Chesapeake reaches $25 million Michigan settlement over leasing charges

(Reuters) - Chesapeake Energy Corp, the second largest U.S. natural gas producer, will create a $25 million compensation fund as part of a settlement on Friday of antitrust, fraud and racketeering charges brought by the state of Michigan, according to terms of the settlement reviewed by Reuters.

In addition to the compensation fund, Chesapeake agreed to plead no contest to one count each of attempted antitrust violation and false pretenses, both misdemeanors. Under terms of the agreement, the court will dismiss those charges after 11 months if Chesapeake adheres to the settlement terms. All other criminal charges will be dismissed by the state. Chesapeake did not admit to wrongdoing.

The antitrust case was triggered by a Reuters report in 2012 that detailed how Chesapeake and an archrival had discussed dividing up their bids on leases of public land in Michigan to avoid prices from escalating. (

“We are pleased to have reached a mutually acceptable agreement with the Michigan Attorney General and to move past these legacy issues inherited from past management,” said Gordon Pennoyer, a spokesman for Chesapeake.

The antitrust charge brought by Michigan’s Attorney General Bill Schuette alleged that Oklahoma City-based Chesapeake colluded with a competitor, Encana Corp, to suppress land prices during an oil-and-gas leasing boom in 2010. Encana agreed to pay $5 million in a civil settlement with the state in May 2014.

The state alleged that Chesapeake struck a deal with Encana to avoid competing on leases offered at an October 2010 state auction. State prosecutors said the collusion may have been a factor pushing down state lease prices to $40 per acre at the October 2010 public auction, from a record-high average $1,510 per acre at the prior auction five months earlier.

Chesapeake was run by chief executive Aubrey McClendon at the time. McClendon, who co-founded Chesapeake in 1989, resigned as CEO in 2013 after a liquidity crunch that was exacerbated by heavy spending on oil and gas acreage and a corporate governance crisis.

“This is a victory for Michigan taxpayers and a victory for all the Michigan land-owners who took deep hits to their pocketbooks following the October 2010 private land auction,” Schuette said in a statement. “This settlement will achieve recovery for every one of the more than 700 affected victims who come forward and make a valid claim.”

Both Chesapeake and Encana said earlier that they had discussed forming a joint venture in Michigan but never reached agreement. The boards of both companies had conducted internal investigations which they said showed no collusion.

The fraud and racketeering charges, also filed in Michigan state court in Cheboygan, alleged that Chesapeake canceled hundreds of land leases on false pretenses after it sought to lock up oil and gas rights in the state.

Reuters first reported on Chesapeake’s land tactics in 2011. <LINK:>;

Hundreds of landowners were notified that their leases had been canceled 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.

Schuette claimed 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.

The $25 million settlement fund, which will be administered by an independent oil and gas attorney, will “compensate landowners for the assessed value of their oil and gas interests that (Chesapeake) offered to lease in 2010,” according to the settlement terms.

Both Michigan landowners who previously settled litigation against Chesapeake and those who never sued will be eligible to make claims for compensation from the fund within 120 days of its formation. If any money remains after the initial claims are paid, up to $2.5 million will to Michigan’s State Park Endowment Fund.

Michigan agreed not to bring further criminal charges against Chesapeake or current and former employees and contractors resulting from the leasing tactics. The state also lifted a ban on new lease bidding by Chesapeake.

In April 2014, Chesapeake and Encana were informed that a Justice Department probe into whether they violated antitrust laws in Michigan had concluded.

The Justice Department is still pursuing an investigation into potentially anti-competitive behavior in oil and gas leasing by Chesapeake in other states.

Reporting By Brian Grow and Joshua Schneyer. Editing by Michael Williams, Chizu Nomiyama and Andrew Hay