The blogosphere has been quick to blast the deal as too little, too soon. Goldman shares actually rose after the announcement, though it’s impossible to know whether that’s from relief over the fact of a settlement — any settlement — or giddy joy over its size.

Here at footnoted, we did what we do best: We went to the filings to find some measure of comparison. We found a few, and they aren’t pretty.

Goldman had $27 billion in cash and short-term securities on March 31, according to its latest 10-Q. That means the settlement, at barely 2% of the total, is in fact pocket change for the company. For a household with net worth of $60,000, the equivalent percentage works out to $1,219 — not trivial, but hardly a major expense.

Like many companies, one of Goldman’s most significant recurring expenses is its personnel. It accrued compensation and benefits expense of $5.49 billion in the first quarter — 10 times what it’s paying out to settle this case.

And finally, the one that puts both Wall Street pay and the penalty onto a human scale: Since the beginning of Goldman’s 2007 fiscal year, Lloyd Blankfein and four other men (the company’s other top-paid officers) have made more than $288 million among them, according to Goldman’s proxy — or about 52% of the penalty amount. In other words, those five men could probably scrape together enough to pay the fine themselves.

All told, not terribly impressive. But there’s also the SEC’s perspective. Obama asked Congress for $1.26 billion to fund the agency for fiscal 2011, an increase of about $139 million over fiscal 2010 — and just barely double what Goldman will shell out without breaking a sweat. This speaks volumes about the resources available to Wall Street’s beat cops.

So from the SEC’s perspective, Khuzami hooked a whale. From Goldman’s, it’s more like a minnow. Which view matters when it comes to deterring future bad behavior?

Image source: dawnzy58 via Flickr

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Meantime, the U.S. proxy process hasn’t changed much. Now the SEC is thinking about doing something about that, launching its first full review of the process in three decades with a unanimous vote this morning.

We’re still digesting the agency’s proposals — its “concept release” comes out to some 151 pages — but from an investor’s perspective, there’s a lot to be done. Indications are that the agency will focus on a number of key areas, some of which play to investors, while others seem to come straight from the boardroom wish-list. (This morning’s brief meeting was webcast; a replay will be posted online soon. The agency has also posted Chairman Mary Schapiro’s comments, and those of commissioners Luis A. Aguilar and Kathleen L. Casey.)

There’s also every sign that the agency is poised to tackle a potentially serious issue in the capital markets: the separation of a share’s economic and voting interests. Henry Hu, the highly regarded University of Texas law professor who now heads the SEC’s Division of Risk, Strategy, and Financial Innovation, apparently pressed this point eloquently at the Stanford University Law School’s Director’s College last month, we’re told (and the concept release cites some of his academic work) . Some scenarios: Shareholders can short a stock — or hold a net short position on a stock using credit default swaps or other instruments — and yet vote borrowed shares against the best interests of the company.

The SEC says it might address these and similar issues by making sure shareholders know what’s at stake well ahead of a vote, giving them time to reclaim and vote shares that they’ve lent out. Another possibility: requiring funds to disclose not just how they voted, but how many of their shares they voted — letting fund investors know, in effect, how many of the shares in their portfolios were passed along to short-sellers and others. Judging from these, the agency’s approach seems to be one we can get behind: Sunlight, to paraphrase the late, great Supreme Court justice, Louis Brandeis, makes a great disinfectant.

We’re also intrigued by a line in the agency’s fact sheet about encouraging “investor-to-investor communications.” It sounds to us like something that could pave the way to proxy access — letting investors put their board candidates directly in the proxy sent to investors by the company, rather than having to wage an expensive proxy battle with their own mailings — though the concept release is vague.

There’s also a proto-proposal to let companies have more information about who their shareholders are. Right now, in many cases, shareholders can essentially draw the curtain, obscuring their identity, either explicitly or simply because their shares are held in street name. Companies complain that makes it difficult to communicate with shareholders, since they have to go through brokers or other intermediaries. At the same time, we can see plenty of investors enjoying anonymity — investor relations departments may not be inclined to be as democratic as they are when they know who holds a few hundred shares and who owns a few hundred thousand.

Finally, there’s the proxy advisory firm kerfuffle: The SEC suggests it should consider

“enhancing regulatory oversight over the formation of voting recommendations, and requiring eventual public disclosure by proxy advisory firms of their voting recommendations in Commission filings.”

