Daily Archives: April 18, 2012
By Janet Levy
The U.S. Constitution, which has guided American society for over two centuries, inspiring nations worldwide and serving as a model for governance, is under serious threat today. Ironically, that threat comes from the very individuals charged with protecting the Constitution — federal, state, and local government officials.
All these public officials take an oath to support the Constitution and to refrain from actions or laws that interfere with individual rights and liberties specified in the Constitution. Yet President Obama and officials all along the way down to local police chiefs are today actively engaged in the daily shredding of the U.S. Constitution.
The Obama administration has expanded its executive branch powers under a comprehensive czar system and myriad executive orders. Meanwhile, Congress quietly passes questionable legislation with the potential to limit personal freedoms — and U.S. agencies, such as the Department of Homeland Security (DHS) and the Department of Justice (DOJ), engage in activities that raise serious concerns about constitutional violations. Even local law enforcement officials have become increasingly intrusive and hostile to civil liberties.
Several dramatic examples illustrate this growing problem and highlight the need for increased vigilance and public scrutiny if we are to remain a constitutional republic with our individual rights intact.
Obama has established a precedent of not working with legislators from both parties to pass congressional bills, instead resorting to changing laws and policies through executive fiat. With over 40 czars controlling various functions, he has structured a second tier of unaccountable government officials that operate behind the scenes away from the glare of public scrutiny. This shadow government undermines Congress, the people’s representatives, and the Cabinet secretaries who undergo a Senate vetting process. It subverts the foundational principle of government by representation for government by proxy.
A dramatic example is the Council of Governors, established in January 2010 when Obama signed Executive Order 13528. The stated intent was to solidify the relationship between the federal and state governments and protect the nation. State governors representing ten FEMA regions in the United States were appointed and serve at the pleasure of the president to “represent the Nation as a whole.” Their duties include “reviewing matters related to the National Guard of the various states, homeland defense, synchronization and integration of State and Federal military activities in the United States[.]“
Also on board are the secretaries of defense and homeland security, the U.S. Northern Command commander, the commandant of the Coast Guard, the chief of the National Guard, and other federal officials. The secretary of defense designates an executive director.
One small problem: the Council in effect ignores the 1878 Posse Comitatus Act, a law that bars the military from exercising domestic police powers. The Council’s existence also erodes the power of the states and their ability to control their militias.
Meanwhile, on Friday afternoon, March 16, with little fanfare, Obama issued another executive order, the National Defense Resources Preparedness Order. In this one, he granted himself absolute power over all American resources during times of peace and national emergency, including food, water, livestock, plants, energy, health resources, transportation, and construction material — all without the consent of Congress and the American people. Although this represented an amendment to an existing order, the new phrase, “under both emergency and non-emergency conditions,” fueled speculation that the new order could allow peacetime martial law.
As for who has the authority to declare war, the Obama administration apparently believes that it has no need to consult Congress, although the power to declare war is clearly enumerated to Congress in the U.S. Constitution. In March, Defense Secretary Leon Panetta denied any need for Congressional involvement and explained that the administration would instead seek permission from NATO and the U.N. for an “international legal basis” to commit U.S. troops abroad. This, despite the fact that our country’s founders clearly specified that only Congress shall declare war so that the People could be closely involved in a decision that could gravely impact their lives.
Congress, meanwhile, in February passed the Federal Restricted Buildings and Grounds Improvement Act of 2011. Signed into law by President Obama in March, the act empowers the Secret Service to designate areas in which free speech, association, and redress of government grievances are prohibited, even temporarily for specific events or if individuals are attending who are protected by Secret Service. Under the Act, anyone who congregates in a restricted area may be prosecuted and, if found guilty, imprisoned for up to ten years. In other words, Secret Service agents may decide where to create “no free speech zones” in which protests may be banned and protestors subject to arrest. This constitutes blatant government suppression of speech.
Also in February, Congress passed a $63-billion FAA appropriations bill, H.R. 658, that could result in up to 30,000 unmanned aerial vehicles surveilling the United States by the end of the decade. The bill authorizes the government to fly across the country conducting warrantless aerial searches but fails to address serious privacy issues raised by the drones. These unmanned aircraft have sensitive surveillance technology to see, hear and record, including GPS, high-power zooming, infrared, ultraviolet, and see-through capabilities.
Also involved with drones is the Department of Homeland Security (DHS), currently building its drone fleet for deployment along U.S. borders, allegedly to curtail the flow of human trafficking, weapons, and contraband. This stated use for DHS drones seems suspect in light of a recent DHS order for an unprecedented 450 million rounds of hollow-point ammunition. As has been demonstrated in Afghanistan and Pakistan, drones are capable of being weaponized and also hacked and captured by opposition forces. All of this deserves heightened concern in light of the ill-fated Fast and Furious operation, in which the Bureau of Alcohol, Tobacco, Firearms and Explosives, under the supervision of the Holder Justice Department, put weapons into the hands of Mexico’s narco-terrorists and then lost track of the firearms. The guns were linked to crimes, including the murder of a U.S. Border Patrol agent.
