Chesapeake, Encana Bid-rigging Revealed -- Reuters (CHK, ECA)

The troubles for Chesapeake Energy Corp. (NYSE: CHK) just keep rolling in. It seems that after one rock gets turned over and something shady has been revealed, the effort to turn over more rocks intensifies.

In a special report this morning, Reuters revealed emails that indicate that Chesapeake’s CEO, Aubrey McClendon, directed one of the company’s vice-presidents to “smoke a peace pipe” with Encana Corp. (NYSE: ECA) in an effort to rein in the bidding on leases for rights to drill on properties in Michigan’s Collingwood shale play. The two companies admit discussing the formation of an “area of mutual interest,” but that no joint venture was formed nor did the two companies submit any joint bids.

That’s fine, but that is the answer to a question that wasn’t asked. The issue is did the two companies collude to restrain lease prices. Such collusion violates the Sherman Antitrust Act and could lead to fines of up to $100 million for each company and up to $1 million for the individuals involved for each offense. A 10-year jail sentence is also possible, but rare.

Reuters cites a former Justice Department attorney, now a law professor at the University of Houston:

Nothing in the documents suggests any benefit to the joint venture other than making the price fall. If it has no other purpose, then it’s just a shell and doesn’t change the liability for illegal conduct.

Another former DoJ attorney concurred:

The famous phrase is a ‘smoking gun.’ That’s a smoking H-bomb. When the talk is explicitly about getting together to avoid bidding each other up, it’s a red flag for collusion, bid-rigging, market allocation.

Added to McClendon’s dubious well-participation benefits and the replacement of more than half Chesapeake’s board of directors, the second-largest US natural gas producer now faces what could be its most serious problem so far.

Shares of Chesapeak are down about -5.5% in pre-market trading this morning, at $17.60 in a 52-week range of $13.32-$35.75. Encana’s shares are down nearly -6% at $18.68 in a 52-week range of $17.02-$32.23.

Paul Ausick