Worst SEC Filing of the Year

[Ballinvarosig Investors]

Courtesy of footnoted

Voting for the worst footnote of 2009 ended last night and footnoted readers have chosen the disclosure by Chesapeake Energy (CHK) that it had spent $12.1 million to purchase Chairman and CEO Aubrey McClendon’s antique map collection. Here’s the disclosure in all of its glory from the April 30 proxy statement:

 

In December 2008, the Company purchased an extensive collection of historical maps of the American Southwest from Mr. McClendon for $12.1 million, which represented his cost. A dealer who had assisted Mr. McClendon in acquiring this collection over a period of six years advised the Company that the replacement value of the collection in December 2008 exceeded the purchase price by more than $8 million. The maps have been displayed at the Company’s Oklahoma City headquarters for a number of years, during which the Company has been insuring the maps in exchange for their display. Our corporate headquarters in Oklahoma City is comprised of numerous buildings in a campus-type setting. These maps have been displayed throughout the Company’s headquarters for a number of years, complementing the interior design features of our campus buildings and contributing to our workplace culture. Our employees and visitors appreciate the maps’ depiction of the early years of the nation’s energy industry and the discovery and expansion of Indian Territory (now, Oklahoma) and the surrounding territories of the early United States. In addition, the collection connects to our Company’s everyday use of mapping in our business of exploring for and developing natural gas and oil. The Company was interested in continuing to have use of the map collection and believed it was not appropriate to continue to rely on cost-free loans of artwork from Mr. McClendon. The Board of Directors authorized the purchase of Mr. McClendon’s collection following review and approval by the Audit Committee and required that the Company’s purchase price be applied as a credit to Mr. McClendon’s future FWPP costs. Future purchases, if any, of historical maps or artwork for the Company’s headquarters will be made directly by the Company.

 

Now just imagine for a moment being the person responsible for writing this sort of bulls-it. Sounds like a fun job, eh? This particular disclosure got a lot of exposure this year after we wrote about it and even prompted Chesapeake to issue a amended proxy a few days later to provide additional details on the maps and other goodies the McClendon received. Toward the end of the year, it was also mentioned in this profile of footnoted friend Nell Minow in The New Yorker.

I've never actually laughed at an SEC filing until I read this. What's even crazier is that this guy seems to be a darling of CNBC (he's been interviewed several times and Cramer thinks he's wonderful). I suppose this only serves to highlight just how important good management is!

 

Has anyone come accross any other filing goodies?

[tooskinneejs]

Disclaimer: The following is an intentional understatement.

 

It almost sounds like management doesn't realize that it is the shareholders' money, not theirs, that they are spending.

[watsa_is_a_randian_hero]

I actually dont think that is that bad.  Most large companies have "art" and other interior design features that would cost just as much.  If you put an antique map on the wall, then you don't have to put a painting.

 

Further, the art/painting isn't "necessary" shareholder spending, but for a company that size that can benefit from having a corporate headquarters that isn't just walls and paint.  A better looking atmosphere will increase employee attitudes and not turn of clients/outsiders when they come for meetings.  Plus, they will probably be used for 50+ years.  $12 million/50 years $240k/year, which is a rounding error to a company with 647 shares outstanding. 

 

In addition, CHK probably didn't get a bad deal; I know their CEO had huge financial problems (I think he margined his stock & was forced to sell during crisis).  He was probably in a position where he had to sell.

[Myth465]

Maybe im weird but that's pretty bad. Others arent much better but, still stuff like this and a 10 million dollar office. Those are not guys I want running MY COMPANY (well actually .00000000000000000000001 of the company).

 

There is a write-up on VIC which highlights his other bright ideas and his excellent job of taking care of shareholders.

[dual_bid]

Check out this filing of Sharper Image Corporation's Settlement Agreement with its departing CEO:

http://www.sec.gov/Archives/edgar/data/811696/000119312506261766/dex101.htm

You want to focus on Section 7 therein...

 

HT: footnoted, of course

[Ballinvarosig Investors]

I actually dont think that is that bad.  Most large companies have "art" and other interior design features that would cost just as much.  If you put an antique map on the wall, then you don't have to put a painting.

 

Further, the art/painting isn't "necessary" shareholder spending, but for a company that size that can benefit from having a corporate headquarters that isn't just walls and paint.  A better looking atmosphere will increase employee attitudes and not turn of clients/outsiders when they come for meetings.  Plus, they will probably be used for 50+ years.  $12 million/50 years $240k/year, which is a rounding error to a company with 647 shares outstanding. 