Further, recent policies belie the stated purpose for employing drones. The Justice Department is suing Arizona, Alabama, South Carolina, Georgia, and Utah for upholding immigration laws that are mirror-images of federal illegal immigration statutes, and the DHS is blocking deportation of illegal immigrants. Meanwhile, Obama signed an executive order to stop the automatic deportation of illegal aliens.
On the local government level, the New York police department is testing gun detection technology with a scanner placed on police vehicles to reveal concealed weapons. This could constitute a violation of Second Amendment rights to bear arms as well as a challenge to the 4th Amendment, which prohibits illegal search and seizure. Broad use of this new technology represents a trespass on personal property for information-gathering when a reasonable expectation of privacy exists and law enforcement lacks a judicially sanctioned warrant, which would check police power.
Police have also stepped up their attacks against the First Amendment right to religious expression. In May 2010, when junior high school students from an Arizona Christian academy visited the U.S. Supreme Court on a field trip and stopped to pray outside the building, a police officer abruptly interrupted their prayers and ordered the group to stop. The students were told they were violating the law. Later, a public information officer for the court stated that no policy prohibits prayer.
In Dearborn, Michigan, in June, 2010, a pastor and two lay Christians were arrested outside an Arab festival, under the pretense that they were blocking a tent entrance, creating a public danger, and “screaming into a crowd.” Video footage of the event clearly showed that this was untrue. Last year, an assistant evangelical pastor from a Southern California church and two church members were arrested by the California Highway Patrol for reading the Bible outside a DMV office to those waiting in line almost an hour before opening time. Although the Christians were 50 feet away from the entrance, they were cited for “impeding an open business.”
On an individual basis, any of the above orders, laws, and actions might seem innocuous and make concerns over government usurpation and abuse of power seem exaggerated and unsubstantiated. However, taken collectively, they represent an alarming trend of a small and steady overthrow of our constitutional guarantees and liberties by elected representatives and unelected government officials.
At a time when the president is using the EPA to limit access to vital energy resources and to impinge on private property rights and has instituted an unpopular, unprecedented mandate to purchase government health care under threat of legal action, the fight for constitutional restraint couldn’t be more critical. If Americans can be ordered to purchase health care and prohibited from the free and clear use of their private property, where does it end? Are our rights, guaranteed under the U.S. Constitution and the Bill of Rights, safe?
The Constitution’s unprecedented fundamentals — separation of powers among the three branches of government with its enumerated powers and checks and balances, the principle of limited government and the concept of a government that exists solely to represent the interests of the governed — were exquisitely designed to protect the natural liberties of the people and prevent government tyranny. The Bill of Rights, the first ten amendments to the Constitution, guarantees specific personal freedoms, limits the government’s power in judicial proceedings, and reserves all unspecified power for the states. The time to reaffirm and reinvigorate these constitutional principles, to limit government power, and to preserve individual liberties is now.
Read more: American Thinker
- The NDAA, The TSA, 30,000 Drones in the Sky by 2020? Is This Still the Land of the Free? (mb50.wordpress.com)
- Why would Obama sign an executive order like this? Why is “The Media” quiet? (trutherator.wordpress.com)
- Help Bring War Criminal Obama to Justice (tatoott1009.com)
From canceling oil leases in his second week in office to denying the XL Pipeline this year President Obama and his administration have offered up a non-stop assault on affordable energy. Now that high gasoline prices have come home to roost, the president is flailing around for an energy policy.
His recent attempts at energy policy include:
- Nobody can do anything about high gasoline prices.
- Maybe I should release crude from the Strategic Petroleum Reserve.
- There is a lot of drilling that I haven’t been able to stop. Don’t I get credit for that?
The latest attempt is to blame everything on speculators. And why not? Previous polling shows that 80 percent of Americans believe petroleum price spikes are caused by speculation, which means no more than 20 percent believe it is caused by the fundamentals of supply and demand.
There are several flaws in “the speculators did it” theory. The first is why do they only do it occasionally? That is, why don’t speculators want to make unconscionable profits all the time?
Second, why do the index funds and all the other bad guys only speculate in oil? Where are the profiteering speculators in natural gas, whose current price is about half of what it averaged over the last decade?
Third, there are sophisticated traders on both sides of the petroleum markets. For every speculator who makes money on a trade, somebody else will lose money. Blaming speculators on continued price increases requires an endless string of chumps to take the other side of the speculators’ deals. If anybody should be the chumps, it should be the newbies from the insurance industry and hedge funds, but they are at the top of the most-wanted list.
Finally, for speculation to drive up prices, the speculators must either cause oil production to slow down (which they haven’t) or to pull oil off the market. If the flow of petroleum and its products remains unchanged, the price at the pump will not change. If petroleum is pulled off the market, which can happen even though there are limits to what can be stored, it will eventually come back on the market. And the question becomes, “When the oil comes back on the market, is the price higher or lower than when it was pulled off the market?” The price will only be higher if the amount supplied at that time is lower or the demand is higher. In either of those cases, speculators have helped moderate price fluctuations and will be rewarded with profits. If the price is lower, then the speculators did a bad thing and will be punished by losing money.
