shales and

resource plays in the Rocky Mountains region, the southern United States and the Appalachian

Basin. The company also is a premier deep-water producer in the Gulf of Mexico, and has

production in Alaska, Algeria, and Ghana with additional exploration opportunities in West

Africa, Mozambique, Kenya, South Africa, Colombia, Guyana, New Zealand and China.

Filling date: 06/23/2010

Class period related to lawsuit: 06/12/2009 to 06/09/2010

Value Change over class period: 31.1% decrease

Are there any major one-day changes in value?On June 1st, 2010, shares of Anadarko fell almost $10.00 per share -- or approximately 20% --


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falling from a close of $42.10 per share, from a prior day's close of $52.33 per share, on hugevolume of over 44.8 million shares traded. Shortly thereafter, on June 9, 2010, shares ofAnadarko fell another 20%.What is the accounting issue?Failure to disclose following information: Leaking millions of gallons of oil into the Gulf ofMexico; Macondo well site had no effective Exploration and Oil Spill Response Plan;Implementation of drilling procedures that placed cost-cutting measures above safety; Lacked

adequate systems of internal,operational, or financial controls; Company failed to estimateadequate insurance reserves to meet the foreseeable risks associated with its deepwater drillingliabilities; Material deficiencies for companys 1 billion dollars in cleanup costs, despite theextent and severity of the event; Lacked reasonable basis to claim that Anadarko could achieveits projected guidance.Who is the external audit firm, and is it being sued? KPMG No.Has there been a settlement? If so, when was the settlement? Who settled and for how

much money?Case status is still ongoing.What is the most surprising fact that you learned about this company and the litigation

case?The joint operating agreement among the partners gave Anadarko broad rights to monitor

and approve activities on the Macondo oil well. Anadarko was given immediate and continuousaccess to detailed information concerning all operations on the oil rig, including daily drillingreports, copies of well test results, and continuous access to "real time" drilling data detailingcurrent and prospective activities at the well. The operating agreement also required Anadarko'sexpress approval for key operations on the well. Another surprising fact is that $42.7 millionworth of CEO James Hackett's stock of Anadarko was sold on March 31, 2010, after theMacondo project had suffered significant delays and just three weeks before the Macondo welldisaster.List any firm-or industry-specific web links that you used:

www.anadarko.com

Consolidated class action complaint as file in the New-York District

Anadarkos 2010 annual reportFactiva


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About Chesapeake. Chesapeake Energy. February 17, 2013.

Boren , D. (2009, 04 05). H.r. 1835: Legislation for natural gas transportation .

Chesapeake Energy Corporation. NYSE Euronex. March 1st, 2013

Chesapeake Energy Corporation. Stahfor Law School. February 5th, 2013

Chesapeake Energy Corporation (CHK). Yahoo Finance

Dow Jones Newswires. (2009, 05 28). Natural gas futures climb on eia storage data.

< http://www.firstenercastfinancial.com/news/?cont=31272>

Etp, chesapeake to build new pipeline. (2009, 01 27).

< http://www.bizjournals.com/dallas/stories/2009/01/26/daily21.html>

Jacobs, S. (s.d.). Oil plunges $10 as US bailout plan voted down. Rcupr sur USAToday:

L. Mobley, Jeffrey( 06/06/2008) : Chesapeake Energy Corporation Provides Update on

Haynesville Shale ActivitiesMeerten , J. V. (2012, 02 12). Chesapeake energy is a company in transition.


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Price , T. (2009, 02 26). Chesapeake Energy Corporation Announces Plan to Reorganize its

Eastern Division Operation in Charleston, West Virginia.

< http://www.chk.com/news/articles/pages/1260504.aspx>

Scott, William. R. Financial Accounting Theory, Sixth (Canadian) Ed. Prentice-Hall Canada.

SEC 10-Q filings. (s.d.). Cheasapeake 2008 10-Q Filing Period Ending March 31, 2008.

Teller, K. (s.d.). Natural gas Year-In-review 2008. US Energy Information Administration:

Audio call 1: Q1 2008 earnings call, May 2, 2008. PDF from Bloomberg.

Audio call 2: Financial updates, September 23, 2008. PDF from Bloomberg.

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Anadarko. Annual Reports, 2009.

BP. Director's Remuneration Report, 2009.

Chesapeake. (2008). Form 10-Q for Quarter ending March 31, 2008.

Chesapeake. (2008). Haynesville Shale Project Update. Bloomberg.

ChesapeakeDEF14A. (2008).DEF14A.SEC.

Chesapeake. Annual Reports, 2009. .

Chesapeake. 10K Reports, 2009. .

Earningsprice.com. (2013). .

Encana Corporation. 2008 Annual Meeting of Shareholders.


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Fox, E. (2009, 01 20). Ceiling falls on exploration and production sector

Gammel, J., Wilson, L., & Shilpa, K. (2008).Doing more with less.Macquarie Research.

Grow, B. (2012, 04 27).Exclusive: Chesapeake board member lent money to CEO McClendon.

< http://www.reuters.com/article/2012/04/27/us-chesapeake-board-loan-

idUSBRE83Q17O20120427>.

L. Mobley, Jeffrey (05/04/2009): Chesapeake Energy Corporation Reports Financial and

Operational Results for the 2009 First Quarter..

Politics & Economics, Fracking: Economic Boom or Environmental Danger. 2013.

Reserve And Economic Evaluation Of Proved Reserves Of Certain Chesapeake Energy

Corporation Eastern Division Oil And Gas Interest.

.

Scott, William. R. Financial Accounting Theory, Sixth (Canadian) Ed. Prentice-Hall Canada.

Simons, R. S. (1999, 05-06). How Risky is Your Company? Harvard Business Review, p.85-94.

SEC 10-Q filings. (n.d.). Cheasapeake 2008 10-Q filing period ending March 31, 2008.

The Associated Press. Fracking Critics Using Bad Science, Experts Say. July 22nd, 2012.


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(Business Insider, 2013)

Wile, Rob. Chesapeake CEO Used Stake in Companys Wells As Collateral For Massive

Personal Loan.Business Insider. April 18, 2012. (Bloomberg Businessweek, 2009)

Palmeri, Christopher. Chesapeake Energy Battles CEO Compensation Furor.Bloomberg

Businessweek.April 29,2009. (ABC News, 2009).

Gomstyne, Alice. Top Five Highest Paid Worst Performing CEOs.ABC News.Sept 22,2009.

(Forbes, 2008).

Farrell, Andrew. Serafin, Tatiana. Margin Calls Ignite Billionaire Fire Sale. Forbes. Oct

23, 2008. (NY times, 2008)

Berenson, Alex. Margin Calls Prompt Sales, and Drives Shares Even Lower. The New York

Times. October 13, 2008. (NY times 2009)


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Morgenson, Gretchen. Shareholders Who Act Like Owners. The New York Times.March 28,

2009. (Reuters, 2012).

Mollenkap, Carrick. "Special Report, Chesapeake's deepest well: Wall Street" Reuters. May 10,

2012.

Driver, Anna. Chesapeake CEO McClendon Cashes in on Wells DealsReuters. April 15,

2011.

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Audio call 3, 2009 Q1 Earnings, May 5, 2009.

Fox, Eric. Ceiling Falls On Exploration And Production Sector, January 20th, 2009.

Documents

Chesapeake Energy: Accounting Theory of Financial Misreporting