The proposal comes out of concerns that “proxy advisory firms may be subject to conflicts of interest or may fail to conduct adequate research” before making their recommendations. We’ll have to wait and see whether this turns out to be tightly focused on real problems, or whether it becomes a way for unhappy companies to try to stifle their most influential critics.

A lot of these issues, of course, aren’t new, and commissioners and agency staff have telegraphed many of the elements in speeches and other venues in recent months. They’ll take some 90 days to evaluate comments on its tentative proposals before presumably proposing actual regulations and taking comment on those.

Meanwhile, the financial-regulatory overhaul pending in Congress is likely to include still more mandates for the SEC, something Schapiro alluded to last week at a corporate secretaries meeting in Chicago, according to Suzanne Hopgood, director of board advisory services for the National Association of Corporate Directors.

“I think the very threat of the amount of rule-making they’re doing, with the deadlines they have, everybody is very focused at the SEC,” Hopgood told us after hearing Schapiro. “That’s a good thing.”

Image source: spiffie via Flickr

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See more of what’s in the filings: Check out FootnotedPro, where we highlight unusual opportunities and potential problems well in advance of the market. For more information or to inquire about a trial subscription, email us at pro@footnoted.com.

On Saturday, Bloomberg reported that the investigation began 9 months ago. In today’s Heard on the Street column, the WSJ also dates the Wells Notice to July 2009. Reuters reported that the SEC had issued a Wells Notice six months ago. But whatever the correct date is, one thing is very clear: there was no mention of this in any of Goldman’s filings.

Since we tend to spend a lot of time here at footnoted taking deep dives into the filings and routinely report on regulatory actions like Wells Notices, we decided to put this issue under the proverbial microscope. As with a lot of things in SEC filings, it all boils down to an issue of materiality: was the existence of the Wells Notice material enough to Goldman that it required disclosure? The rules on materiality are pretty vague and it’s now clear that Goldman’s attorneys came to the conclusion that the Wells Notice was not material, even if the market seems to disagree.

Given Goldman’s size and the amount listed in the complaint, reasonable people can certainly argue that the Wells Notice was not material, even if other companies routinely file 8Ks for far less serious interactions with the SEC, like responding to a comment letter or an informal investigation.

At a breakfast this morning at the National Press Club that Theo attended, David Z. Seide, a partner with Curtis, Mallet-Prevost, Colt & Mosle in Washington and former Assistant US Attorney in Los Angeles said, ”This is a bet-the-franchise kind of thing, it’s their whole business model.” And that’s the job of a disclosure attorney, “you have to look into the future and figure it out,” he added. George B. Curtis, a partner at Gibson Dunn & Crutcher in Washington, DC., a former Regional and Deputy Director of the SEC’s Division of Enforcement between 2006-2009, noted that “There’s no bright line.”

If Goldman’s argument was that the Wells Notice was not material, they may see some challenges from other very large companies that have disclosed Wells Notices in the past. A quick skim of Morningstar Document Research of companies over $50 billion in market cap that have disclosed the existence of Wells Notices in the past turns up General Electric (GE), Bank of America (BAC), UBS (UBS) and units of both Berkshire Hathaway (BRK.A) and of JP Morgan Chase (JPM).

If disclosing a Wells Notice was material enough for these companies, why was it not material enough for Goldman?

Image source: Faiz Scientific

Of course, in Gupta’s case, the little stuff turned out not to be so little, as the SEC tells it. We’ll spoil the ending: Gupta, infoGroup Inc.’s (IUSA) former chairman and CEO, was formally accused yesterday of fraudulently using nearly $9.5 million in corporate funds “to support his lavish lifestyle,” while hiding another $9.3 million of transactions with companies that he owned at least in part. Two other former executives and a former director of the Omaha-based database and mailing-list vendor were also charged in the case.

Without admitting or denying wrongdoing, Gupta agreed to pay $7.4 million in penalties, interest and disgorgement, and will be banned from serving as a corporate director or officer for life. An attorney for Gupta didn’t return a call seeking comment.

If you’re feeling a little déjà vu, loyal readers, there’s a reason: Gupta’s a frequent flyer here at footnoted — he appeared in August 2008 when the company agreed to pay him $10 million to go away while requiring him to repay $9 million. Then, last year, Gupta and infoGROUP made the 2009 short list for footnoted’s worst footnote of the year contest after the company said that Gupta’s personal use of the company yacht in 2008 totaled more than $870,000 — not the zero previously reported.

