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Class Certification Granted in Chesapeake Energy

May 30, 2012

In February 2009, a securities class action was filed against Chesapeake Energy Corp. over its secondary offering in July 2008 of 28.75 million shares, priced at $57.25 per share. This is the first of many actions that have been filed against the now notorious Aubrey McClendon arising out of Chesapeake’s failure to disclose certain of McClendon’s financial dealings that posed conflicts of interest with the company. The class of purchasers of Chesapeake’s stock issued pursuant to its July 2008 offering has been certified by Western District of Oklahoma Judge Timothy D. DeGiusti.

The action arises out of misstatements and omissions made in the July 2008 offering. The eventual revelation of significant risks undisclosed to investors prior to the offering caused Chesapeake’s stock to crater over 70%. Chesapeake failed to disclose that almost all of McClendon’s Chesapeake stock was purchased on margin, and that McClendon would be unable to prevent the forcible sale of this stock by providing additional capital in the event of margin calls on his stock. That is exactly what occurred when over 30 million of McClendon’s shares flooded the market, causing the stock’s price to decline at an alarming rate.

Chesapeake also failed to disclose risks involving its contracts used to hedge against the volatility of natural gas prices. A significant number of these contracts were with Lehman Brothers. At the time of the offering, Lehman Brothers was in financial ruin and facing almost inevitable collapse. Regardless, Chesapeake failed to disclose in the offering that Lehman Brothers was a counterparty to these contracts, and thus, if the financial institution went bankrupt (as it did), Chesapeake would be left unhedged. Chesapeake also failed to update the nature and extent of certain of its hedges – referred to as knockout or kickout swaps – at the time of the offering. Instead, it provided data that was months old. When the risks hidden by these omissions materialized, Chesapeake’s stock price faltered.

After these allegations were upheld in the face of defendants’ motion to dismiss the complaint, the parties began discovery on matters including whether the proposed class should be certified. Among the issues surrounding class certification was whether the United Food and Commercial Workers Union Local 880 – Retail Food Employers Joint Pension Fund was an adequate class representative. Rejecting each of defendants’ arguments, the court held that the Pension Fund is an adequate class representative, particularly because of its selection of Robbins Geller Rudman & Dowd LLP as class counsel in this matter.

As part of the class certification process, the court also defined the members of the class – an issue hotly debated by the parties. Defendants argued that the class should exclude anyone who did not purchase shares in the offering directly from Chesapeake or one of the underwriters and at the price of $57.25. Judge DeGiusti rejected these limitations as inappropriate under the law, especially given the contemplation by the parties that “aftermarket purchasers” would be included in the class. The class definition certified by the court promotes the representation in this action of all those harmed by defendants’ conduct. “It is important for public investors in the stock offering at issue to have a potential class remedy, and class certification was a necessary step in that process,” said Robbins Geller partner James Jaconette in describing the decision. “We are now moving on to the next battle.”

United Food & Commercial Workers Union  v. Chesapeake Energy Corp., 281 F.R.D. 641 (W.D. Okla. 2012).

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