By Michael Erman and Anna Driver and Brian Grow
Jan 14 For 17 years, Tom Ward and Aubrey
McClendon teamed up to build Chesapeake Energy Corp into the
second-largest natural gas producer in the United States.
The two Oklahoma City energy men were a study in contrasts.
CEO McClendon was brash and aggressive; company president Ward
came across as steady and soft-spoken.
When Ward left in 2006 to start his own natural-gas company
a few miles away, however, he borrowed from the Chesapeake
playbook. At SandRidge Energy Inc, Ward adopted some of the same
idiosyncratic business practices deployed by McClendon.
At Chesapeake, McClendon intertwined his personal financial
deals with the company he runs.
Similarly, Ward has melded his own financial interests with
those of publicly traded SandRidge more than many of the
company's shareholders may know, an examination of court
documents, Oklahoma state records and Securities and Exchange
Commission filings shows.
Like McClendon, Ward has faced criticism from shareholders
and others for running a public company like a private firm,
drawing large paychecks and bonuses even during periods when his
In 2008, Ward received personal loans from the chairman of
Bank of Oklahoma - one of SandRidge's key lenders. He also took
the unusual step of opening the company's books for the lender's
review of that personal deal. The mixing of personal and
corporate roles posed a potential conflict of interest for the
CEO, analysts say.
Now, the question is whether Ward will be forced to change
his ways as McClendon was earlier this year, when shareholders
shook up Chesapeake's board and stripped him of his job as
chairman following a series of Reuters reports. On Monday,
Chesapeake said it was not awarding McClendon, who remains CEO,
a bonus for 2012.
Two large SandRidge shareholders - hedge fund TPG-Axon
Capital and investment firm Mount Kellett Capital - have been
pressing to replace Ward and the board and to put the company up
"There is constant intermingling of the personal and the
private" between the CEO and SandRidge's business, said Dinakar
Singh, founder of TPG-Axon, which owns 6.7 percent of SandRidge.
Greg Dewey, a spokesman for SandRidge, declined to respond
to questions from Reuters on Ward's transactions or on any
similarities between SandRidge and Chesapeake. But he stressed
that "in each case, we have followed our own internal guidelines
and we know the (Securities and Exchange Commission) rules very
well and have followed those."
In addition to borrowing $75 million from Bank of Oklahoma's
chairman, Ward also collected $67 million from SandRidge by
selling back his personal interests in a controversial corporate
perk: stakes in the company's wells. McClendon, too, had a
similar incentive at Chesapeake.
SandRidge has also paid nearly $28 million more to Ward or
firms linked to him or his family, according to SEC filings.
Those payments are in addition to the more than $116 million
Ward has received in compensation as CEO since 2007. Between
2007 and 2011, Ward made more than $7 million more than the two
men who served as CEO of Chevron, a company more than 60 times
the size of SandRidge by market capitalization. (Compensation
data for 2012 is not yet available for Chevron.) Ward's pay
included $4.2 million for accounting services related to his
personal and family finances.
In each case, SandRidge disclosed the benefits that Ward has
drawn, and nothing is illegal about the compensation packages.
But some analysts and shareholders question why Ward earns so
much, given the company's size and stock price. As natural gas
prices plummeted, SandRidge shares fell from a high of $69 in
July 2008 to about $7 today.
Some corporate-governance experts don't see a problem. "As
long as it's disclosed, I think it's fine," said David Larcker,
an accounting professor at Stanford University's Graduate School
Others say Ward's transactions raise questions about how
SandRidge is being run and create the risk he is putting his own
interests ahead of the company's.
"The number of related-party transactions (SandRidge)
reports is out of proportion to the size of the company," says
Paul Hodgson, an independent corporate-governance consultant.
Ward's compensation has drawn the attention of California
pension fund CalSTRs, which owns 880,000 SandRidge shares and is
in talks with the company over executive pay.
"We believe that compensation at this point is too high
relative to the stock performance," said CalSTRS spokesman
Ricardo Duran. "Our standard throughout our portfolio is to,
wherever possible, link executive compensation to performance.
We feel that standard's not being met."
Ward and McClendon, who began working together in their 20s,
co-founded Chesapeake in 1989 with 10 employees and $50,000 in
cash. The two Oklahoma natives were "land men," traveling back
roads to lease promising acreage for drilling.
Ward, 53, grew up in the tiny town of Seiling, Oklahoma. He
became Chesapeake's operational brain. McClendon, born into the
state's wealthy Kerr family, became its financial wizard.
Chesapeake prospered by being first to snap up acreage in
emerging oil and gas plays.
For years at Chesapeake, Ward and McClendon enjoyed an
unusual corporate incentive. They received up to a 2.5 percent
stake in the profits of every well the company drilled, as long
as they paid 2.5 percent of the costs.
