Starts Today to May 8, 2014: Encana and Chesapeake Criminal Anti-trust Hearing in Michigan: Encana pleads “no contest” and buys its way out on the first day with $5 Million Settlement

Encana pays $5 million to settle antitrust case, Michigan drops criminal charges by Dan Healing, May 5, 2014, Calgary Herald
Encana Corp. agreed to pay $5 million and plead no contest to state charges Monday to end an antitrust case involving alleged collusion to drive down drilling rights prices in Michigan in 2010. The action follows on the U.S. federal government’s decision last week to conclude a grand jury probe into allegations Oklahoma-based Chesapeake Energy Corp. and Calgary-based Encana colluded to rig the bidding process for shale play leases in the state.

In a statement, Encana verified the settlement and said a “substantial portion” of the $5 million will be paid to a state park endowment fund. “The State of Michigan agreed to dismiss the charge against Encana of violating the Michigan antitrust laws in 11 months if Encana complies with the terms of its agreement with the state,” Encana said. The state release noted that $2.5 million will go to funds managed by the natural resources department and the remainder to help finance state antitrust enforcement activities.

It said Encana also agreed to enter into a four-year “corporate integrity agreement” providing increased transparency of future oil and gas lease bidding activity.

Its no-contest plea entered Monday before Judge Maria Barton in Cheboygan District Court was to one count of criminal attempted antitrust violations, a misdemeanour. [Emphasis added]

Encana reaches settlement in Michigan collusion case by Jeffrey Jones, May 5, 2014, The Globe and Mail with files from Reuters
Encana Corp. has agreed to pay $5-million (U.S.) to settle charges in Michigan that it colluded with a rival to lower land prices during an exploration rush, a deal that it hopes will close an ugly chapter that tarnished the reputation of Canada’s largest natural gas producer.

Encana pleaded no contest on Monday to misdemeanour antitrust violations in a Michigan court.

The scandal enveloped a handful of Encana executives, including its former chief executive officer and head of U.S. operations, both of whom have since left the company. A recurring irritant for Encana, it raised questions about its assertions that it operated with the highest ethical standards.

“Together, these effectively conclude the inquiries of both the federal and state government into these allegations, averting the need for costly and protracted litigation,” the company said in a statement.

Since the case came to light in a series of investigative reports by Reuters in 2012, based on e-mails and communications by executives with the two companies, Encana has undergone major executive and strategic changes, although not necessarily as a result of the imbroglio. Encana had said in September of that year that an internal investigation revealed that former CEO Randy Eresman had done nothing wrong, although four months later he stepped down amid investor discontent over years of perceived strategic missteps that had pressured the share price. Encana had once earmarked interests in its Michigan assets for sale as part of a major effort to attract joint venture partners for properties throughout North America, but it pulled them off the market after the antitrust allegations surfaced. Under the new CEO, Doug Suttles, Encana has removed Michigan from its roster of assets into which it is pumping capital and currently has no plans to develop the lands.

The case hurt Encana’s reputation during a difficult period as it sought ways to cope with depressed gas prices, said Phil Skolnick, an analyst at Canaccord Genuity. However, the company has undergone a renaissance of sorts under Mr. Suttles, who has sold off numerous assets and concentrated spending on those with the best prospects for returns just as the commodity market has rebounded. “It’s a legacy issue, as opposed to the new management team,” Mr. Skolnick said.

Under the deal on Monday, the two sides agreed to a delayed sentence under which the criminal case will be dismissed in 11 months if Encana lives up to the terms.

Half of the penalty will go to funds managed by Michigan’s Department of Natural Resources for those affected by the company’s actions and the rest will fund the state’s antitrust enforcement efforts, said Bill Schuette, Michigan’s Attorney-General. “Allegations of bid-rigging are taken seriously, and today’s settlement with Encana is a good result for taxpayers,” Mr. Schuette said in a statment. [Emphasis added]

Chesapeake to continue fighting antitrust charges despite Encana settlement by Jay F. Marks, May 5, 2014, NewsOK
Chesapeake Energy Corp. continues to contest antitrust charges in Michigan, even though co-defendant Encana Corp. reached a settlement in the case.
Encana Corp. on Monday reached a settlement with Michigan prosecutors who had charged the Canadian natural gas producer of colluding with Chesapeake Energy Corp. to keep prices down in a 2010 land auction. Encana agreed to a pay a $5 million civil fine.

