Back in May 2009, we came across something that, even after nearly six years of reading footnotes, managed to surprise us. It was a disclosure buried deep in Chesapeake Energy’s (CPK) proxy for 2009 about the company spending $12.1 million to buy a collection of antique maps from Chairman and CEO Aubrey McClendon and it quickly became one of our favorite footnotes of all time. We first wrote about the disclosure for the NY Times’ DealBook and footnoted readers selected it for the highly coveted (!) prize of worst footnote of 2009.
Indeed, the disclosure about McClendon’s map collection began to take on a life of its own, prompting several shareholder lawsuits (more on that in a minute), showing up in a New Yorker magazine profile of footnoted friend Nell Minow and prompting Chesapeake to issue an amended proxy in an effort to set the record straight about some of the, um, more unusual disclosures in the initial proxy, including the map collection. The amended filing was really just a letter from General Counsel Henry Hood to Daily Oklahoman reporter Randy Ellis. Both the initial disclosure and the amended filing are well worth reading, for sheer entertainment value.
Among the justifications given for the purchase was that the company “believed it was not appropriate to continue to rely on cost-free loans of artwork from Aubrey.” As we footnoted after reading the second filing, it really was hard to read these disclosures with a straight face. The letter also noted that the map collection was really worth more than $8 million more than Chesapeake had paid, at least according to the appraiser who had helped assemble the collection in the first place!
We mention all this back-story because yesterday we learned that Chesapeake had reached a settlement with the investors who first filed suit back in the spring of 2009. The settlement was first reported (subscription required) by Brianna Bailey of The Daily Record and we picked it up in our Twitter feed yesterday afternoon. As Bailey reported and Chesapeake later confirmed, McClendon will pay back the $12.1 million plus interest of 2.28%.
One key part of the settlement appears to be this: “The Company will not reimburse Mr. McClendon for the Recission Payment, whether as part of any future compensation or otherwise. Insurance also won’t be used to cover the cost. Chesapeake also has to pay $3.75 million to cover the plaintiff’s legal fees (assuming the court approves the payment) and presumably spent millions of its own money over the last 2 1/2 years fighting the lawsuit. A spokesman for Chesapeake declined to provide an estimate of what it had spent. The spokesman for Chesapeake did provide this statement however, which it attributed to Holt:
—We are pleased to have reached this settlement and believe it is fair and conducive to bringing this matter to a positive conclusion. Since the settlement remains subject to final court approval, we will limit further comment.
Even with a few more years of SEC scuba-diving under our belts, McClendon’s map collection remains something of a gold-standard when it comes to unusual disclosures. While we’ve come across some other CEO art collections in the filings, we’ve yet to come across something quite as flagrant.
That Chesapeake stock has far underperformed some of its closest competitors, including Anadarko Petroleum (APC), Cabot (COG) and EOG Resources (EOG) since the disclosure is a cold-hard fact. But how much of a role the disclosure and ensuing legal mess and, quite frankly, the environment that led directors to approve such a stupid deal in the first place is one of those — to borrow some words from former Defense Secretary Donald Rumsfeld — great unknown unknowns.
Perhaps the real question is whether other top executives — and their boards — learn from this. Let’s say the whole thing wound up costing around $20 million in cash plus millions more in lost opportunity costs (summoning up that Brandeis economics degree). Is that really enough to prevent this sort of thing from happening again? We’d like to think so, but the pessimist in us says that’s probably not the case.