The real problem is that combating high gasoline prices requires a greater supply, and this administration’s policies have pushed the other way. It seems the administration does not really want lower gasoline prices. Steven Chu, Obama’s non-car-owning Secretary of Energy, famously said we need to get our gasoline prices up to the $8-$10/gallon level they are in Europe.
- The Obama Oil Embargo: But Only USA Cap and Trade (tarpon.wordpress.com)
- Obama officials rip into GOP gasoline bills (mb50.wordpress.com)
- As gas prices pinch, Obama targets oil speculators (hazimiai.wordpress.com)
- Running on empty: Failing to address high gas prices (thehill.com)
- In Defense of Oil Speculators (foreignaffairs.com)
NEW YORK – Russian energy Czar Igor Sechin said Wednesday that U.S.-Russia economic relations still don’t reflect their full potential, but that opportunities to tap Russia’s massive oil reserves will provide opportunities for that to change.
At an event in New York describing details of Exxon Mobil Corp.‘s deal with OAO Rosneft, Sechin, who is Russia’s Deputy Prime Minister, said that “the time has come in Russia-U.S. relations for a step-up in the level of practical and real projects.”
The partnership between Exxon and Rosneft could give the companies access to about 90 billion barrels of oil equivalent in estimated resources from the Arctic Ocean and the Black Sea, Rosneft said Wednesday.
In a video presented to analysts in New York, Rosneft said that the partnership would drill its first wells at the Kara Sea in the Arctic Ocean as early as 2014-2015, with a final investment decision on full-scale development expected by 2016-2017. Sechin said that Kara Sea production is estimated to begin around 2027.
The Exxon-Rosneft deal comes in the wake of the Russian government’s efforts to step up the development of new oil production regions, especially in the Arctic. Sechin said that about 5% of oil output to come from new regions by 2020, and up to 40% by 2030.
“We recognize that the implementation of such projects will require strong and consistent support of the state,” which aims to ensure transparent terms of access to the new fields, Sechin said.
Sechin said that under new rules, tax rates were defined for different types of operational conditions. Exxon-Rosneft projects in the Kara Sea will have a royalty of 5%. Royalty levels for deepwater projects in the Black Sea will be 10%, Sechin said.
Long-term investment in offshore development is estimated to exceed $500 billion, Sechin added, creating more than 300,000 jobs.
Overall, the large scale investments needed to tap Russia’s massive oil and gas wealth provides an “enormous potential for U.S.-Russia cooperation, which ought to help us to overcome our over-politicized relationship,” he said.
Such large projects “will be welcomed and will find strong support of the Russian government,” Sechin said.
Copyright (c) 2012 Dow Jones & Company, Inc.
The out-of-control Transportation Security Administration is past patdowns at airports – now it’s checkpoints and roadblocksJennifer Abel guardian.co.uk, Wednesday 18 April 2012 15.42 BST
Ever since 2010, when the Transportation Security Administration started requiring that travelers in American airports submit to sexually intrusive gropings based on the apparent anti-terrorism principle that “If we can’t feel your nipples, they must be a bomb”, the agency’s craven apologists have shouted down all constitutional or human rights objections with the mantra “If you don’t like it, don’t fly!”
This callous disregard for travelers’ rights merely paraphrases the words of Homeland Security director Janet Napolitano, who shares, with the president, ultimate responsibility for all TSA travesties since 2009. In November 2010, with the groping policy only a few weeks old, Napolitano dismissed complaints by saying “people [who] want to travel by some other means” have that right. (In other words: if you don’t like it, don’t fly.)
But now TSA is invading travel by other means, too. No surprise, really: as soon as she established groping in airports, Napolitano expressed her desire to expand TSA jurisdiction over all forms of mass transit. In the past year, TSA’s snakelike VIPR (Visual Intermodal Prevention and Response) teams have been slithering into more and more bus and train stations – and even running checkpoints on highways – never in response to actual threats, but apparently more in an attempt to live up to the inspirational motto displayed at the TSA’s air marshal training center since the agency’s inception: “Dominate. Intimidate. Control.”
Anyone who rode the bus in Houston, Texas during the 2-10pm shift last Friday faced random bag checks and sweeps by both drug-sniffing dogs and bomb-sniffing dogs (the latter being only canines necessary if “preventing terrorism” were the actual intent of these raids), all courtesy of a joint effort between TSA VIPR nests and three different local and county-level police departments. The new Napolitano doctrine, then: “Show us your papers, show us everything you’ve got, justify yourself or you’re not allowed to go about your everyday business.”
Congresswoman Sheila Jackson-Lee praised these violations of her constituents’ rights with an explanation asinine even by congressional standards:
“We’re looking to make sure that the lady I saw walking with a cane … knows that Metro cares as much about her as we do about building the light rail.”