Chesapeake, meanwhile, vowed to continue fighting the charges. “This changes nothing for Chesapeake. The Michigan state action has no merit and we are vigorously contesting it,” spokesman Gordon Pennoyer said. “There was never an agreement between Chesapeake and Encana regarding leasing activity in Michigan in 2010. “Our board reached that conclusion more than a year ago after a thorough review, and now the Department of Justice Antitrust Division has closed its investigation related to leasing activities in Michigan.”

Chesapeake and Encana were charged March 4 with two misdemeanor counts of antitrust violations. The more serious charge carries up to a $1 million fine for corporations. [Emphasis added]

Encana settles Michigan antitrust case, Chesapeake fights on by Joshua Schneyer in New York; Editing by Jeffrey Benkoe, May 5, 2014, Reuters
Natural gas giant Encana Corp has agreed to pay Michigan $5 million in a settlement that could clear the company of criminal antitrust charges stemming from its role in a 2010 land leasing spree. Chesapeake Energy Corp vowed at a Monday hearing to fight its own criminal antitrust charges. Michigan’s attorney general alleges that Chesapeake conspired with Encana to keep land lease prices artificially low in the state.

At a probable cause hearing in a state court in Cheboygan, Encana pleaded no contest to a state charge it attempted to commit antitrust violations during a land leasing spree in 2010 in which it and Chesapeake were the biggest lease buyers. Both companies faced criminal charges of antitrust violations and attempted antitrust violations.

The court took Encana’s plea under advisement and agreed it would dismiss charges against the driller if it fulfilled terms of a civil settlement over the next 11 months, Encana spokesman Jay Averill said in an emailed statement. As part of Encana’s settlement, the company also agreed to cooperate with prosecutors in Michigan who are still pursuing a criminal case against Oklahoma-based Chesapeake, which they allege was Encana’s co-conspirator during the leasing spree.

Michigan’s charges against the companies, announced by Attorney General Bill Schuette in March, allege they collaborated to “avoid bidding wars against each other” in a state land lease auction and in negotiations to acquire leases from private landowners. The alleged collaboration caused “prices to plummet,” Schuette’s office said.

Prosecutors have said the alleged collusion may have been a factor pushing down state lease prices to $40 per acre at public auction in October 2010, from a record-high average $1,510 per acre at the prior auction five months earlier.

During opening remarks, Heather Tewksbury, an attorney representing Chesapeake, described Michigan Attorney General Bill Schuette’s allegations of antitrust violations against her client as “smoke. Smoke with no fire.” Tewksbury, a former U.S. Department of Justice antitrust lawyer, added, “there was no agreement in this case.”

Encana’s civil settlement with Michigan, and Chesapeake’s pledge to defend the charges, came after both companies conducted internal investigations they said showed no collusion between the firms. …

NEW STATE EVIDENCE

As part of Encana’s settlement agreement on Monday, Michigan prosecutors filed an affidavit containing references to several previously unreported communications. Prosecutors said these exchanges bolster the antitrust case against the energy companies.

One email exchange cited was between then-Chesapeake Chief Executive Aubrey McClendon and the former CEO of Calgary-based Encana, Randy Eresman. In it, McClendon is quoted as asking Eresman: “should we throw in 50/50 together here rather than trying to bash each other’s brains out on lease buying?”

The email is dated May 4, 2010, the same day as a record-setting Michigan state land auction. The state raised $178 million at the auction, an amount equal to the proceeds from all prior Michigan state land lease auctions since 1929. Chesapeake and Encana bought the majority of the acreage.

Prosecutors also said they had evidence that a May 2010 phone conversation between the Chesapeake and Encana CEOs, documented in Eresman’s “work journal notes,” included setting a land lease price “goal $500/acre vs. $2,000/acre and divide into leasing blocks.”