 

In addition, CHK probably didn't get a bad deal; I know their CEO had huge financial problems (I think he margined his stock & was forced to sell during crisis).  He was probably in a position where he had to sell.

I don't have a problem with corporate art as long as there isn't a conflict of interest. In this case however, there's a conflict of interest so large, you could drive a bus through it! A cash strapped CEO selling his own useless maps to the company without an independent valuation is most certainly that.

[Ballinvarosig Investors]

Check out this filing of Sharper Image Corporation's Settlement Agreement with its departing CEO:

http://www.sec.gov/Archives/edgar/data/811696/000119312506261766/dex101.htm

You want to focus on Section 7 therein...

 

HT: footnoted, of course

Talk about taking your toys and going home :D

[watsa_is_a_randian_hero]

I actually dont think that is that bad.  Most large companies have "art" and other interior design features that would cost just as much.  If you put an antique map on the wall, then you don't have to put a painting.

 

Further, the art/painting isn't "necessary" shareholder spending, but for a company that size that can benefit from having a corporate headquarters that isn't just walls and paint.  A better looking atmosphere will increase employee attitudes and not turn of clients/outsiders when they come for meetings.  Plus, they will probably be used for 50+ years.  $12 million/50 years $240k/year, which is a rounding error to a company with 647 shares outstanding. 

 

In addition, CHK probably didn't get a bad deal; I know their CEO had huge financial problems (I think he margined his stock & was forced to sell during crisis).  He was probably in a position where he had to sell.

I don't have a problem with corporate art as long as there isn't a conflict of interest. In this case however, there's a conflict of interest so large, you could drive a bus through it! A cash strapped CEO selling his own useless maps to the company without an independent valuation is most certainly that.

 

"These maps have been displayed throughout the Company’s headquarters for a number of years, complementing the interior design features of our campus buildings and contributing to our workplace culture."

 

"A dealer who had assisted Mr. McClendon in acquiring this collection over a period of six years advised the Company that the replacement value of the collection in December 2008 exceeded the purchase price by more than $8 million."

 

If these statements are not lies than I would not be put-off by this as a shareholder.  Statement 2 is probably a large exaggeration, but in order for them to have gotten a bad deal they would have had to exaggerate by 66% here ((8+12)/12)=66%.

 

 

 

 

[tooskinneejs]

"A better looking atmosphere will increase employee attitudes"

 

I don't know.  If I was an employee and the management told me and the other employees, "We've got $12.1 million laying around that we don't know what to do with it, so we're trying to decide whether to pay our hard working employees some performance-based cash bonuses or to buy some old maps.  Which one of those two options will increase your attitudes the most?", I think I'd have to go with the cash bonuses.  And in fact, I'd imagine some employees are probably fairly peeved to read that the money was spent as it was rather than on them.  This expenditure may have turned out to be a de-motivator.

 

And applying the "there is seldom just one cockroach in the kitchen" theory, it would make me wonder what else management is spending it's (oops, I mean the sharholders') money on.

[T-bone1]

I am a big fan of Aubrey Mcclendon and a shareholder in CHK . . .

 

That being said, this transaction was completely inexcusable and attrocious. I didn't sell my shares when this happened and it didn't change my estimate of the value of the company, but come on guys!

 

This is a natural gas company, not a rare map dealer.  Due to his financial difficulties, Aubrey had to sell of his wine collection too, should the company have bought that just because they regularly serve wine at the christmas party? Should they buy his rare cars to display in the lobby of company HQ?

 

I am saying this as a big fan of the company, but I don't think companies should have expensive art to begin with. The fact that this is was a blatant insider deal and a bailout of the CEO is obvious.  The CEO of Valero was in financial trouble at the same time, what would you think if CHK opportunistically purchased that guy's art collection?  

 

This occurred in the same year that CHK lost a ton of market cap and paid Aubrey $100 Million dollars. I don't have that much of a problem with the $100 million payout . ..  I do think value was created that year even if the stock went down, and at least that payout was honest and they took the P.R. hit for it. If Aubrey really needed another $12Million they should have paid him $112 Million. A company should not buy crap from their CEO, no matter what it appraises for, especially if its not part of their core business (and no, these maps have nothing to do with looking for natural gas).

 

I would imagine Aubrey will buy these maps back from the company for $20 million or something when he gets back on his feet, to "do the right thing" and prove they were worth that, but its beside the point. If he needed a $12 Million dollar loan secured by his rare map collection he should have gone to the bank.