Chesapeake had disclosed the existence of this perk. But
last year, Reuters reported significant facts that Chesapeake
hadn't divulged: McClendon had arranged to borrow more than $1
billion to finance his acquisition of these well stakes, used
the stakes themselves as collateral, and obtained most of the
financing from a company that was also an investor in
Chesapeake. In response to the resulting outcry, the company cut
short the perk.
Ward left Chesapeake in early 2006 to begin his own firm,
buying into a private energy company in Texas. He renamed that
company SandRidge Energy and took it public the following year.
At SandRidge, Ward initiated a more-lucrative version of the
perk, raising the maximum stake to 3 percent, as disclosed in
A Reuters review of SEC filings and court documents shows
Ward's well perk at SandRidge provided a safety net when he
faced a severe personal financial crunch.
By 2008, Ward had borrowed heavily from Wachovia and other
lenders. He had pledged holdings of SandRidge stock as
collateral for those loans. When the global financial crisis
struck, those shares plunged in value. According to documents
filed in 2010 shareholder lawsuit against SandRidge, Ward's
lenders issued a so-called margin call, which typically requires
a borrower to put up more cash or face the liquidation of his
In October 2008, Ward raised cash by selling his stakes in
SandRidge wells back to the company for $67 million, according
to SEC filings. A Reuters analysis of costs incurred by Ward
between 2006 and 2008 for the well program show he made an
estimated $19 million on the deal.
The payout to the CEO came at a time when SandRidge was
itself in financial distress. By the end of 2008, the company
had just $636,000 in cash on hand, according to the company's
KAISER TO THE RESCUE
Despite the big payout, Ward wasn't out of the woods. The
same month, he did another deal that potentially mingled his
personal and corporate interests, this time with George Kaiser,
chairman and majority shareholder of BOK Financial, parent
company of Bank of Oklahoma.
Kaiser's Bank of Oklahoma has been a lender to SandRidge and
was recently among a group that entered into a $1.75 billion
credit agreement with the energy company, according to an SEC
Kaiser did not respond to several requests for comment for
In a suit filed in federal court in Oklahoma in December
2010, a SandRidge shareholder alleged that Ward improperly
profited from a series of transactions with Kaiser.
Those transactions, Ward's attorneys wrote in response to
the suit, came at a time when the SandRidge chief "was facing
unexpected economic difficulties." This crunch, they wrote,
involved "an upcoming repayment obligation on a credit line with
Wachovia Bank and other creditors that was secured, in part, by
Mr. Ward's SandRidge stock."
At the time, Ward had pledged at least 25 million SandRidge
shares as collateral for a personal credit line from Wachovia
and others, according to an SEC filing. The filing did not say
how large the loan was, or what it was needed for. But the
SandRidge shares were worth about $45 apiece, or some $1.1
billion in total when he pledged them to the banks in August
2008. By late October, the shares had fallen to less than $10,
or around $240 million in total.
As the shares plunged in value, the lenders called on Ward
to post more collateral. That same October, he turned to Kaiser,
borrowing $75 million from him and a charitable trust Kaiser
controlled. The deal gave Kaiser warrants granting him the right
to buy a substantial interest in SandRidge, using shares then
owned by Ward, according to an SEC filing.
SandRidge stock continued to fall between October and
December 2008. Ward realized he would need to renegotiate the
terms of the $75 million loan from Kaiser, according to a court
document filed by Ward's attorneys.
The revised deal, renegotiated on Christmas Eve in Tulsa,
was complex. It included the payment to Kaiser of 8.9 million
SandRidge shares, worth some $50 million at the time, and a
warrant giving Kaiser the right to buy more shares in the
It also came with an unusual condition. Ward agreed to open
SandRidge's financial records to Kaiser, to "facilitate
(Kaiser's) due diligence investigation of the issuer for a
limited period of time following the sale," according to the
James Cox, a law professor at Duke University, said he has
never come across another situation in which a public company's
books and records were opened as part of a private deal.
"Access is being provided for no apparent corporate
purpose," Cox said.
The shareholder and SandRidge agreed to dismiss the suit on
Nov. 9, 2012, court documents show. The company later disclosed
that Ward agreed the same day to pay SandRidge $5 million to
settle a lawsuit. It declined to say whether the payment was
related to the Kaiser suit.
Lingering anger over SandRidge's big 2008 payout to Ward is
one reason some shareholders say they have recently called for
the CEO's ouster.
Ward and SandRidge are fighting back. On Nov. 19, the
company's board unanimously approved resolutions that make it
more difficult for the company to be taken over.
Now, hedge fund TPG-Axon is soliciting support from other
shareholders to replace the board. No deadline has been set for
that solicitation. TPG-Axon hasn't said how much support it has
garnered so far.