Giving the CEO explicit license to play the markets represented an extraordinary incentive that enhanced one of corporate America's most generous compensation plans and reinforced the unique treatment afforded to McClendon by Chesapeake.

Oil and gas producers say they typically prohibit such trading by executives because of the potential for conflicts of interest. Indeed, Reuters found that McClendon, 52, was granted greater leeway to participate in external ventures than were his top lieutenants.

The 2009 contract did, however, limit McClendon in at least one way: Months after his personal hedge fund shut down, the agreement explicitly banned McClendon from taking an active role in any hedge fund.

The contract raises new questions about what Chesapeake board members knew of McClendon's personal investments, and whether his dealings might be at odds with his fiduciary responsibilities as head of the second-largest natural gas producer in the United States.

It isn't clear why Chesapeake changed the contract. Two board members declined to comment, and Chesapeake spokesman Michael Kehs said only that McClendon's employment contracts "fall under board review." Through a personal spokesman, McClendon also declined to comment.

Some lawyers and commodity-trading analysts said they were troubled by provisions in McClendon's agreements with the company. At a minimum, they said, McClendon could be distracted from his job at Chesapeake by his outside business activities.

They also said McClendon could have used privileged Chesapeake information to advance his own trading.

"This is edge-of-the-universe contract language," said Saul Cohen, a retired securities lawyer who formerly served as general counsel at investment bank Lehman Brothers.

Last week, Chesapeake's board stripped McClendon of his chairmanship after Reuters reported that he had taken $1.1 billion in personal loans against his stakes in Chesapeake wells during the past three years. The loans, which came mostly from an investment-management company that also did business with Chesapeake, hadn't been disclosed to shareholders. The Securities and Exchange Commission and the Internal Revenue Service have launched inquiries.

Reuters subsequently reported that McClendon partially owned and helped run a $200 million private hedge fund from within Chesapeake's Oklahoma headquarters. The fund, Heritage Management Company LLC, operated between 2004 and 2008 and traded McClendon's own cash in markets including natural gas and oil, the same commodities that Chesapeake produces.

On Friday, Senator Bill Nelson, a Democrat from Florida, asked U.S. Attorney General Eric Holder to investigate McClendon's private commodity trading for potential fraud, insider trading or commodity price manipulation.

HEDGE FUND RESTRICTION

The 2009 contract, which extends for five years, is McClendon's first to include a specific mention of hedge funds or commodity market investments, part of a new sub-section governing the types of investments he could pursue.

It says McClendon is allowed to trade a range of financial instruments such as commodities - including "short positions, long positions or positions in options" in both futures and over-the-counter markets.

It also states that McClendon could put cash into a "passive investment entity," including a hedge fund, provided it "does not actively engage in (exploration and production) activities," and "for which the Executive does not directly or indirectly provide input, advice or management."

Why Chesapeake made the changes remains unclear. The revisions could indicate they were aware of McClendon's personal hedge fund and worried that such a side business might run afoul of shareholders, according to legal experts who reviewed McClendon's current and prior contracts.

The former head trader at the Heritage hedge fund, Peter Cirino, said McClendon and Chesapeake co-founder Tom Ward spent significant amounts of time managing Heritage between 2004 and 2008. That often included daily communications between McClendon and Heritage traders, weekly strategy calls that could be "exhaustive," frequent meetings with traders in New York and occasionally in Oklahoma, and meetings or calls between McClendon and investors, Cirino said.

Chesapeake's board hasn't said whether it knew about Heritage or whether it vetted the hedge fund's trading for any conflicts. Ward said he couldn't recall whether the fund was disclosed. Even though the company still allows McClendon to trade in commodities, the 2009 agreement does signal that it was tightening its grip to some degree.

"In 2004, they had a contract that was not nearly as long, not nearly as precise," said John Coffee, a contract law professor at Columbia University. "It looks like the board learned something over the years and was increasingly beginning to restrict his activities," Coffee said of McClendon.

TRAIL OF REVISIONS

Reuters reviewed McClendon's employment contracts with Chesapeake, filed with securities regulators, since 1997. In that time, the contracts have been revised or amended about a dozen times, for a variety of reasons.

Some of the revisions relate to the controversial Founders Well Participation Program, which allowed McClendon to buy as much as a 2.5 percent share in all wells that Chesapeake drills. In the wake of the Reuters investigation into McClendon's personal borrowing, Chesapeake's board announced it would discontinue the program in 2014.

One example of the changes comes in a section of the contract called "outside activities." Initially, that section imposed a blanket ban on McClendon serving as an officer, general partner or member of an outside enterprise. It did not differentiate between public or private firms.

In July 2001, that ban was relaxed. The new contract said he could become a "general partner or member of any corporation, partnership, company or firm," so long as the activity was a "passive investment" that involved "minimal" time. It barred him from any role in a "public" company.

In July 2005, shortly after Heritage was established, the contract was again revised. The new contract said he could not "engage in activities which require such substantial services" that McClendon would be "unable to perform the duties assigned to the Executive in accordance with this Agreement." It also said he could not "serve as an officer or director of any publicly held entity" but made no other mention of external management roles.

That text remains in place in the last contract, which took effect March 1, 2009. The new text addressing commodity trading and hedge funds also has been in place since then.

McClendon's contract gives him more latitude for outside ventures than his subordinates are allowed.

Chesapeake's contracts with at least four other senior executives say the executives may not "engage in other business activities independent of" Chesapeake. They specifically ban the executives from serving "as a general partner, officer, executive, director or member of any corporation, partnership, company or firm."

PAY TO STAY

During 2008, a year in which McClendon still operated the Heritage hedge fund, Chesapeake's board awarded him the biggest pay package of any Fortune 500 CEO. It was worth around $112 million. A group of shareholders later sued, calling the pay package too generous.

The company also gave McClendon a $75 million cash bonus that year - the same year that margin calls from his brokers forced McClendon to unload more than 90 percent of his Chesapeake shares. He suffered a $2 billion paper loss, and his selling contributed to an 88 percent fall in Chesapeake's share price from its all-time high of $74 that year.

In its disclosure statement of January 7, 2009, Chesapeake explained why it chose to compensate McClendon as it did: "Because of other entrepreneurial opportunities that exist in the industry and Mr. McClendon's reduced Company stock holdings, the Compensation Committee focused on providing a retention incentive to Mr. McClendon that the Compensation Committee believed would be effective for multiple years without issuing substantial equity awards at current stock prices, which the Compensation Committee views as depressed."

The company didn't elaborate on that statement.

(Additional reporting by Sarah N. Lynch in Washington and Jonathan Leff in New York; editing by Blake Morrison)

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