Shareholder confidence in Chesapeake Energy Corp. sank to itslowest point since the 2008 global economic meltdown as companydirectors reversed course on the need to examine Chief ExecutiveOfficer Aubrey McClendon's personal financial transactions.

Chesapeake's board, propelled by a plunging stock price andpotential conflicts between McClendon's personal finances andcorporate duties, said yesterday it would end a program allowingits chairman and CEO to buy stakes in the company's wells andreview loans McClendon obtained by using those investments ascollateral.

“Simply letting the Founders Well Participation Program expireis too little, too late,” said New York State Comptroller Thomas P.DiNapoli, who oversees 3.1 million Chesapeake shares held by the$140 billion New York State Common Retirement Fund. “Much moreneeds to be done to restore investor confidence.”

Chesapeake shares have tumbled 24 percent since the end ofMarch, heading for the worst monthly performance since 2008. Agrowing number of investors are betting the stock will continue todrop.

One out of every 13 shares available for trading was sold shortas of April 24, close to the 8.5 percent level reached last monththat was the highest in 3 1/2 years, according to New York-basedresearch firm Data Explorers. That's more than double the averagefor energy producers in the Standard & Poor's 500 Index.

So-called short investors bet a stock will fall by sellingborrowed shares with the expectation of repurchasing them at alower price.

Seeking to counter criticism that its oversight was too lax, thecompany said in a statement yesterday its board would review allfinancing transactions between McClendon and “any third party thathas had or may have a relationship with the company in anycapacity.”

The U.S. Securities & Exchange Commission has opened aninformal inquiry into the loans, Reuters reported yesterday, citingan unidentified source familiar with the matter. SEC spokesmanKevin Callahan declined to comment.

Jim Gipson, a Chesapeake spokesman, didn't respond to a phonemessage or e-mail requesting comment.

Controversy over McClendon's personal portfolio has compoundedthe impact of collapsing gas prices on Chesapeake's shares, SeanSexton, managing director at Fitch Inc., the Chicago-basedcredit-rating company, said yesterday in an interview. U.S.natural-gas futures, pressured by a supply glut from new wells inshale formations, lost 54 percent of their value in the pastyear.

Turmoil Danger

Chesapeake fell 3.1 percent yesterday to $17.56 in New York.

The turmoil could hamper Chesapeake's ability to meet its“massive” funding requirements stemming from its aggressivespending and weak cash flow, Scott Sprinzen, a debt analyst atS&P in New York, said yesterday in a note to clients. Sprinzenlowered Chesapeake's corporate credit and senior secured debtratings to BB from BB+.

Chesapeake's 4.5 percent convertible preferred shares tumbledmore than 8 percent today, the biggest decline since December 2008,on concern the company's ability to pay a quarterly dividend may beimpaired.

Questions about potential conflicts of interests involvingMcClendon's personal finances stirred debate over his continuedrole at the company. Mark Hanson, a Chicago-based analyst atMorningstar Inc., said the board should separate the chairman andCEO positions to minimize McClendon's influence over a panel thatis supposed to watch over him. Philip Weiss, an Argus Researchanalyst in New York, said McClendon and the entire board should befired.

“The decision about whether Aubrey should go ought to be left toa board that is able to operate independently from him,” saidMichael Garland, director of corporate governance for New York CityComptroller John C. Liu. “Given the litany of historic indicationsand most recent indications, this board appears to be incapable ofdoing that.”

The city comptroller's office, which says it manages 1.57million Chesapeake shares worth $28.4 million in pension funds, hasproposed that the company allow large, long-term shareholders tonominate board candidates. A vote is scheduled at the company'sJune 8 annual meeting in Oklahoma City.

For most of the past 23 years, McClendon has purchased as muchas 2.5 percent in every well the company has drilled. The programwas established to tie the CEO's fortunes to company performanceand requires McClendon to cover a proportionate share of eachwell's expenses.

$846 Million in Loans

His share of such costs was $973 million for the 2009 to 2011period, the company said in an April 20 filing.

McClendon got a $1 billion line of credit with EIG ManagementCo. LLC, according to a Nov. 18 deed filed in Brooke County, WestVirginia. EIG Management is a unit of EIG Global Energy PartnersLLC, which participated in a $1.2 billion preferred-shares purchasein a Chesapeake subsidiary on April 9.

McClendon said in a separate statement yesterday that hepersonally had $846 million in outstanding loans related to thewell-participation program.

The directors yesterday backed away from last week's endorsementof McClendon's practice of using his stakes in company wells ascollateral to secure those loans. Chesapeake General Counsel HenryJ. Hood issued an April 18 statement that directors were “fullyaware of the existence of Mr. McClendon's financing transactions”and that they didn't represent a conflict of interest.

By that, he meant directors were “generally aware” thatMcClendon had used his interests in company-operated wells ascollateral for personal loans, and the board hadn't reviewed orapproved any of the individual transactions, Oklahoma City-basedChesapeake said in its statement yesterday.

“The board was aware of but neither approved or reviewed theloans. Where were they? They have an obligation to look deeper,”Garland of the New York City comptroller's office saidyesterday in an interview.

Under McClendon's stewardship, Chesapeake is planning to sell$14.9 billion in assets by the end of next year to close a fundinggap that Standard & Poor's estimates could reach $9 billion in2011. The company raised $2.6 billion earlier this month throughthe sales of preferred stock, gas fields and future production.

2008 Free Fall

The recent decline in Chesapeake's stock price is reminiscent oflate 2008, when McClendon was forced to sell almost all his stockin the company to meet margin calls. McClendon dumped millions ofshares over the course of a few days, accelerating a freefall inOctober and November 2008 that wiped out more than half thecompany's market value.

Andrew Behar, chief executive officer of As You Sow, a SanFrancisco-based corporate-activism group that has clashed withChesapeake over environmental issues, doubted the latestcontroversy would cost McClendon his job.

“They'll find some jiu-jitsu way of rationalizing his behavior,”Behar said “Aubrey McClendon operates that company in his ownimage.”

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