Chesapeake and Encana have said previously that their discussions were related to a kind of joint venture known as an area of mutual interest (AMI) that never came to fruition.

AMI agreements are common in the oil industry. In them, two or more companies leasing land for drilling agree to let each other buy a portion of the leases the partner has acquired. Such agreements are intended to encourage development of oil and gas properties. While legal, they are not supposed to restrain trade or allow companies to avoid bidding against each other for leases.

The DOJ was still pursuing an investigation into potentially anti-competitive behavior in oil and gas leasing in other states.

A “substantial portion” of Encana’s $5 million payment to Michigan will go to the Department of Natural Resources State Park Endowment Fund, Encana said in a statement. The payment comes “in exchange for a release of the state’s civil claims,” Averill said. The DNR is the state agency that runs Michigan’s bi-annual auctions of public lands for oil and gas leasing.

[Emphasis added]

Chesapeake, Encana face state criminal antitrust hearing in Michigan by Brian Grow, Editing by Michael Williams and Ed Davies, May 5, 2014, Reuters
Michigan state prosecutors plan to call a former Encana Corp. executive to testify on behalf of the state, at a multi-day hearing in their criminal antitrust case against oil and gas companies Chesapeake Energy Corp. and Encana Corp. that begins Monday.

Kurt Froistad, a former land acquisition specialist at Canadian energy giant Encana’s U.S. unit until August 2011, was involved in decisions about how to lease land in Michigan during a prospective oil and gas boom there in 2010. He exchanged emails with a counterpart at Chesapeake about dividing up bidding responsibilities between the two companies in nine Michigan counties ahead of an October 2010 state land auction, according to documents previously reported by Reuters.

In March, Michigan’s attorney general, Bill Schuette, alleged Oklahoma City-based Chesapeake, the second-largest natural gas producer in the United States, and Encana, based in Calgary, colluded to keep oil and gas lease prices artificially low in Michigan during an oil and gas rush in its Collingwood Shale region in 2010.

The companies were charged with one count each of antitrust violations “relating to a contract or conspiracy in restraint of commerce,” and one count each of attempted antitrust violations.

At Monday’s probable cause hearing in Michigan district court in Cheboygan, state prosecutors will present evidence supporting the charges. If the court finds sufficient probable cause, the case will move to trial. Chesapeake and Encana both plead not guilty in March and said they would fight the claims. The boards of both companies previously conducted internal investigations and said they found no collusion. [How often does self-investigation declare guilty?] The companies have acknowledged holding talks about forming a joint venture in Michigan during 2010, but said no agreement was ever reached.

Michigan’s criminal investigation began in 2012 after a Reuters report found that top executives from Chesapeake and Encana discussed dividing up bidding responsibilities involving nine private landowners and nine counties in the state. Chesapeake and Encana were the biggest leasers of land during Michigan’s short-lived leasing boom in 2010.

DEPARTMENT OF JUSTICE PROBE
Michigan’s Attorney General is pursuing a criminal trial against the companies even as the U.S. Department of Justice has concluded its own probe into whether Chesapeake and Encana colluded in Michigan, without bringing any charges against the firms. On April 30, the companies said they had received closure letters from the Department of Justice ending its investigation of possible antitrust violations related to their land-leasing activities in Michigan. The Justice Department’s probe is not completely closed, however.

On May 1, Gina Talamona, a spokesperson for the Justice Department’s antitrust division said in an emailed statement to Reuters that “while part of the Antitrust Division’s investigation into the possibility of anticompetitive practices in the purchase and lease of oil and gas properties in Michigan has closed, other aspects of the investigation remain open.” She clarified that the “other aspects” of Justice’s investigation relate to oil and gas leasing activities in states other than Michigan. She did not respond to requests for comment on whether Chesapeake or Encana remain subjects of the investigation, nor which states are involved.

A Chesapeake spokesman declined to comment. Jay Averill, an Encana spokesman said, “We can’t provide comment because we are not aware of any ongoing investigation at this time.”

In Michigan, the state’s antitrust charges against Chesapeake and Encana came nearly two years after Reuters reported on a series of email exchanges between top executives of the companies about land leasing in the state. No current or former executives at either company have been charged by the state.

