| NEW YORK
NEW YORK Shares of Chesapeake Energy Corp (CHK.N) dropped more than 5 percent on Wednesday and one investor called for the company to "clean up" its leadership after a Reuters report that Chief Executive Aubrey McClendon borrowed as much as $1.1 billion against his stake in thousands of company wells.
Those loans, taken out over the past three years, were previously undisclosed to shareholders, analysts and academics said, and raised worries about the potential for conflict of interest. McClendon and the company insist there is no conflict.
Jittery investors pushed the company's shares down more than 10 percent to a low of $17.17, the lowest level since July 2009, before they rebounded to close down 5.5 percent at $18.06.
Trading in the company, the nation's second-largest natural gas producer behind Exxon Mobil Corp (XOM.N), was heavy, with 93.2 million shares changing hands. That was the highest level since October 10, 2008, the end of a week when McClendon was forced by margin calls to sell more than 31 million shares in the company.
"Chesapeake is one of the leaders in this (sector), but his business ethics are out of the Wild West," said David Dreman, chairman of Dreman Value Management LLP, which owns about 1 million shares of the company.
Dreman said the report of the new loans rekindled fears that had surfaced in 2008 around McClendon's stock sales.
"I think the company has to be more professional," Dreman said. "I think that the whole management and the board of directors has to be cleaned up. We're obviously very unhappy with the situation as it is now."
Chesapeake said the program that granted McClendon a 2.5 percent stake in its oil and gas wells had long been public.
"We respectfully disagree and reiterate that the program has been in place for 20 years and was strongly endorsed by a vote of our shareholders in 2005," spokesman Michael Kehs said in an email.
Another investor, who declined to be named, citing company policy, said he believed Wednesday's drop was caused by short sellers, and that he could add to the 5,000 shares in his portfolio.
"For me, it's more of a buying opportunity," he said.
The volume of Chesapeake shares changing hands was more than double the 10-day moving average, and the stock was the most actively traded on the New York Stock Exchange, topping trade in Bank of America Corp (BAC.N).
At a previously planned presentation to analysts and investors Wednesday morning, McClendon did not mention the Reuters report.
The CEO, who appeared subdued compared with his usual upbeat demeanor, was not asked about the report as he discussed the company's drilling program and asset sales.
The news threatens to "put a cloud" over the company's planned initial public offering of its oilfield services unit, Brean Murray analyst Ray Deacon said.
Chesapeake wants to raise up to $862.5 million from the IPO, announced on Monday.
"Now that loan documents are made public, it just adds another layer of complexity to an already opaque corporate web," Deacon said.
'WHERE THERE IS SMOKE, THERE MAY BE FIRE'
As quoted in the Reuters story, McClendon and Chesapeake said the loans did not pose any conflict of interest. The loans are private transactions that the company has no responsibility to disclose or to vet, Chesapeake said.
"There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way," McClendon wrote in an email to Reuters.
But traders appeared to be erring on the side of caution.
"I think where there is smoke, there may be fire, and investors are still in a shoot-first mentality," said David Lutz, a trader a Stifel Nicolaus in Baltimore.
The loans, which have not been previously detailed to shareholders, were used to fund McClendon's operating costs for an unusual corporate perk that offers him a chance to invest in a 2.5 percent interest in every well the company drills. McClendon in turn used the 2.5 percent stakes as collateral on those same loans, documents filed in five states showed.
Analysts, academics and attorneys who reviewed the loan documents said the arrangement raised the potential for conflicts of interest.
Companies involved in natural gas production have seen their shares hit recently as excess supply and warm weather undercut prices of the commodity.
(Reporting by Ernest Scheyder, Matt Daily, Edward Krudy and Rodrigo Campos in New York, with Anna Driver in Houston; editing by John Wallace, M.D. Golan and Matthew Lewis)