Michigan's attorney general filed felony racketeering and fraud claims against Chesapeake Energy on Thursday, alleging the company canceled hundreds of private land leases under false pretenses following a short-lived oil and gas boom in the state in 2010.
The charges, filed in Michigan state court in Cheboygan, allege Chesapeake, through its leasing agents, victimized private landowners in northern Michigan by falsely claiming mortgages on their properties were a legitimate basis for the lease cancellations. Landowners were previously told the mortgages were not a problem, the state alleged.
"I will defend and protect the taxpayers of Michigan in the face of fraudulent business practices," Michigan Attorney General Bill Shuette said in a press release. "Scamming hardworking Michigan citizens is not how we do business in this state."
A felony complaint filed by the Attorney General charges Chesapeake with one count of "conducting a criminal enterprise," punishable by up to a $100,000 fine, and eight counts of "false pretenses," punishable by a $10,000 fine each or three times the value of money or property involved, whichever is greater.
Schuette alleged that, as a result of leasing the oil and gas rights on Michigan landowners' properties then cancelling the deals, "Chesapeake therefore obtained uncompensated land options from these landowners by false pretenses, and prevented competitors from leasing the land."
Chesapeake allegedly signed leases with as many as 800 Michigan landowners, but honored less than 30 leases, according to the state's felony complaint.
"We believe this action has no merit and we will vigorously contest these baseless allegations," said Gordon Pennoyer, a spokesman for Chesapeake.
Chesapeake shares traded at $29.67, up 1.3 percent, at midday on Thursday.
In 2011, Reuters reported on the company's land leasing and cancellation tactics in Michigan. Hundreds of landowners were notified that their leases had been canceled by an obscure company called Northern Michigan Exploration, a shell company formed by Chesapeake.
Scores of landowners later sued Chesapeake in Michigan state courts, alleging their contracts had been breached. Many of those cases have been settled, according to private attorneys.
Michigan Attorney General Schuette now alleges that the "massive, orchestrated nature" of Chesapeake's lease cancellations, using mortgage and other reasons, "indicates that Chesapeake entered into those leases knowing it would cancel them if Chesapeake so choose—a scheme known as 'cold drafting' in the industry."
Chesapeake is scheduled to be arraigned on the racketeering and fraud charges in Michigan state court in Cheboygan on June 25.
The new Michigan criminal charges add to Chesapeake's troubles in the state. In March, Attorney General Schuette alleged the Oklahoma City-based company, the second-largest natural gas producer in the United States, and rival Encana Corp., based in Calgary, colluded to keep oil and gas lease prices artificially low in Michigan during the oil and gas rush in its Collingwood Shale region in 2010.
The companies were originally 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 a probable cause hearing on May 5 in Michigan state court in Cheboygan, Encana agreed to pay Michigan $5 million in a civil settlement that could clear the company of criminal antitrust charges stemming from its role in the 2010 land leasing spree.
Encana pleaded no contest to a misdemeanor state charge it attempted to commit antitrust violations during the leasing spree in which it and Chesapeake were the biggest lease buyers. The court took Encana's plea under advisement and agreed to dismiss all charges against the driller if it fulfilled terms of its civil settlement over the next 11 months.
At the same hearing, Chesapeake fought the criminal antitrust charges. Heather Tewksbury, an attorney representing Chesapeake, described the 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" between Chesapeake and Encana.
The companies said earlier that they discussed forming a joint venture in Michigan but never reached agreement. The boards of both Chesapeake and Encana conducted internal investigations in 2012 which they said showed no collusion.
A series of communications between Chesapeake and Encana executives showed they had discussed bidding strategies to acquire leases, Reuters reported in 2012. The executives discussed splitting bidding responsibilities for nine private landowners and nine counties ahead of an October 2010 state lease auction in order to keep prices from creeping higher, Reuters reported.
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 a prior auction five months earlier.
Following the probable cause hearing in May, state prosecutors expanded alleged antitrust violations against Chesapeake. The charges were divided into two separate claims, alleging the company conspired against private landowners between May and June 2010 and against the state of Michigan's oil and gas lease auctions between August and October 2010. The charge of attempted antitrust violation, a misdemeanor, remains.
A ruling from a state court Judge Maria Barton is expected this month. If the court finds sufficient probable cause, the case will move to trial.
Chesapeake and Encana received letters in April from the U.S. Justice Department informing them that a separate, Justice Department-led probe into whether they violated antitrust laws in Michigan had concluded.
The Justice Department is still pursuing an investigation into potentially anti-competitive behavior in oil and gas leasing in other states.