In one email, dated June 16, 2010, former Chesapeake chief executive Aubrey K. McClendon told a Chesapeake deputy that it was time “to smoke a peace pipe” with Encana “if we are bidding each other up.” The Chesapeake vice president responded that he had contacted Encana “to discuss how they want to handle the entities we are both working to avoid us bidding each other up in the interim.”

In addition to former Encana executive Froistad, Michigan state prosecutors plan to call at least nine other witnesses, according to a list provided by the attorney general’s office. They include state officials, antitrust experts, and representatives of private Michigan landowners who sought to lease their acreage for oil and gas production during 2010.

One aspect of Michigan prosecutor’s antitrust claims relate to an alleged bidding strategy that Chesapeake and Encana executives – with the involvement of Froistad — developed ahead of an auction of state land on October 26, 2010.

Bidding at the state’s May 2010 auction had been vigorous and contested. That helped the state raise a record $178 million from the sale of more than 118,000 acres, according to a review of state auction data by Reuters. At that auction, 83 percent of the more than 1,200 winning bids had competitive offers. Five months later, at the October auction, the bidding and the results proved remarkably different and far less lucrative. It raised just $9.7 million from the leasing of about 274,000 acres – more than twice the acreage sold in May but almost $170 million less in revenue.

Froistad now works as Vice President of Land for Forge Energy LLC in San Antonio, Texas. He said he was “unable to talk” when contacted on Sunday.

The probable cause hearing in the Michigan antitrust case is expected to last through Thursday, May 8. [Emphasis added]

Chesapeake, Encana face state criminal antitrust hearing in Michigan by Brian Grow, May 5, 2014, Financial Post
Michigan state prosecutors plan to call a former Encana Corp.  executive to testify on behalf of the state, at a multi-day hearing in their criminal antitrust case against oil and gas companies Chesapeake Energy Corp. and Encana Corp. that begins Monday. Kurt Froistad, a former land acquisition specialist at Canadian energy giant Encana’s U.S. unit until August 2011, was involved in decisions about how to lease land in Michigan during a prospective oil and gas boom there in 2010. He exchanged emails with a counterpart at Chesapeake about dividing up bidding responsibilities between the two companies in nine Michigan counties ahead of an October 2010 state land auction, according to documents previously reported by Reuters.

In March, Michigan’s attorney general, Bill Schuette, alleged Oklahoma City-based Chesapeake, the second-largest natural gas producer in the United States, and Encana, based in Calgary, colluded to keep oil and gas lease prices artificially low in Michigan during an oil and gas rush in its Collingwood Shale region in 2010. The companies were charged with one count each of antitrust violations “relating to a contract or conspiracy in restraint of commerce,” and one count each of attempted antitrust violations.

DEPARTMENT OF JUSTICE PROBE
Michigan’s Attorney General is pursuing a criminal trial against the companies even as the U.S. Department of Justice has concluded its own probe into whether Chesapeake and Encana colluded in Michigan, without bringing any charges against the firms. On April 30, the companies said they had received closure letters from the Department of Justice ending its investigation of possible antitrust violations related to their land-leasing activities in Michigan. The Justice Department’s probe is not completely closed, however.

On May 1, Gina Talamona, a spokesperson for the Justice Department’s antitrust division said in an emailed statement to Reuters that “while part of the Antitrust Division’s investigation into the possibility of anticompetitive practices in the purchase and lease of oil and gas properties in Michigan has closed, other aspects of the investigation remain open.” She clarified that the “other aspects” of Justice’s investigation relate to oil and gas leasing activities in states other than Michigan. She did not respond to requests for comment on whether Chesapeake or Encana remain subjects of the investigation, nor which states are involved. A Chesapeake spokesman declined to comment. Jay Averill, an Encana spokesman said, “We can’t provide comment because we are not aware of any ongoing investigation at this time.”

In Michigan, the state’s antitrust charges against Chesapeake and Encana came nearly two years after Reuters reported on a series of email exchanges between top executives of the companies about land leasing in the state. No current or former executives at either company have been charged by the state.