 

/end of rant. long CHK

 

 

P.S. I know its not the same people, but I cannot believe how hard this board was on FFH for - in my opinion - a very fair deal in the ORH buyout, and how easy people seem to be going on CHK for very blatant insider dealing and arguably eggregious executive pay (I say arguably because I think he has created a lot of value and the $100 Mil is over 5 years, but he was the highest paid CEO in the country in a year that the stock lost ~2/3 of its value)

[ragnarisapirate]

"A dealer who had assisted Mr. McClendon in acquiring this collection over a period of six years advised the Company that the replacement value of the collection in December 2008 exceeded the purchase price by more than $8 million."

 

Saying something like that is pretty pollyannish... To quote a great man (Buffett) I would liken it to asking a barber if you need a haircut. Of course the guy that brokered the deals will say that they are worth more than they were when he told his client to buy them! Why didn't they at least get an independent appraisal? Furthermore, if they were bought in the height of the real estate bubble, I am guessing that they were 'worth' more than they are now- but that is a very 'all things equal' guess.

 

I do wonder if there were some reproduction maps that they could of ordered or even had made, which would have looked the same to the employees (since you wouldn't want them to be standing around, critiquing the finer points of obsolete maps), still fostered a good work environment, and cost around 1/10,000th of the price.

 

Somewhat sarcastically, they should have bought the titanic artifacts from the Mark Sellers @ Premier; at least they would be able to use them to eat on if people would no longer to pay more than the last fool for them... :D

[StubbleJumper]

P.S. I know its not the same people, but I cannot believe how hard this board was on FFH for - in my opinion - a very fair deal in the ORH buyout, and how easy people seem to be going on CHK for very blatant insider dealing and arguably eggregious executive pay (I say arguably because I think he has created a lot of value and the $100 Mil is over 5 years, but he was the highest paid CEO in the country in a year that the stock lost ~2/3 of its value)

 

 

I would suggest that the reason why there was such vociferous criticism of the ORH deal was that a great many people had significant skin in the game.  For some of us, the impact of the takeover price (ie, $60, $65 or $70) had an impact of several thousand dollars...which provides an enormous incentive to bitch and moan!  Further, some have hypothesized that FFH staff sometimes skim through this forum, so there may have been an element of certain posters wanting to send a message to FFH.

 

In the case of CHK, very few people here have skin in the game.  A few tens of millions amounts to bugger-all in the context of total market cap, so the effective impact on any one small shareholder is very little.  It's hard get motivated to bitch and moan too much about wastage of 10 or 20 cents per share....

 

It doesn't make it right, but incentives do drive our behaviour!

 

SJ

[Parsad]

I actually dont think that is that bad.  Most large companies have "art" and other interior design features that would cost just as much.  If you put an antique map on the wall, then you don't have to put a painting.

 

Further, the art/painting isn't "necessary" shareholder spending, but for a company that size that can benefit from having a corporate headquarters that isn't just walls and paint.  A better looking atmosphere will increase employee attitudes and not turn of clients/outsiders when they come for meetings.  Plus, they will probably be used for 50+ years.  $12 million/50 years $240k/year, which is a rounding error to a company with 647 shares outstanding.  

 

In addition, CHK probably didn't get a bad deal; I know their CEO had huge financial problems (I think he margined his stock & was forced to sell during crisis).  He was probably in a position where he had to sell.

 

Sorry Watsa, I have to disagree with you here.  Other than Fairfax's foyer area and the boardroom, there really isn't much to look at in their office, yet employee moral is terrific and clients want to deal with Fairfax.  Even the foyer and boardroom don't have any real significant art or anything, other than a bust of Sir John Templeton and framed historical checks and share issues by Fairfax.  Pretty plain jane for a company with $30B in assets and an $8B market cap.

 

I think employee moral is best when employees are given respect, treated as equals and have a working environment where they feel productive and needed.  Fancy offices and lobbies are as fleeting as that $1500 Louis Vuitton suitcase or a Rolex watch.  I remember going on a tour of the CN Tower a few years back, and the tourguide was telling us how the Royal Bank building's windows looked gold colored, because there were real flecks of gold included in the production process of the window glass.  I nearly vomitted thinking about that and exactly how ostentatious that is.

 

You are correct that for many people, an artifice building or guilded lobby provide some comfort, because they feel that their money is more secure for some reason...thus the fancy buildings most banks and insurance companies built over the last 120 years in North America.  But that probably attracts the wrong type of shareholder, employee or customer into the office.  Cheers!

