So we took the opportunity to go back and dig a little deeper into some bank filings, and touch base with some of the accounting gurus we know. What we found, and put in the FootnotedPro report we published yesterday, is a simmering issue that’s going to be increasingly important to banks as they work through the aftermath of the financial crisis — banks ranging from giants like Wells Fargo (WFC) to smaller outfits like Zion Bancorp. (ZION) and Umpqua Holdings (UMPQ).

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The arguments in the case, which was formally titled the Free Enterprise Fund vs. PCAOB, lasted a little over an hour and produced an 87 page transcript (pdf) that gave me new appreciation for the seeming simplicity of SEC filings! Maybe it’s just that after 6 years of digging in to the filings, we’re used to that particular version of English, but we found the language in yesterday’s transcripts to be overly complicated. In addition to the transcript, you can listen to the oral arguments (both pro and against) here. Footnoted friend Broc Romanek attended yesterday’s arguments in person and has some quick thoughts here. He’ll be posting more later this week.

Only one Justice — Justice Thomas — didn’t ask any questions, but the rest of the Court seemed pretty spirited and there was even some joking, which given the subject matter, seemed somewhat surprising. Basically, the argument boils down to how much control the SEC has over PCAOB. The plaintiffs basically argued that PCAOB is like a rogue government agency with the ability to wreak havoc on individual companies with little or no oversight. Solicitor General Elena Kagan argued that there was plenty of oversight. Here’s the key argument made by Jones Day partner Michael Carvin, who appeared on behalf of the Free Enterprise Fund:

The board is unique among Federal regulatory agencies in that the President can neither appoint nor remove its members, nor does he have any ability to designate the chairman or review the work product, so he is stripped of the traditional means of control that he has over the traditional independent agencies. On the other side of the balancing test, Congress provided no reason for stripping him of these traditional means of control.

And here’s a snip from Kagan’s main argument:

The President has constitutionally sufficient control over the SEC. The SEC has comprehensive control over the Accounting Board, therefore the President has constitutionally sufficient control over the Accounting Board.

We also liked a question from Chief Justice Roberts, who asked “Is there any other situation in the vast federal bureaucracy, where you have this two-level situation that we have here?” With that kind of question, it shouldn’t be any surprise on which way he’s going on this one!

As we’ve said many times before, we’re not attorneys (though Sonya is a former attorney) and this is the first Supreme Court case we’ve tried to parse, so our analysis is worth what you’re paying for it. But the WSJ, which does this more often, reported earlier today that it all seems to boil down to Justice Kennedy. A decision is expected by June.

UPDATE 12/9: Broc Romanek has posted his thoughts on Tuesday’s argument, which he attended in person.

The basic premise is that good managers surround themselves with good people and that when those good people go off on their own to be top management at other companies, it pays to watch where those people land. One of his top examples was Jim Kilts, who was credited with turning around Gillette, selling it to Procter & Gamble (PG) and collecting close to $200 million in the process. While Kilts’ disciples may have learned good turnaround skills, they also no doubt learned a lot about collecting out-sized pay packages in the process. “We’re looking for a change in management and we start really digging when we find management that seems promising. We like to build CEO family trees.”

When I heard this, I just had to ask the question during the Q&A about Jack Welch’s CEO family tree. Welch, of course, was one of the most celebrated CEOs, probably ever, and some of his proteges didn’t exactly live up to the so-called magic. What about Bob Nardelli, who went on to screw up Home Depot (HD) and Gary Wendt, who worked his magic on Conseco (CNO), I asked.  Not exactly a dose of pixie powder, huh, though both executives certainly learned how to enrich themselves in the process!

Khaner laughed at the question and said that GE would not have fit into the model because it was always too much about financial engineering and not about making significant (and often difficult) changes. Indeed! Since we last footnoted GE a year ago, the stock is down about 40%.

Image source: Marriott

The Congress kicked off with a session by D3 Family Funds founder David Nierenberg who talked about some of his battle scars, including one with Brooks Automotive (BRKS) several years ago. The 13-D that details some of the problems is here. Nierenberg also talked about Move Inc. (MOVE) where after filing a 13-D in March 2008, he was invited by the company’s Chairman to talk about his concerns, which eventually led to a new CEO and Chairman.