See, if you don’t support the random harassment of ordinary people riding the bus to work, you’re a callous bastard who doesn’t care about little old ladies.
No specific threats or reasons were cited for the raids, as the government no longer even pretends to need any. Vipers bite you just because they can. TSA spokesman Jim Fotenos confirmed this a few days before the Houston raids, when VIPR teams and local police did the same thing to travelers catching trains out of the Amtrak station in Alton, Illinois. Fotenos confirmed that “It was not in response to a specific threat,” and bragged that VIPR teams conduct “thousands” of these operations each year.
Still, apologists can pretend that’s all good, pretend constitutional and human rights somehow don’t apply to mass transit, and twist their minds into the Mobius pretzel shapes necessary to find random searches of everyday travelers compatible with any notion that America is a free country. “Don’t like the new rules for mass transit? Then drive.”
Except even that doesn’t work anymore. Earlier this month, the VIPRs came out again in Virginia and infested the Hampton Roads Bridge-Tunnel, also known as the stretch of Interstate 64 connecting the cities of Hampton and Norfolk. Spokesmen admitted again that the exercise was a “routine sweep”, not a response to any specific threat. Official news outlets admitted the checkpoint caused a delay (further exacerbated by a couple of accidents), but didn’t say for how long. Local commenters at the Travel Underground forums reported delays of 90 minutes.
I grew up in the Hampton Roads region of Virginia. When I was a kid, my dad crossed the bridge-tunnel every day while commuting to work. When I was in university, I did the same thing. The old conventional wisdom said “Get to the airport at least two hours early, so TSA has time to violate your constitutional rights before boarding.” What’s the new conventional wisdom – “Leave for any destination at least 90 minutes early, so TSA can violate your rights en route”?
Airports, bus terminals, train stations, highways – what’s left? If you don’t like it, walk. And remember to be respectfully submissive to any TSA agents or police you encounter in your travels, especially now that the US supreme court has ruled mass strip-searches are acceptable for anyone arrested for even the most minor offence in America. If you’re rude to any TSA agent or cops, you risk being arrested on some vague catch-all charge like “disorderly conduct”. Even if the charges are later dropped, you’ll still undergo the ritual humiliation of having to strip, squat, spread ‘em and show your various orifices to be empty.
Can I call America a police state now, without being accused of hyperbole?
- Big Sis Launches Undercover TSA Spies To Ride Houston Buses (wrc559.com)
- TSA continues to expand operations outside of airports with VIPR teams (activistpost.com)
- TSA continues to expand operations outside of airports with VIPR teams (blacklistednews.com)
- More TSA Tyranny…. (mountainrepublic.net)
- Prison Planet.com ” Big Sis Launches Undercover TSA Spies To Ride Houston Buses (gunnyg.wordpress.com)
End of the Euro?: The IMF warns that one country leaving the single currency could force its entire collapseBy Hugo Duncan PUBLISHED: 12:45 EST, 17 April 2012 UPDATED: 04:28 EST, 18 April 2012
In its World Economic Outlook report, the International Monetary Fund said the collapse of the crisis-torn single currency could not be ruled out.
It was the first time the Washington-based institution has accepted the prospect of the eurozone splitting up and follows fears over the health of the Spanish economy.
The IMF predicted a return to recession in the eurozone this year but upgraded its growth forecasts for Britain.
However, it warned that the world remains at risk of collapsing into a slump that would rival the Great Depression – with ‘acute risks in Europe’ the major threat.
‘Things have quietened down but there is a very uneasy calm,’ said IMF chief economist Olivier Blanchard. ‘I have a feeling that at any moment things could get very bad again.’
Speaking at the launch of the half-yearly report in Washington, Mr Blanchard said there was ‘no plan’ in place to deal with a country leaving the euro.
However Greece is widely expected to default on its crippling debts and quit the doomed single currency.
‘If such an event occurs, it is possible that other euro area economies would come under severe pressure as well, with a full-blown panic in financial markets,’ the IMF report said.
‘Under these circumstances, a break-up of the euro area could not be ruled out. This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.’
U.S. investment bank Lehman Brothers imploded in September 2008 – plunging the world economy into the worst recession since the 1930s. The IMF said that although ‘the outlook for the global economy is slowly improving again’ it is ‘still very fragile’.
It warned of the ‘possibility that several adverse shocks could interact to produce a major slump reminiscent of the 1930s’.
The IMF forecast growth of 0.8 per cent in Britain this year – more than the 0.6 per cent it predicted in January, but less than last September’s target of 1.6 per cent. Its 2013 forecast was unchanged at 2 per cent.
Asked about the IMF’s comments on the eurozone, a Downing Street spokesman said: ‘The eurozone still needs to get its house in order. Those issues still exist and no doubt will be a focus of discussions at the coming meeting of the IMF towards the end of the week, which the Chancellor will be attending.’
The IMF said Britain will outperform Germany and France this year – their economies are expected to grow by just 0.6 per cent and 0.5 per cent respectively.
