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Chesapeake Settles Antitrust, Racketeering Charges in Michigan, to Compensate Victims

Chesapeake Energy Corp. has agreed to create a $25 million compensation fund to settle multiple antitrust, fraud and racketeering charges filed by the state of Michigan last June in connection with leasing activity five years ago.

In a 20-count complaint and amended filing last June, Michigan Attorney General Bill Schuette charged that Chesapeake and its agents had victimized Michigan landowners in the summer of 2010 by recruiting "multiple landowners across Northern Michigan to lease their land" (see Daily GPI, June 25, 2014; June 5, 2014). 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 charges said. The complaint alleged that Chesapeake signed leases with as many as 800 landowners, but honored fewer than 30 of the agreements.

The antitrust complaint alleged that Chesapeake colluded with Encana Corp. to suppress prices in a state oil and gas lease sale, also in 2010 (see Daily GPI, March 19, 2014). Encana settled with authorities last May and agreed to pay $5 million in a civil settlement. In 2012, Reuters unearthed a possible conspiracy between executives of the companies, including former Chesapeake CEO Aubrey McClendon, who apparently discussed via email an agreement regarding the May 2010 auction to split up Michigan counties where each company would be an exclusive bidder for both public and private leases in the October 2010 sale (see Daily GPI, June 26, 2012).

As part of the settlement, Chesapeake pleaded no contest to misdemeanor charges of one count each for attempted antitrust violation and false pretenses. If Chesapeake abides by the settlement terms, the misdemeanor charges would be dismissed after 11 months. All of the other criminal charges would be dismissed by the state. Chesapeake did not admit to wrongdoing.

Chesapeake spokesman Gordon Pennoyer told NGI on Friday that the agreement was "mutually acceptable" to the company and Michigan authorities. Chesapeake now is ready "to move past these legacy issues inherited from past management. The current management team is focused on delivering top quartile performance and driving shareholder returns."

Schutte said the settlement was "a victory for Michigan taxpayers and a victory for all the Michigan landowners who took deep hits to their pocketbooks following the October 2010 private land auction...This settlement will achieve recovery for every one of the more than 700 affected victims who come forward and make a valid claim."

The fund would be administered by an independent oil and gas attorney to compensate landowners for the assessed value of their oil and gas interests that Chesapeake offered to lease in 2010. Michigan landowners that already have settled lawsuits with Chesapeake, as well as those that never filed any litigation, would be eligible to make compensation claims within 120 days of the fund being formed. If there are funds still available once initial claims are paid, up to $2.5 million would go to Michigan's State Park Endowment Fund.

The state also agreed not to bring additional criminal charges against Chesapeake or current and former employees or contractors involved in the leasing. The state also lifted a ban on future auction lease bidding by Chesapeake.

The U.S. Department of Justice continues to pursue an investigation against Chesapeake and Encana regarding possible anti-competitive behavior in Michigan, as well as other states.

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