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Did McClendon Die Over A ‘Club Deal’?

Aubrey McClendon plowed his car into a bridge abutment in Oklahoma City a day after the Justice Department indicted him for allegedly monopolizing the market for oil and gas leases in northwestern Oklahoma.

I don’t know if it was a suicide, though a lot of people believe it was, for obvious reasons. I do know that prosecutors at Justice who fell all over themselves canceling the indictment after McClendon’s death were more interested in bagging a scalp than in protecting the mineral rights of Oklahoma landowners. They didn’t get their scalp, but they certainly got a body.

In this sad incident, we can see some of the fruits of the Obama administration’s campaign to push legal boundaries to try to put people whom it portrays as “bad guys in suits” behind bars. Chesapeake Energy Corp., the company that McClendon headed when the alleged crimes allegedly occurred, was not charged – only McClendon himself, who left the company several years ago.

At its height in 2008, Chesapeake was valued at $35.6 billion, largely due to McClendon’s efforts to promote hydraulic fracturing and horizontal drilling before such methods were in wide use to extract minerals from difficult rock formations. His shareholders effectively forced McClendon out when the company’s value crashed in the gas boom, and he had resigned by the beginning of 2013.

The Justice Department cited a period between December 2007 and March 2012 for the alleged misbehavior. Yet while McClendon was acting on his company’s behalf, Chesapeake itself did not come under fire from federal prosecutors.

Why not? Justice smugly claimed that it was because the company “actively” cooperated in its investigation. In other words, the company tossed its former CEO, with whom it was involved in a separate legal dispute, to the Washington wolves. And this conveniently means that Justice did not have to fight the company’s legal team, nor must it now prove its case that McClendon engaged in an illegal conspiracy.

Whether it would have been able to do so is debatable, since the law on the subject is unclear. Companies are forbidden to conspire with competitors to fix prices or rig bids. Bid rigging was, in fact, at issue in a previous case against Chesapeake, which the company settled last year. In that instance, the Michigan attorney general charged the energy company with illegally dividing up counties with Encana Corp. to avoid bidding against one another for drilling rights. (Encana was also charged and also settled.)

Those within the oil industry know that antitrust laws prohibit collusion between competitors, but the reality of how the energy sector functions makes the situation more complicated than outsiders may realize.

For instance, it is not against the law for companies to form joint ventures, even with competitors. Energy drilling is a field in which joint ventures have been common for decades. Oil wells can be risky and expensive investments. When you drill a well, the deposits it taps may not come only from land in which you hold the rights. Oil and gas are fluids, and your well may drain resources from properties on which others hold interests (as anyone who saw Daniel Day-Lewis’ performance in “There Will Be Blood” is apt to remember). Joint leasing and drilling ventures are among the many ways in which the industry deals with these issues.

Joint action in expensive and risky ventures happens in many fields beyond oil and gas. Private equity firms have often formed “club deals,” in which several firms join forces to bid for a company. Those arrangements have also been criticized as offering sellers a lower price than they would otherwise get if the club members acted separately, but to my knowledge they have never been challenged as criminal antitrust violations. Any such challenge would quickly run into an obstacle: The theory that sellers could get a higher price assumes that, operating independently and thus taking on more risk individually than they do collectively, buyers would be willing to pay a higher price. Nearly any economist will tell you that the higher an investment’s risk, the lower the price a potential investor is willing to pay.

The charges against McClendon alleged that he orchestrated a deal between two large energy companies not to bid against each other for certain leases in northwest Oklahoma, a charge that McClendon called “wrong and unprecedented” in a statement. According to the indictment, conspirators decided which company would bid on the leases, and the winner would allocate an interest in the lease to the company that stepped aside. Which is another way of saying they were bidding jointly, just as in a typical private equity club deal, in which one firm plays the lead role in negotiating the transaction.

While Chesapeake may have teamed up with another competitor to lease mineral rights rather than compete with one another in some Oklahoma counties, it is worth remembering that landowners there remained free to deal with any of the scores of other companies that operate in the state and region. They were equally free, if they did not like the price they were offered, not to lease their mineral rights at all. From the outside, the facts hardly resemble an airtight antitrust case.

Maybe Justice could have proven an antitrust violation and maybe it couldn’t. But either way, it would have made a lot more sense to test this legal theory against the companies whose business practices were being challenged, rather than against a former executive who was operating on his company’s behalf rather than his own. But that is not the way justice is pursued these days at the Obama administration’s Justice Department.

Now there is no case, no precedent, no vindication for the alleged victims of the alleged crime and no scalp for prosecutors. All that is left is a grieving family, a community that lost a prominent if controversial figure, and a black mark where a car slammed into a bridge.

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