[Guest kawikaho]

I have to agree.  It's a conflict of interest, and the company should have no business paying their CEO money for anything besides his salary. 

[Eric50]

Another example of inadequate behavior that I read recently came from Limoneira, a real estate and avocado/lemon producer in California:

 

"Additionally, the Corporation has invested in the career of Charlie Kimball, a Formula 1 racing driver,who is related to a member of the Corporation’s Board of Directors. Included in other assets at October 31,2008 and 2007 were $200,000 and $100,000, respectively, of costs related to this investment." - Limoneira 2008 Annual Report, page 20 (http://www.limoneira.com/pdfs/2008_Annual.pdf)

 

Do you fancy a career in formula one?

[Alekbaylee]

I think employee moral is best when employees are given respect, treated as equals and have a working environment where they feel productive and needed.  Fancy offices and lobbies are as fleeting as that $1500 Louis Vuitton suitcase or a Rolex watch.  I remember going on a tour of the CN Tower a few years back, and the tourguide was telling us how the Royal Bank building's windows looked gold colored, because there were real flecks of gold included in the production process of the window glass.  I nearly vomitted thinking about that and exactly how ostentatious that is.

 

You are correct that for many people, an artifice building or guilded lobby provide some comfort, because they feel that their money is more secure for some reason...thus the fancy buildings most banks and insurance companies built over the last 120 years in North America.  But that probably attracts the wrong type of shareholder, employeed or customer into the office.

 

I totally agree. And this "vanity" leads sometimes people to follow the Earl Jones and Madoff of this world...

[ubuy2wron]

Aubrey is the poster child for egregious self dealing in my opinion. He did a fabulous job in building the company and long term shareholders benefited hugely because of his acumen. He was compensated enormously through options and other compensation ,sheer hubris cost him his fortune however. The board repriced his options after his margin call and did some of the other stuff mentioned . Heads I win Tails you lose compensation schemes are a pox on the capitalist system.

[watsa_is_a_randian_hero]

I actually dont think that is that bad.  Most large companies have "art" and other interior design features that would cost just as much.  If you put an antique map on the wall, then you don't have to put a painting.

 

Further, the art/painting isn't "necessary" shareholder spending, but for a company that size that can benefit from having a corporate headquarters that isn't just walls and paint.  A better looking atmosphere will increase employee attitudes and not turn of clients/outsiders when they come for meetings.  Plus, they will probably be used for 50+ years.  $12 million/50 years $240k/year, which is a rounding error to a company with 647 shares outstanding.  

 

In addition, CHK probably didn't get a bad deal; I know their CEO had huge financial problems (I think he margined his stock & was forced to sell during crisis).  He was probably in a position where he had to sell.

 

Sorry Watsa, I have to disagree with you here.  Other than Fairfax's foyer area and the boardroom, there really isn't much to look at in their office, yet employee moral is terrific and clients want to deal with Fairfax.  Even the foyer and boardroom don't have any real significant art or anything, other than a bust of Sir John Templeton and framed historical checks and share issues by Fairfax.  Pretty plain jane for a company with $30B in assets and an $8B market cap.

 

I think employee moral is best when employees are given respect, treated as equals and have a working environment where they feel productive and needed.  Fancy offices and lobbies are as fleeting as that $1500 Louis Vuitton suitcase or a Rolex watch.  I remember going on a tour of the CN Tower a few years back, and the tourguide was telling us how the Royal Bank building's windows looked gold colored, because there were real flecks of gold included in the production process of the window glass.  I nearly vomitted thinking about that and exactly how ostentatious that is.

 

You are correct that for many people, an artifice building or guilded lobby provide some comfort, because they feel that their money is more secure for some reason...thus the fancy buildings most banks and insurance companies built over the last 120 years in North America.  But that probably attracts the wrong type of shareholder, employee or customer into the office.  Cheers!

 

Lots of money is spent on marketing, "appearances," interior design, and overall aesthetics and it has more of an effect on peoples subconscious than many are willing to admit.  You said it best for the finance industry "people feel that their money is more secure for some reason."  It is subconscious; an impressive office makes people assume you are successful.  An impressive corporate campus could make some take more pride in their work; it could impress prospective new hires, it could impress clients.  And again, as long is they didn't pay more than the market price (we have no way of knowing that), the only real cost is insurance.

