June 5, 2014 / 3:41 PM / 5 years ago

Michigan AG charges Chesapeake with racketeering and fraud

ATLANTA (Reuters) - The state of Michigan filed felony racketeering and fraud claims against Chesapeake Energy Corp (CHK.N) on Thursday, in the latest legal fallout from Chesapeake’s ambitious attempt to acquire drilling rights amid the U.S. fracking boom.

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. REUTERS/Steve Sisney

The charges, filed in Michigan state court in Cheboygan, allege the second-largest natural gas producer in the United States canceled 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 release.

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 June 25.

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 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.

“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 (ECA.TO), 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 companies negotiations.

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 leasing spree.

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 and Encana.

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

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