(Adds background, detail on disputed leases, attorney comment)
By Brian Grow and Joshua Schneyer
ATLANTA, June 5 The state of Michigan filed
felony racketeering and fraud claims against Chesapeake Energy
Corp on Thursday, in the latest legal fallout from
Chesapeake's ambitious attempt to acquire drilling rights amid
the U.S. fracking boom.
The charges, filed in Michigan state court in Cheboygan,
allege the second-largest natural gas producer in the United
States cancelled hundreds of land leases on false pretenses
after it sought to lock up oil and gas rights.
State Attorney General Bill Schuette said Chesapeake,
through its leasing agents, harmed private landowners in
northern Michigan by falsely claiming that mortgages on their
properties were a legitimate basis for the lease cancellations.
Landowners were previously told the mortgages were not a
problem, the state alleged.
"I will defend and protect the taxpayers of Michigan in the
face of fraudulent business practices," Schuette said in a press
Oklahoma City-based Chesapeake said it will fight the
charges. "We believe this action has no merit and we will
vigorously contest these baseless allegations," said Gordon
Pennoyer, a Chesapeake spokesman. The company has said it spent
approximately $400 million acquiring leases in Michigan.
The felony complaint charges Chesapeake with one count of
"conducting a criminal enterprise," punishable by up to a
$100,000 fine, and eight counts of "false pretenses," punishable
by a $10,000 fine each - or three times the value of money or
property involved, whichever is greater.
Chesapeake is scheduled to be arraigned on the charges on
Schuette alleged that, as a result of leasing oil and gas
rights and then cancelling the deals, Chesapeake "obtained
uncompensated land options from these landowners by false
pretenses, and prevented competitors from leasing the land."
Chesapeake allegedly signed leases with as many as 800
Michigan landowners, but honored fewer than 30 leases, according
to the complaint.
Chesapeake shares closed up 1.9 percent at $29.87 on
Thursday on the New York Stock Exchange.
In 2011, Reuters reported on Chesapeake's land tactics in
Michigan. Hundreds of landowners were notified that their leases
had been cancelled by Northern Michigan Exploration, a shell
company formed by Chesapeake. Scores of landowners later sued
Chesapeake in Michigan state courts, alleging their contracts
had been breached. Hundreds of others brought claims to recoup
lease bonus money outside of court.
"The majority of the cases have been resolved amicably,"
said Sue Topp, a Michigan attorney who handled many of the
cases. Settlement terms remain confidential, she said.
In 2012, two state court judges ruled in lawsuits brought by
landowners that Chesapeake was within its rights to cancel the
leases any time before title to the minerals was finalized,
court records show.
In March, Schuette separately alleged that Chesapeake and
rival Encana Corp, based in Calgary, colluded to keep
oil and gas lease prices artificially low in Michigan during the
oil and gas rush in its Collingwood Shale region in 2010.
The companies were charged with one count each of antitrust
violations and one count each of attempted antitrust violations.
Michigan added a second antitrust violation against Chesapeake
in May. Those charges followed a 2012 Reuters report on the two
On May 5, Encana agreed to pay Michigan $5 million in a
civil settlement that could clear the company of criminal
antitrust charges stemming from its role in the 2010 land
Encana pleaded no contest to a misdemeanor state charge that
it attempted to commit antitrust violations. The court agreed to
dismiss all charges against the driller if it fulfilled its
civil settlement over the next 11 months.
Chesapeake fought the antitrust charges. Heather Tewksbury,
an attorney for Chesapeake, called the allegations "smoke with
no fire" and said "there was no agreement" between Chesapeake
The companies said earlier that they discussed forming a
joint venture in Michigan but never reached agreement. The
boards of both Chesapeake and Encana conducted internal
investigations in 2012 which they said showed no collusion.
State court Judge Maria Barton is expected to rule this
month on whether the case will move to trial.
(Reporting by Brian Grow and Joshua Schneyer; editing by Edward
McAllister and Tom Brown)