In one recent situation, Nierenberg chose to use “the meek” — that’s his words, not mine — 13G when trying to effect change at Heartland Payment Systems (HPY). There’s a link to the 13G here. “Investing is not only about the numbers, it’s also about the people and the process. Selling is not the only option when confronted by the issues of performance and governance. A lot of times, the dogs we decide to take home are improvable,” Nierenberg said. Still, he said that parts of the corporate governance movement — again his words — feels like more of a “faith-based movement where people who advocate radical solutions often don’t think things through.”

If you’re also at the Congress, ping me and say hi.

Update 3:20 pm: Unfortunately, there’s no WiFi here in the conference room or I’d be updating more consistently. Instead, I have to go to a separate room and connect via Ethernet, which seems so 1998! But that doesn’t diminish the quality of some of the speakers. Here’s a brief run-down since this morning:

David Einhorn: Talked about how he missed the boat on MDC (MDC), which he felt strongly about two years ago, just before housing imploded and said that while it held up better than other homebuilders because it only fell 40% as opposed to 70%, he should have listened to Stanley Druckenmiller who spoke negatively at the same conference about MDC. “For years, I considered myself to be a bottom-up investor that didn’t need to focus on the big-picture.” Einhorn spent the rest of his time bashing the Fed and the Treasury for trying to take a stab at various financial reforms. Said it was somewhat similar to President Bush declaring “Mission Accomplished” in Iraq. “Trying to make a safer credit default swap is like trying to make safer asbestos,” he said. “The financial reforms are only designed to have a veneer of reform while continuing to serve the special interests.” My one quibble with Einhorn is that he spent most of the time sticking to prepared comments, which after awhile started to sound like a long drone. Einhorn’s speech, which is getting a fair amount of play across the web is available to download here.

Legendary hedge fund investor Julian Robertson took the opposite tack, with no prepared comments and just opened up the audience to questions which touched on a wide range of topics including China, individual stocks and what he’s doing with his days. “My big concern is that we’re still spending more than we’re earning and there comes a point when we’re going to have to pay it back and we’re not even thinking about that. We continue to borrow and the Chinese are the only ones who we’re able to do that from and there’s a lot of other things they can do with their money. They may come up with that conclusion as well.”

In response to another question about the many Tiger Cub funds, Robertson said he credited their success to honesty, being reasonably smart and very competitive. As for what he’s doing now, he says that he’s mostly seeding Tiger Cubs, which he enjoys doing, though it represents a “change of life”.

Image source: Marriott

Take, for example, the letters to Berkshire Hathaway (BRK.A) that were made public on Friday, even though the first letter was sent on April 20. Of the five letters, the May 22 letter which asked questions about the 2008 10-K is the most interesting. Just to be clear: the letter isn’t actually addressed to Warren Buffett or sent by Mary Schapiro, but instead is between CFO Marc Hamburg and Accounting Branch Chief Carlton Tartar.

While we don’t hold ourselves out to be a student of Buffett like our friend, Jeff Matthews, we think the letter provides some important additional details about the 10-K that Berkshire filed back in March. For example, there’s more details on the $1.8 billion “other than temporary impairment” that the company took last year. In the letter, Berkshire says that they had invested in 12 companies and that “unrealized losses in these securities generally ranged from 40% to 90% of cost”. Ouch. The good news here for ordinary investors, is that even the vaunted Berkshire makes some bad mistakes from time to time.

If you have interest in learning more about the comment letter database that we’re working on with the SEC Data Guy, drop us a note here.

While the reasons for being late vary from a switch in accounting firms to more serious accounting irregularities, paying attention to those who can’t get their filings in on time can be very interesting. This morning, we posted about one of those companies — American Apparel (APP) — over on the footnoted portal on Research Edge. You can get access to that post by sending an email here.

We’ve also paired up with our new friend, the SEC Data Guy to pull together a list of every late filer so far. That list will be available for sale later today and you can contact me if you have any questions about that.

This isn’t news to anyone who flies regularly — meetings get moved around all the time at the last minute. But yesterday’s WSJ put some of the fees into perspective. The article, citing a new Department of Transportation report, shows that these fees are costing people $2 billion a year. AMR Corp. (AMR), parent company for American Airlines (which I still haven’t been back on after last year’s Dallas fiasco) raked in $116 million in cancellation fees during the first quarter and another $108 million in baggage fees.