But that turns out to have been the tip of the iceberg, by the SEC’s account. Indeed, the agency’s allegations read like a primer on proxy-filing red flags:

“Gupta improperly used corporate funds for more than $3 million worth of personal jet travel for himself, family, and friends to such destinations as South Africa, Italy, and Cancun.  He also used investor money to pay $2.8 million in expenses related to his yacht; $1.3 million in personal credit card expenses; and other costs associated with 28 club memberships, 20 automobiles, homes around the country, and three personal life insurance policies.”

Granted, those totals span 2003 to 2007, but they’re still eye-opening.

The SEC argues that Gupta had plenty of assistance when it came to shielding the largess from prying eyes. Former director Vasant H. Raval, a Creighton University accounting professor who once headed infoGroup’s audit committee, was accused of having omitted “critical facts in a report to the board” about the matter, and of failing to “respond appropriately to various red flags,” even after two internal auditors questioned whether Gupta was seeking reimbursement for personal spending. He has agreed to pay $50,000 to settle the charges against him, without admitting or denying wrongdoing, and will also be banned from serving as a public-company officer or director for five years, the SEC said. His attorney didn’t return a call seeking comment. (A spokeswoman for infoGROUP declined to comment.)

Two former infoGROUP CFOs are also accused of signing off on phony expenses without “sufficient explanation of business purpose.” Neither former CFO has settled as yet. Attorneys for Gupta and former CFO Rajnish K. Das didn’t return calls seeking comment. David Zisser, who represents ex-CFO Stormy Dean, called the SEC “wrong on both the law and the facts.”

“There are a lot of issues about what constitutes a perk and what constitutes a related-party transaction,” Zisser said. “There was a lot of information regarding the things supposedly hidden that shows they weren’t hidden at all.”

However things shake out in court, it looks like the curtain is falling on this chapter of the infoGROUP’s perks saga: Last week, Gupta resigned from the board, and the company announced it would be taken private by CCMP Capital. Once private, they can throw around whatever perks they might want, and we aren’t likely to find out (at least, until CCMP takes the company public again).

In the meantime, when you hear that even lavish perks are a small price to keep a good executive, think back to the long, strange tale of Vinod Gupta, infoGROUP and the corporate yacht that turned out to be more of a pleasure boat than the filings initially let on.

Sometimes, it turns out, the little things aren’t. And if you don’t take a good hard look, you might find out too late.

We admit that we haven’t read the entire 129-page document, but here’s a summary of some of the key changes that take effect for all proxies filed after Feb. 28, 2010:

• The background and qualifications of directors and nominees.
• Legal actions involving a company’s executive officers, directors and nominees.
• The consideration of diversity in the process by which candidates for director are considered for nomination.
• Board leadership structure and the board’s role in risk oversight.
• Stock and option awards to company executives and directors.
• Potential conflicts of interests of compensation consultants.

Given some of the things that we’ve footnoted about directors recently (see this interview yesterday on Reuters for more details on this subject), we’re particularly interested in some of the new requirements for disclosure on directors, including any other public company boards that they sit on and any enforcement actions dating back 10 years.

We also think that the current stock option disclosure in the summary compensation chart doesn’t present a real picture of total compensation because of the odd way the SEC requires options to be counted as an accounting expense. That changes come March 1. The Center on Executive Compensation, a lobbying group that represents large companies on issues of pay, was generally supportive of the changes, but thought that there should be more to separate current compensation from long-term compensation.

But we have to wonder given some of these changes: will companies try to rush their proxies to avoid the new disclosure rules? Because the SEC set a calendar cut-off as opposed to a cut-off that was based on the end of a company’s fiscal year, it’s certainly a real possibility. While companies that are on a calendar year normally have until early May to get their proxy statements in (the requirement is 120 days from the end of the fiscal year), it certainly seems within the realm of possibility that some companies may be tempted to get them in by Feb. 28 to avoid the additional disclosure.

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Tomorrow, we’ll open up voting for “footnote of the year”. We’re working on finalizing our list today for the worst of the worst, so if you have any suggestions for finalists, drop us a note. Last year, A. Schulman (SHLM) “won” for its fishing lodge disclosure. The year before, it was Qwest (Q) and its disclosure on private jet usage for a high school student, so there’s some tough competition out there!