In one email, dated June 16, 2010, former Chesapeake chief executive Aubrey K. McClendon told a Chesapeake deputy that it was time “to smoke a peace pipe” with Encana “if we are bidding each other up.” The Chesapeake vice president responded that he had contacted Encana “to discuss how they want to handle the entities we are both working to avoid us bidding each other up in the interim.” In addition to former Encana executive Froistad, Michigan state prosecutors plan to call at least nine other witnesses, according to a list provided by the attorney general’s office. They include state officials, antitrust experts, and representatives of private Michigan landowners who sought to lease their acreage for oil and gas production during 2010.

One aspect of Michigan prosecutor’s antitrust claims relate to an alleged bidding strategy that Chesapeake and Encana executives – with the involvement of Froistad — developed ahead of an auction of state land on October 26, 2010. Bidding at the state’s May 2010 auction had been vigorous and contested. That helped the state raise a record $178 million from the sale of more than 118,000 acres, according to a review of state auction data by Reuters. At that auction, 83 percent of the more than 1,200 winning bids had competitive offers. Five months later, at the October auction, the bidding and the results proved remarkably different and far less lucrative. It raised just $9.7 million from the leasing of about 274,000 acres – more than twice the acreage sold in May but almost $170 million less in revenue.

Froistad now works as Vice President of Land for Forge Energy LLC in San Antonio, Texas. He said he was “unable to talk” when contacted on Sunday. [Emphasis added]

Justice Department ends antitrust probe of Chesapeake, Encana by Brian Grow, Edited by Michael Williams, April 30, 2014, Reuters
(Adds Encana statement and recasts to reflect.)
The U.S. Department of Justice has ended a probe of possible antitrust violations by Chesapeake Energy Corp and Encana Corp related to their land-leasing activities in Michigan, the companies said. Spokesmen for the two companies said Chesapeake and Encana have received closure letters from the Department of Justice, ending the government’s criminal probe into alleged antitrust violations in Michigan. The letters were not made available for review.

“We are very pleased with the confirmation by the U.S. Department of Justice Antitrust Division that it has closed its grand jury investigation,” Encana spokesman Jay Averill said in a written statement. “The conclusion of their investigation is consistent with the findings of our independent investigation, and of our Board of Directors, that Encana did not engage in collusion with competitors in Michigan in 2010.”

A Justice Department spokesperson did not immediately respond to a request for comment. Chesapeake and Encana still face state charges in Michigan. In March, Michigan’s attorney general, Bill Schuette, charged Chesapeake and Encana with colluding to keep oil and gas lease prices artificially low in the state. The companies were charged with one count each of antitrust violations “relating to a contract or conspiracy in restraint of commerce,” and one count each of attempted antitrust violations.

Both companies denied the Michigan charges and said they would fight the allegations. [Emphasis added]

Chesapeake Energy’s Secrets Could Make it Impossible to be Acquired by Matt DiLallo, April 7, 2014, Motley Fool
Big mergers always come with the promise of supercharging future returns. However, the stock market is littered with the worthless paper of mergers that went bust. Synergies never happened, sales’ growth never materialized or something beyond management’s control made profits evaporate. While any of these risks could doom a future buyer of Chesapeake Energy (NYSE: CHK  ), the company’s closet full of secrets are what should really worry any future acquirer.

Massive risks can be hiding in the unlikeliest of places
Over the years a number of notable mergers ended up costing the acquirer billions of dollars years later when an unknown risk came back to bite. For example, in 2000 Chevron (NYSE: CVX) paid $36 billion to buy Texaco only to discover that there was a $19 billion future contamination judgment hiding in an Ecuadorian rainforest. That judgment has been sliced in half to $9.51 billion and more recently a U.S. judge ruled that the original judgment was acquired through corrupt means. However, there is still a risk that Chevron will one day have to pay billions of dollars thanks to its acquisition of Texaco.

Anadarko Petroleum (NYSE: APC) is another company that was hurt by a hidden liability. It will now have to pay out a multi-billion dollar settlement relating to an acquisition it made years ago. Anadarko spent $18 billion to buy Kerr-McGee in 2006, however, a few short years later a $25 billion lawsuit emerged due to the toxic past of a former Kerr-McGee unit. That payout was eventually reduced to a range of $5.15 billion to more than $14 billion before Anadarko settled last week for $5.15 billion.