The Italian and Spanish economies are forecast to decline by 1.9 per cent and 1.8 per cent, while a slump of 4.7 per cent is expected in Greece following a 6.9 per cent drop in 2011.
But the report warned that output in the eurozone could fall by 3.5 per cent over the next two years if the debt crisis escalates.
This would knock 2 per cent off the world economy, said the IMF, while a 50 per cent rise in the oil price would lower output by a further 1.25 per cent.
In the absence of such ‘shocks’ the global economy is expected to grow by 3.5 per cent this year, down from 3.9 per cent in 2011, with the U.S., Canada and Japan leading the way in the developed world.
‘Because of the problems in Europe, activity will continue to disappoint in the advanced economies as a group, expanding by only about 1.5 per cent in 2012 and by 2 per cent in 2013,’ said the report.
- Euro meltdown will be a bigger disaster than the credit crunch’ (express.co.uk)
- IMF: Euro Break-up Cannot Be Ruled Out (news.sky.com)
- IMF Exploits Euro-Crisis to Create Global Money Power (mb50.wordpress.com)
(Reuters) – Aubrey K. McClendon is one of the most successful energy entrepreneurs of recent decades. But he hasn’t always proved popular with shareholders of the company he co-founded, Chesapeake Energy Corp., the second-largest natural gas producer in the United States.
McClendon, 52, helped cause Chesapeake shares to plummet amid the financial crisis when he sold hundreds of millions of dollars in stock to raise cash for himself. Later, to settle a lawsuit by shareholders, he agreed to buy back a $12 million map collection that he’d sold to Chesapeake.
His approach to running his company also is renowned: Among other employee perks, on-site Botox treatments are available at its headquarters in Oklahoma City, Oklahoma.
Now, a series of previously undisclosed loans to McClendon could once again put Chesapeake’s CEO and shareholders at odds.
McClendon has borrowed as much as $1.1 billion in the last three years by pledging his stake in the company’s oil and natural gas wells as collateral, documents reviewed by Reuters show.
The loans were made through three companies controlled by McClendon that list Chesapeake’s headquarters as their address. The money is being used to help finance what could be a lucrative perk of his job – the opportunity to buy into the very same well stakes that he is using as collateral for the borrowings.
The size and nature of the loans raise concerns about whether McClendon’s personal financial deals could compromise his fiduciary duty to Chesapeake investors, according to more than a dozen academics, analysts and attorneys who reviewed the loan agreements for Reuters.
“If Mr. McClendon has $1 billion in debt through his own companies — companies operating in the same industry as Chesapeake — he has or could have a high degree of risk for conflicts of interest. As in, whose interest will he look out for, his own or Chesapeake’s?” said Joshua Fershee, an associate professor of energy and corporate law at the University of North Dakota.
The revelation of McClendon’s bout of borrowing comes as he is scrambling to help Chesapeake avert a multi-billion-dollar cash shortfall amid a plunge in natural gas prices.
It also exposes a potentially serious gap in how U.S. regulators scrutinize corporate executives, a decade after those rules were tightened in the wake of major accounting scandals.
The loans portend a number of possible problems, the analysts said. McClendon’s biggest lender is simultaneously a major investor in two units of Chesapeake. That connection raises questions about whether Chesapeake’s own financing terms could be influenced by its CEO’s personal borrowing.
Another concern: A clause in the deals requires McClendon “to take all commercially reasonable action” to ensure that other owners and operators of the wells – including Chesapeake – “comply with…covenants and agreements” of the loans. Such clauses are common in energy-finance deals. But it is rare for the CEO of a major energy company to be personally subject to one involving the corporation that he runs. That means McClendon could have an incentive to influence Chesapeake to act in the interest of his lenders, rather than of his shareholders.
“Basically what you have here is a private transaction that could potentially impact a public company, depending on the manner in which the clause is interpreted and applied,” says Thomas O. Gorman, a partner at law firm Dorsey & Whitney in Washington, D.C., and a former special trial counsel at the Securities and Exchange Commission (SEC). “That may create a conflict of interest.”
As a result, the loans should have been fully disclosed to Chesapeake shareholders, the academics, attorneys and analysts said.
Both McClendon and Chesapeake say the loans are purely private transactions that the company has no responsibility to disclose or even to vet. And they disputed the view that the deals could create a conflict of interest.
“I do not believe this is material to Chesapeake,” McClendon said in an email response to questions. “There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way.”
Chesapeake general counsel Henry Hood said in a statement that the clause in the loan agreements questioned by analysts – called “Compliance by Operator” – is “typical boilerplate language” used in oil and gas mortgages. It requires borrowers to exercise their rights with operators of wells, such as Chesapeake, on behalf of the lender.
Neither the existence of McClendon’s loans nor their terms create the possibility of a conflict of interest, Hood said, in part because the company has a first lien on McClendon’s share of company wells. That would mean Chesapeake gets paid before all other creditors in the event that McClendon defaults on his debt.
“Any loans are Mr. McClendon’s personal business and not appropriate for review or monitoring by the company or public comment,” Hood said.