 

I guess that is my biggest point; that $12 mm is not even the real economic cost.  Art/collectibles generally do not depreciate.  The real cost is basically insurance.  Lets say that is 2% of value a year (I have no idea if this is correct, but I can't imagine it being higher given property insurance rates), then the real cost would be $240k/ year.  Spread that out over 7.6 thousand employees at CHK and you are talking about $31 per employee on an annual basis.  Its insignificant.  Who cares.

 

[watsa_is_a_randian_hero]

Here is another example, of a fairly successful company spending money on art/collectibles:

 

http://art.progressive.com/

 

Fairfax actually held the stock at one point.  Hows that for endorsement of corporate spending of "frivolous" aesthetics!

[watsa_is_a_randian_hero]

Here is another example, of a fairly successful company spending money on art/collectibles:

 

http://art.progressive.com/

 

Fairfax actually held the stock at one point.  Hows that for endorsement of corporate spending of "frivolous" aesthetics!

 

Many Fortune 500 companies have stuff like this at headquarters.  From Progressive's website:

 

Collection History

 

Progressive's Art Collection, conceived and nurtured by former CEO Peter Lewis, began in the early 1970's as a print collection. Peter's goal was to bring the creative experience to the work environment.

 

In 1985, under the direction of Toby Devan Lewis, the Progressive art program was accelerated and the Corporate Art department was formed. Toby expanded the scope of the collection to include works of art by emerging artists in a variety of media.

 

Today the collection includes more than 6,000 artworks displayed in Progressive offices countrywide. While the collection has no central theme, its emphasis is on emerging artists who create innovative and daring work.

 

The purpose of the collection

The art is intended to challenge and inspire people's creativity and originality while serving as a visual reminder of the importance and necessity of risk-taking and innovation at Progressive.

 

While encouraging originality, the art reflects respect for all people. Artwork in the collection is often provocative and has fostered discussion and sometimes passionate controversy through the years. Each artwork is accompanied by a wall label giving a brief explanation and information about the artist.

[ragnarisapirate]

I would be interested to hear what potential clients would think of BRK's HQ other than the paperweight that Buffett has, which is made out of 100 dollar bills, it is pretty bare bones. Hell, Warren Buffett looks like a bum when put up against a guy in a nice well tailored suit!

 

Sure, places should look nice. But 12 MILLION dollars for some obsolete maps, which were insider deals!? eeek!

[Crip1]

I think employee moral is best when employees are given respect, treated as equals and have a working environment where they feel productive and needed. 

 

Sanj...you nailed it. I have nothing to add.

 

-Crip

[vinvest09]

from an article in the latest issue of fortune magazine - another example of egregious insider deals at CHK.

 

http://money.cnn.com/2010/01/04/news/companies/director_compensation.fortune/index.htm

 

Of the 10 companies, Chesapeake Energy (a competitor of XTO's) exhibits the most bizarre set of circumstances. In the first place, the high earner among Chesapeake's eight nonemployee directors in 2008 -- all of them classified as "independent" -- was Breene Kerr, a cousin of CEO Aubrey Kerr McClendon. Kerr (who, having turned 80, left the board this year) received $784,687. Second, all eight of the company's outside directors were paid richly in 2008, averaging $670,000. Third, they drew notorious attention because of their benevolent treatment of a reeling McClendon.

 

Bad judgment had done him in. An indefatigable bull on Chesapeake's (CHK, Fortune 500) stock through mid-2008, McClendon, now 50, bought heavily on margin, amassing a stake that at Chesapeake's July high of $72 a share exceeded $2 billion. In December the stock plunged to $10 as the credit crisis flared and petroleum prices plummeted. Two months earlier, margin calls had forced McClendon to sell almost all of his position, at prices between $13.60 and $24 a share. The sales clobbered his net worth.

 

Racing to the rescue like corporate first-responders, the Chesapeake board awarded McClendon a $75 million special bonus for 2008. Other compensation raised his total to $100 million, one of the highest figures in the land. Chesapeake's compensation committee issued a "rationale" for the bonus that stressed the board's wish to keep McClendon as CEO.

 

Asked by Fortune why Chesapeake pays its directors so much, McClendon said, "We have a very large and complex company, and we value our directors' time."

[bookie71]

That's why I like Costo - no doors and very unfancy offices at headquarters. 

[twacowfca]

That's why I like Costo - no doors and very unfancy offices at headquarters. 

 

 

Ditto, for WalMart.  When they built their new HQ a few years ago,  they deliberately furnished all their buyers' offices with church-on-a-tight-budget fold up tables to send the right message to the reps that call on them.