The skeletons in Chesapeake Energy’s closet
Most of these were unknown risks at the time of the acquisition. That’s really worrisome as Chesapeake Energy has a number of already known risks that could one day come back to haunt a would-be acquirer. For example, one skeleton in its closet involves possible collusion with Encana (NYSE: ECA  ) to bring down the price of leases in Michigan. Just recently the state of Michigan charged both Chesapeake Energy and Encana with collusion. If found guilty Chesapeake would be forced to pay a fine of up to a million dollars.

However, beyond that Chesapeake Energy could also face federal charges under the Sherman Antitrust Act. Criminal penalties can be up to $100 million or in some cases up to twice the amount lost by the victims of the crime. Needless to say given the billions in leases signed during the land rush, Chesapeake Energy and anyone that acquires the company could face very stiff penalties in the future.

Beyond that there is no telling what other secrets could still be hiding. Chesapeake was one of the most aggressive companies pursing the land-grab and subsequent drilling boom. It entered into a number of transactions that included off balance sheet arrangements. An article by Pro Publica, for example, noted that the company had as much as $36 billion worth of these arrangements, including $17 billion in long-term gathering agreements. The company, for example, has a number of volumetric production payments, or VPPs that could come back to bite the company, or again, the company that someday buys Chesapeake. [Emphasis added]

Exclusive – Encana, Chesapeake near settlements on Michigan collusion probe by Joshua Schneyer and Anna Driver, February 26, 2014, Reuters in wn.com
Encana Corp and Chesapeake Energy Corp are negotiating civil settlements with the state of Michigan to try to end its criminal investigation into whether the energy companies colluded to keep oil and gas lease prices artificially low in the state. Encana is hopeful that a settlement will be finalized within a few weeks, said Gregory Curtner, a lawyer representing Encana in a separate civil antitrust lawsuit, during a February 14 court hearing. “I can fill you in on the status of the Michigan Attorney General investigation because I’m handling that,” [Emphasis added]

[Refer also to:

April 16, 2014: Alberta Minister of Justice and Solicitor General intervenes in Ernst appeal of ERCB Charter violation

March 2014; Attorney General Bill Schuette: Encana and Chesapeake Energy criminally charged with colluding to keep oil and gas lease prices artificially low in Michigan; Also face separate, federal antitrust investigation by Department of Justice

2013: Isn’t frac’ing supposed to create massive prosperity and jobs? Encana proves it isn’t so!

2013: Investors sue BP’s ex-CEO Tony Hayward and Doug Suttles, now Encana CEO; Encana chops executives, five senior managers gone including USA President Jeff Wojahn, who headed the unit when it was accused of collusion

2013: Battered Encana taps former BP exec Doug Suttles, who reportedly covered-up the extent of the Deepwater Horizon disaster, as new CEO

2013: Energy lobbyist, Ex Encana VP Gerard Protti, appointed as Alberta’s new top energy regulator

2013: Chesapeake, Encana sued in civil antitrust action filed by Northstar Energy

2013: Encana wants embarrassing audio file erased from Internet

2013: yedlin: Profanity brings Encana pressures to the fore

January 14, 2013: Encana CEO Randy Eresman retires suddenly, News release confirms top executive stepping down after 35 years

January 11, 2013: Down goes Encana’s Eresman! Natural gas giant’s president and CEO abruptly announces his retirement

October 24, 2012: Encana posts big loss, to split U.S. asset sale package

September 5, 2012: Ewart: Encana’s in-house exoneration only goes so far

September 5, 2012: Encana’s denial of collusion charges leaves many questions unanswered

August 10, 2012: Analysis: Legal woes may spoil Chesapeake’s Michigan sale

July 29, 2012: Big Oil and Gas industry writing down billions in U.S. shale gas assets

June 26, 2012: Encana’s troubles widen with collusion allegations

September 28, 2007: EnCana to cut $1-billion if royalties rise

September 20, 2007: EnCana faces California gas price-fixing trial ]

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