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Chesapeake Charged with Racketeering, Fraud for 'Victimizing' Michigan Landowners

Chesapeake Energy Corp. was charged Thursday by the Michigan attorney general's office with nine counts of racketeering and fraud in connection with leasing activity four years ago.

The complaint filed by Bill Schuette alleges that the Oklahoma City-based operator directed its agents "to recruit multiple landowners across Northern Michigan to lease their land to Chesapeake the summer of 2010. Allegedly, landowners often notified the agents of existing mortgages on the land to be leased, and the agents allegedly indicated the mortgages would not be an obstacle.

"When competition from competitors stopped, Chesapeake -- through its leasing agents OIL Niagaran and shell corporation Northern Michigan Exploration -- allegedly canceled nearly all the leases, using mortgages as the purported basis for the cancellation." The complaint alleges that Chesapeake signed leases with as many as 800 landowners, but honored fewer than 30 of the agreements.

Chesapeake's actions in turn "obtained uncompensated land options from these landowners by false pretenses, and prevented competitors from leasing the land."

The charges were filed by the attorney general's Corporate Oversight Division in Cheboygan County District Court [People v. Chesapeake Energy Corp., No. 2014-0076935-B].

"Scamming hardworking Michigan citizens is not how we do business in this state," Schuette said. The charges are:

  • One count of conducting criminal enterprises, a felony punishable by a fine of up to $100,000; and
  • Eight counts of false pretenses, $1,000-20,000; each felony carries a fine of $10,000, or three times the value of the money or property involved, whichever is more.

The arraignment hearing is scheduled for June 25 in the Cheboygan County district court.

"We believe this action has no merit and we will vigorously contest these baseless allegations," a Chesapeake spokesman said.

Chesapeake already is facing criminal charges by Schuette for alleged antitrust violations with regard to private land leasing in the summer of 2010 and the state land auction held in October 2010 by the Michigan Department of Natural Resources. In March, Schuette, who has led the investigation since its inception, filed charges against Chesapeake and the U.S. arm of Encana Corp. for allegedly collaborating in 2010 to avoid bidding against each other in the state lease sale; both companies pleaded not guilty (see Daily GPI, March 19; March 6).

However, Encana settled the antitrust litigation in May for $5 million and entered a no-contest plea to a misdemeanor charge.

"In the five-month period following the state's May 2010 auction, this alleged conspiracy may have been a key driver behind the state-held land lease price in Michigan going from $1,510 per acre in May 2010 to less than $40.00 an acre at the October 2010 auction and for private leasing to stop," Schuette said.

In the March filing, Chesapeake was charged with one count of antitrust violations and one count of attempted antitrust violations. On May 9, following a week-long preliminary examination, Schuette filed one additional antitrust violation count based on evidence presented during the preliminary exam.

District Judge Maria Barton has not issued a ruling on whether the case will be bound over to circuit court and set for trial.

About a month ago Chesapeake and Encana were cleared by the U.S. Department of Justice (DOJ) for attempting to manipulate lease sales in Michigan (see Daily GPI, May 1). DOJ's antitrust division sent a letter to the producers indicating the case was closed.

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