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DOJ Subpoenas Chesapeake Regarding Royalty Payment Practices

Chesapeake Energy Corp. has received subpoenas from the U.S. Department of Justice (DOJ) and state agencies in connection with leasehold purchases and royalty underpayments, according to a regulatory filing.

In its 3Q2014 Form 10-Q filed with the U.S. Securities and Exchange Commission, Chesapeake said DOJ and some governmental agencies had issued subpoenas and demands for "documents, information and testimony in connection with investigations into possible violations of federal and state antitrust laws" regarding leasehold purchases in various states.

The company also has received subpoenas seeking information on the royalty payment practices, all of which it said it is responding to.

Chesapeake has been involved in lawsuits concerning underpayments of royalty fees for years in several states, some of which it has won, others that are still pending (see Shale Daily, Aug. 29; Aug. 21; March 11).

"Regarding royalty claims, Chesapeake and other natural gas producers have been named in various lawsuits alleging royalty underpayment," the filing said. "The suits against us allege, among other things, that we used below-market prices, made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL [natural gas liquids].

"The company has resolved a number of these claims through negotiated settlements of past and future royalties and has prevailed in various other lawsuits. We are currently defending lawsuits seeking damages for royalty underpayment in various states, including cases filed by individual royalty owners and putative class actions, some of which seek to certify a statewide class."

Two criminal cases also are being pursued by Michigan's attorney general. One complaint arises from a state lease sale in 2010 (see Daily GPI, July 10). A second alleges that Chesapeake's conduct in canceling lease offers to Michigan landowners in 2010 violated the state's criminal enterprises and false pretenses felony statutes (see Daily GPI, Sept. 9). No trial date has been set for either matter.

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