In the current crop of airline Qs, there’s not nearly as many details on the fees. But AMR, which filed its 10-Q on July 15, disclosed that “other revenues” which include cancellation and baggage fees, were up 7% to $565 million. Just to put that into perspective, that’s higher than revenues for AMR’s regional airlines. In its 10-Q, Delta (DAL) said its other revenues climbed by $81 million during the quarter “due to new or increased administrative service charges and baggage handling fees and higher SkyMiles program revenue.” USAirways (LCC) also disclosed a hefty amount of fee income during the quarter for what it described as “ancillary items”. Even footnoted favorite JetBlue (JBLU) said in its 10-Q that other revenue was up 7% “due to higher change fee and excess baggage revenue resulting from increased change fee rates and the introduction of the second checked bag fee”.

Of course, the question to ask is how much longer the airlines can continue to rely on these fees to help goose revenues. There’s a fee for pretty much everything and other than charging to use the bathroom on the flight, it’s hard to see how this pattern can continue. Indeed, some customers are already fighting back. As Delta noted in its Q, several lawsuits in different jurisdictions have been filed against Delta and Airtran challenging the baggage fees for violating the Sherman Anittrust Act.

Which brings me to the 10K that McDonald’s (MCD) filed on Wednesday. There were lots of interesting things in the filing. But among the things that caught our attention was the popularity of the Bacon Roll in the UK, despite the oddly named “brown sauce” that’s a featured ingredient. (Sorry — but brown sauce just doesn’t sound like something particularly tasty!) Still, the tidbit that really jumped out was this: “Open communication and transparency is especially important to European consumers.” I’ve added the emphasis, but what does that mean exactly? That Americans prefer not to know what they’re stuffing into their mouths? I mean c’mon: we don’t have something called brown sauce on our McD’s menus!

On Thursday, Coca-Cola (KO) filed its 10K which included this new Eureka statement: “Recent developments indicate that the United States economy is in recession and that the global economy is experiencing a slowdown.” We’re guessing that they’re picking up on the December announcement by the National Bureau of Economic Research that the US economy officially entered a recession in January 2008. The odd thing, however, is that Coke doesn’t mention the economy again in the nearly 160-page long filing, including what impact it may have. Perhaps they’re just waiting for the NBER to issue their next report!

Both were new disclosures at major consumer products companies — one might even call them bellwether indicators for consumer spending — and both were the about as nutritious as a visit to the drive-thru window.

Image Source: Mark Lennihan/Associated Press

Yes, Tiffany’s – the iconic jewelry store that Holly Golightly (as played by Audrey Hepburn in “Breakfast at Tiffany’s”) swore was so special that “nothing very bad could happen to you there” – is dealing with its own economic case of “the mean reds.”

The big news in the 10-Q that Tiffany’s just filed is that last week the company rolled out a program to offer voluntary retirement buyouts to up to 800 employees who meet “certain age and service eligibility requirements.” It may spend between $50 – 65 million on the buyout packages, which are available to eligible employees through January 12, 2009. Executives are not “eligible” to accept the buyout.

One reason that Tiffany’s is offering buyouts is tied to sales, which declined at comparable U. S. retail stores 14% in the third quarter and 6% for the year. The only real bright spot for the company’s U. S. sales occurred at the New York Flagship store, which benefited from increased sales to foreign tourists. (Meanwhile, in Europe, at least, comparable store sales rose between 8 – 10%.) Tiffany’s also took a $4.3 million pre-tax charge in the third quarter, a step that was necessary after Lehman Brothers Special Financing Inc. was no longer around to pay up on some interest-rate swap contracts.

One thing the company is doing in response to its economic mean reds is scaling back its expansion plans. In 2009, the company will now open approximately five new stores in the Americas and eight or so in Asia-Pacific and/or Europe. (And, as this report notes, the company may move some of its existing inventory into those new stores.)

It’s also planning to borrow another $300 million “to address the Company’s current and future liquidity requirements.” So long as the credit markets don’t get much worse – which would increase the cost of the loans or make them even more difficult to obtain – Tiffany’s expects to be able to weather the storm.Per the Q:

Based on the Company’s financial position at October 31, 2008, management anticipates that cash on hand, internally-generated cash flows, the funds available under its revolving credit facility and the additional sources of funding that the Company has already secured and is currently pursuing will be sufficient to support the Company’s planned worldwide business expansion, working capital increases and debt repayments for the foreseeable future.

Let’s hope they’re right. And let’s hope that by next year, we’re reading lots of filings that take us back to the “nice greens.”

Image source:  Tiffany & Co.