The company has many checks to protect against conflicts, Hood said. Among them: Some of the world’s largest energy companies own a share of Chesapeake wells and “monitor the actions of the Company” via well audits, government filings and participation in development plans, Hood said.
He added that Chesapeake now employs more than 13,000 people and drills more than 2,000 wells per year, “all of which minimizes the ability of any one person” – McClendon included – “to influence actions on any single well.”
Less than four years ago, a personal transaction by McClendon did negatively influence the company.
To buy more Chesapeake stock, McClendon borrowed money from his brokers – what’s called “buying on margin.” In October 2008, just after the financial crisis erupted with the bankruptcy of Lehman Brothers, he was forced to sell more than 31 million Chesapeake shares for $569 million to cover margin calls from those brokers. The company’s stock fell nearly 40 percent the week of McClendon’s share sales. McClendon issued an apology but the company’s credibility with many shareholders suffered significantly.
Chesapeake’s board of directors is aware that McClendon has borrowed against his share of company wells, Hood said, but “the board did not review or approve the transactions.” Nor did the company vet the loan terms for possible conflicts. “If there were any conflicts of interest,” Hood said, “they would have surfaced by now.”
Chesapeake board members contacted declined to comment. Marc Rome, Chesapeake’s vice president for corporate governance, did not respond to requests for comment.
WELL INVESTMENT PLAN
The loans reveal how McClendon is using an unusual corporate incentive as collateral. The perk, known as the Founder Well Participation Plan, grants Chesapeake’s billionaire co-founder a 2.5 percent stake in the profits – and makes him pay 2.5 percent of the costs – of every well drilled during each year he decides to participate.
Today, Chesapeake is the only large publicly traded energy company to grant its CEO the opportunity to take a direct stake in wells it drills. Chesapeake says the well plan is a uniquely powerful incentive because it aligns McClendon’s personal interests with those of the company’s.
The well plan does not allow McClendon to select the wells in which to invest; Chesapeake says the program is an all-or-nothing proposition so that McClendon can’t cherry-pick only the most profitable wells.
“He has to eat his own cooking here,” said company spokesman Michael Kehs.
But because McClendon is using the loans to finance his participation in the well plan, he defrays his risks. Two of McClendon’s lenders, both private equity firms, in turn spread the loan risks to other investors by raising money from state pension funds and other investors to fund them. Those insights emerge from a February 2011 document detailing a meeting between McClendon’s largest personal lender and a prospective investor.
“If he hasn’t had to put up any of his own money, how is that alignment” of McClendon and Chesapeake’s interests, asked Mark Hanson, an analyst with Morningstar in Chicago.
Chesapeake said McClendon’s loans are “well disclosed” to company shareholders. General Counsel Hood cited two references in the company’s 2011 proxy. In them, the firm refers to McClendon’s personal “financing transactions,” including one in a section entitled “Engineering Support” that discusses McClendon’s use of Chesapeake engineers to assess well reserves.
Nowhere in Chesapeake proxy statements or SEC filings does the company disclose the number, amounts, or terms of McClendon’s loans. Veteran analysts of the company said they were never aware of the loans until contacted for this article.
“We believe the disclosures made by the company have been appropriate under the circumstances, particularly since the disclosure of the loans is not required in any event,” Hood said in a statement.
THROUGH THE CRACKS
Legal experts say the size and terms of McClendon’s borrowing are unusual – and highlight a gap in regulatory scrutiny of American corporate executives.
In the past, major Wall Street banks formed separate companies – or special purpose vehicles, just as McClendon has – to allow select employees to borrow from the employer and make investments. The WorldCom accounting scandal was, in part, fueled by more than $1 billion in loans taken out by former chief executive Bernard Ebbers that were secured by his shares of company stock. And energy giant Enron used off-balance-sheet entities to hide debt from investors. New accounting and corporate governance laws and regulations banned such transactions or required their disclosure.
In September 2006, the SEC revised its related-party transaction rules to require companies to disclose when executives pledged corporate stock as collateral for loans. “These circumstances have the potential to influence management’s performance and decisions,” the SEC wrote.
McClendon’s loans – backed not by stock but by stakes in company wells – aren’t covered by the SEC rule. “Because they have decided to compensate him with a business interest, it kind of falls through the cracks,” says Francine McKenna, an accounting expert and author of the accounting-related blog re: The Auditors.
As a result, no SEC regulation precludes McClendon from using his well plan stake as loan collateral. The SEC declined to comment on the McClendon loans.
Tall and thin, McClendon is a tireless booster for the oil and gas industry – and of his company. At an energy conference in November in Houston, he sported a tie printed with tiny drilling rigs. His daring deals and stirring speeches to investors have attracted some adoring followers.
During one speech last September, McClendon said opponents of a controversial drilling technique called hydraulic fracturing were interested in “turning the clock back to the Dark Ages.”
“What a great vision of the future!” he said sarcastically. “We’re cold, it’s dark, and we’re hungry!”