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.

One of the cool sites that’s surfaced since the last time I had to go trudging through NT-10Q filings back in August is SEC Watch which is working mightily to open up the black box that is the SEC’s Edgar. Now Edgar has improved mightily over the years — trust me on this one — but it is still incredibly cumbersome to navigate, which is why I’ve long used 10KWizard, which was renamed Morningstar Document Research in late August.

But some people don’t want to pay to access SEC filings and that’s where SEC Watch comes in. With one click, I can get a list of every company that filed an NT 10-Q the past few days. Then I can quickly skim the list and look for names that are worth paying closer attention to. I also like the fact that you can see full images of the individual pages — kind of the way that Scribd works. (Full disclosure: I am listed as an advisor for the site, which means that me and the two co-founders, Jason Zucchetto and Chris Auer have gotten together for tea once).

When I was looking at the list of late filers, one of the filings that popped out immediately was American Apparel (APP), which I remember also filed a late Q in August. The company managed to file its 10-Q yesterday, but the excuse that it listed in the NT-10Q of “unanticipated technical difficulties” reminded me — perhaps unfairly — of Janet Jackson’s infamous wardrobe malfunction from the 2004 Super Bowl.

The bottom line is that anything that makes digging through SEC filings a bit less cumbersome is a welcome addition. Reading filings and interpreting them is hard enough!

Happy Veteran’s Day!

Whose fault was it? Well the Inspector General’s office has just made the list of the 536 exhibits available on their site, while the SEC’s list remains uncategorized. You can see the full list here:

Public Exhibit List

If only this had been made available on Friday. It would have prevented a lot of wasted hours over the weekend!

So far, the biggest headlines to emerge has been about Madoff’s jailhouse interview with SEC Inspector General David Kotz. The Times also posted highlights of interviews with former SEC Chairman Arthur Levitt Jr., William Donaldson, and Chris Cox. Exhibit #29 was also pretty interesting because in it, an SEC branch chief and assistant director for Compliance, Inspections and Examinations said he couldn’t remember “off the top of my head” what a Form 13-F was for. Even Kumara, my SEC file reading dog, knows what that one’s for!

But here’s the real rub: by dumping this kind of thing on a Friday night and providing no description next to the 536 exhibits, the SEC is essentially green-lighting companies to do the same thing with their filings. Right now, the overwhelming majority of companies provide some sort of description of what’s in the exhibits that they file, so that you can figure out whether a particular exhibit is worth reading. It’s the difference between stating “material contract” and “employment agreement with John Doe”.

Over the weekend, I asked the SEC why they chose to release the information this way and didn’t exactly get a good response. In a nutshell, the folks at the SEC blamed the OIG’s office for the Friday night dump and David Kotz, whom I spoke to this morning, said it was the SEC’s decision. “To be honest, I’m surprised that they did this on a regular Friday, instead of waiting for a holiday Friday to put this out,” Kotz told me a short time ago.

Not very reassuring, is it?

UPDATE 11/3: Just to be clear here, the person whom I spoke to at the SEC gave me information on background and never used the word blamed. The choice of the word was my own based on my understanding of the facts after speaking to both this person and David Kotz.

One of the ones that caught our attention was this letter between the SEC and the Washington Post Co. (WPO) which is dated July 16, but only became available on Friday. (Just a reminder: the rules on comment letters are that the SEC releases them no sooner than 45 days after the matter has been deemed resolved). In the letter, the company’s associate general counsel, Nicole Maddrey, says that the company doesn’t agree with the SEC’s request that additional disclosure on bonuses was necessary because it’s not material. Still, the letter does note that:

the more detailed approach proposed by the Staff could have made it easier for an investor to understand the relationship between the bonus amounts paid to our named executive officers and our reported financial results for 2008. We therefore undertake to include such disclosure in future filings to the extent applicable.

The letter is in response to this letter sent back in May to CEO Don Graham which questions how the earnings target used to set bonuses was $31.90, but the actual reported earnings were $6.89 per share. The difference between the two numbers is a bevy of “unusual items” that were excluded to get to the much higher number.

What’s particularly interesting here is that Warren Buffett — long a critic of overly complicated pay structures that use unusual targets – is not just a board member and major investor — he’s the lead director.

Image source: Washington Post