Pomerantz Recovers $12.1 Million in Chesapeake Excess Compensation Case

Pomerantz has long sought to curb corporate excess. Indeed, our first major case was brought by Abe Pomerantz against First National City Corp. officers and directors who had granted themselves interest-free loans and other benefits after the 1929 Crash. It so happens that First National City was the predecessor of today’s Citigroup, which suggests that bankers have not yet learned their lesson.

Consistent with our firm’s tradition, Pomerantz (representing Louisiana Municipal Police Employees Retirement System) spearheaded an action to recover the excess compensation awarded in 2008 to Aubrey McClendon, the maverick founder and CEO of Chesapeake Energy (and the subject of a recent Forbes cover story). In a year that saw Chesapeake’s earnings fall 50%, triggering a 60% decline in its stock price, the company’s Board saw fit to grant Mc- Clendon a more than five-fold increase in his compensation, and, on top of that, to buy his collection of antique survey maps that hung in corporate headquarters. The Board’s purported justification for its largess was that McClendon had bought his Chesapeake shares on margin and, when the stock price tanked, he suffered a margin call and had to sell off the shares. Because McClendon's employment contract required him to maintain ownership of a significant number of company shares which he would now have to buy, the Board reasoned that, rather than do that, McClendon might abandon the company for other interests.

After engaging in vigorous litigation in Oklahoma state court, McClendon has agreed to repay Chesapeake $12.1 million (and to retake ownership of his map collection, which had remained on the headquarters walls throughout).

As the Wall Street Journal noted, this settlement represented a rare concession for the 52-year-old executive, who has run the company largely by his own rules since he co-founded it in 1989.

In addition, the Board agreed to adopt rigorous governance reforms, including mandating the use of independent compensation consultants, to avoid the recurrence of this type of conduct. Excess compensation cases are notoriously difficult, particularly in view of the deference the courts often give to board decisions about executive compensation. Indeed, we are unaware of any case not involving deception of the board which has resulted in a clawback, much less one of this magnitude. The difficulties inherent in such cases were exemplified a few years ago in the instance of a $140 million severance payment made by Disney to Michael Ovitz, who was dismissed after merely one year on the job.

Nonetheless, after over six years of litigation, culminating in a full trial, the court found no fault on the directors’ part. The Chesapeake case was all the more problematic given that the company was incorporated in Oklahoma, the court hearing the case was an Oklahoma state court, and its Board of Directors included a former Oklahoma U.S. senator, former governor ofthe state, and the current President of Oklahoma State University.