McClendon’s investor presentations are standing-room-only. But he often bristles when his business model is questioned by analysts, frequently arguing that Wall Street does not understand the company.
That tension has intensified as Chesapeake scrambles to shed more than $10 billion in debt through the rapid-fire sale of assets amid the lowest natural gas prices in a decade. This year, it has done a series of deals to try to close a cash shortage estimated by analysts to be as high as $6 billion.
McClendon continues to treat his employees well. In recent years, he built a 50-acre red-brick campus in Oklahoma City as Chesapeake headquarters. It boasts a 72,000 square-foot state-of-the art gym, visiting doctors who provide lunchtime Botox treatments for employees, and dentists to whiten teeth.
A part owner of the NBA’s Oklahoma City Thunder and supporter of charitable causes in the state capital, McClendon holds considerable sway in Oklahoma. Former U.S. Senator Don Nickles and former Oklahoma Governor Frank Keating, both Republicans, are members of the Chesapeake board.
McClendon’s close relationship with the board hasn’t left him immune to tensions with stockholders.
After Chesapeake’s board agreed to buy McClendon’s map collection in 2008 for $12.1 million, shareholders sued. The lawsuit was settled in November 2011, when McClendon agreed to refund the $12.1 million, plus interest, and hold stock worth 500 percent of his annual salary and bonus. Chesapeake also agreed to hire Rome, the vice president of corporate governance, and an executive compensation consultant to evaluate corporate pay packages.
The well participation plan, which was approved by shareholders in 2005 and cannot be discontinued until 2015, has remained unaffected.
Disgruntled investors continue to launch challenges. On March 13, New York Comptroller John C. Liu and the $113 billion New York Pension Funds called on Chesapeake to let large long-term shareholders put up their own nominees for the board of directors.
Key aspects of McClendon’s loans remain hidden from shareholders. Because promissory notes underpinning the loan agreements are private, the interest rate, the exact amount borrowed and other terms of the transactions are not publicly known.
But the loan agreements demonstrate the extent to which McClendon has leveraged his interests: He has pledged as collateral almost every asset associated with his share of Chesapeake wells. Oil, gas and land interests, platforms, wells and pipelines, hedging contracts, geological and business data, and intellectual property are among scores of well-related assets that can be seized should McClendon default.
Chesapeake said it would be “unaffected by any dispute” between McClendon and a lender in the event of a default because of its first lien on oil and gas production, equipment and land leases.
The company also said that McClendon’s share of “related assets” pledged as collateral – such as business data and hedging contracts associated with wells – is completely separate from similar assets owned by Chesapeake. That means Chesapeake would not become entangled should McClendon default, the company said.
Chesapeake “does not have an interest in the (McClendon’s) related assets … and Mr. McClendon does not have an interest in the company’s related assets,” general counsel Hood said in a statement.
In explaining why Chesapeake’s board isn’t obligated to monitor McClendon’s personal loans, Hood cited a September 2003 decision by a Delaware Chancery Court. The ruling in Beam v. Stewart found the board of Martha Stewart Living Omnimedia did not breach its fiduciary duty to shareholders by failing to monitor her personal investments. (Stewart served five months in prison in 2004 following her conviction for obstruction of justice in an unrelated insider-trading case.)
Given the size, scope and complicated terms of the loans, their particulars constitute important stockholder information and therefore should be more fully disclosed, said David F. Larcker, a professor of accounting at Stanford University’s Graduate School of Business.
Some shareholders agree. “While recognizing (McClendon’s) right to privacy, the more information the company releases to shareholders the better – particularly when it’s such a large amount of money and related to the oil and gas business,” said Mike Breard, oil and gas research analyst at Hodges Capital Management in Dallas, which owns Chesapeake shares.
As with a mortgage on a residential home, state law requires that ownership rights to physical property be recorded with county clerks.
Reuters found McClendon’s loan agreements by following the trail of well and land lease transfers from Chesapeake to three companies that list McClendon as their corporate representative, according to state deed records.
In county courts in Louisiana, Texas, Arkansas, Pennsylvania and Oklahoma, where Chesapeake operates thousands of wells, the company regularly files a form called a conveyance. In keeping with the corporation’s well participation program, the conveyance grants McClendon a 2.5 percent share of each well and of the leased land on which it is drilled.
For years, Chesapeake has distributed 2.5 percent shares in wells and land to three McClendon-controlled companies – Chesapeake Investments LP, Larchmont Resources LLC and Jamestown Resources LLC.
Since he co-founded Chesapeake in 1989, McClendon has frequently borrowed money on a smaller scale by pledging his share of company wells as collateral. Records filed in Oklahoma in 1992 show a $2.9 million loan taken out by Chesapeake Investments, a company that McClendon runs. And in a statement, Chesapeake said McClendon’s securing of such loans has been “commonplace” during the past 20 years.
But in the last three years, the terms and size of the loans have changed substantially. During that period, he has borrowed as much as $1.1 billion – an amount that coincidentally matches Forbes magazine’s estimate of McClendon’s net worth.
The $1.1 billion in loans during the past three years breaks down this way:
In June 2009, McClendon agreed to borrow up to $225 million from Union Bank, a California lender, pledging his share of wells as collateral.
In December 2010, he borrowed $375 million from TCW Asset Management, a private equity firm.
And in January 2012, McClendon borrowed $500 million from a unit of EIG Global Energy Partners, a private equity firm formed by former TCW executives.
It is unclear how much, if any, of those loans have been repaid.
Randall Osterberg, a senior vice president at Union Bank who signed the loan agreement, declined to comment. TCW and EIG also declined to respond to questions.
At first blush, what the company tells shareholders suggests the well plan is a money-loser for McClendon.
In its proxy statements, Chesapeake says McClendon lost $116 million in 2009, and $141.9 million in 2010.
It’s unclear whether McClendon has suffered any real losses, however. Asked about the calculations, Hood said McClendon’s net loss is a byproduct of his drilling costs being “front end loaded,” while his revenues accrue over many years.
“If they are showing that kind of negative cash flow, the wells don’t have value,” said Phil Weiss, oil analyst at Argus Research who has a sell rating on the company’s shares. But given that McClendon has borrowed more than $1 billion based on the value of his well stakes, “I really don’t think (the company’s disclosures) tell me much,” Weiss said.
Chesapeake has resisted attempts by regulators to get more information on McClendon’s well-participation plan before. In 2008, the SEC requested more information about McClendon’s benefits from the well plan as part of a review of the company’s 2007 annual report.
From May to October that year, Chesapeake and SEC officials exchanged at least eight letters and held negotiations on the issue. After first refusing to provide more information, Chesapeake ultimately agreed to provide shareholders a chart detailing well plan revenues and costs, a review of the letters shows.
Chesapeake’s Hood said in a statement that the company’s disclosures are “fully compliant with all legal and regulatory requirements.” The chart and other SEC filings contain “all material facts that Chesapeake was required to disclose,” he said.
A spokesman for the SEC declined to comment.
McClendon’s biggest personal lender, EIG, has been a big financer for Chesapeake, too.
In November, Chesapeake raised $1.25 billion from a group of investors including EIG through the sale of “perpetual preferred shares” in a newly formed entity, Chesapeake Utica LLC, which controls about 800,000 acres of oil and gas-rich land in Ohio. The sale offers lucrative terms to EIG investors, paying an annual dividend of 7 percent and royalty interests from oil and gas wells, according to analysts.
On April 9, the company announced a nearly identical deal to raise another $1.25 billion from EIG and other investors, in another new subsidiary called CHK Cleveland Tonkawa.
Dividends on preferred shares are controversial because they are paid before regular dividends owed to common shareholders. “Basically it’s a form of more expensive debt,” Morningstar’s Hanson said. “It makes it appear that it’s not debt, but it sits on top of obligations to the common shareholder.”
The fact that McClendon’s largest personal lender received favorable terms on its Chesapeake investments caused some Wall Street analysts to call for more information about McClendon’s loans.
“I think the company should disclose this information. One reason is that the CEO is taking out loans from at least one entity, EIG, which recently provided financing to Chesapeake,” said Joseph Allman, oil and gas industry analyst at JPMorgan in New York, who reviewed the loan agreements. “In the same way that investors want to know the counterparty to significant Chesapeake transactions, they would want to know if one of those firms has significant private dealings with the CEO.”
Chesapeake’s Hood acknowledged there could be “some theoretical possibility of a conflict of interest” with the company and its CEO borrowing from the same lender. But because Chesapeake does not believe there is “an actual conflict of interest,” more disclosure is not required, Hood said.
CLOSING A GAP
McClendon’s personal loans highlight a gap in current SEC rules governing disclosures of related-party transactions, say accounting experts. The SEC requires disclosure of any transaction over $120,000 involving a company and a related party, such as the CEO, directors and certain family members, “with direct or indirect material interest.”
Chesapeake said the SEC’s related-party rule doesn’t apply to McClendon’s loans – only to his participation in the well plan. That’s because Chesapeake believes the loans “do not constitute a material transaction with Chesapeake or even involve Chesapeake,” Hood said.
That disclosure gap may be closing. A proposed new standard, released for public comment by the Public Company Accounting Oversight Board on February 28, would require auditors to identify and evaluate “significant unusual transactions” with executives connected to publicly traded firms. The board defined such transactions as those “outside the normal course of business or that otherwise appear to be unusual due to their timing, size or nature.”
Board chairman James R. Doty described the proposal as a way to scrutinize transactions that have played “a recurring role in financial failures.” The oversight board declined to comment on McClendon’s loans.
For now, said analyst Weiss, Chesapeake and McClendon are pushing the limits. “If Chesapeake were trying to make things muddy and unclear without breaking the law, this would be a good way to do it.”
(Reporting by Anna Driver in Houston and Brian Grow in Atlanta; additional reporting by Joshua Schneyer in New York; editing by Blake Morrison and Michael Williams)
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