On April 1, Southwest Airlines (LUV) Flight 812 suffered a 5-foot rupture in its fuselage, causing the cabin to depressurize rapidly and forcing the pilot into an emergency landing shortly after takeoff from Phoenix. Southwest canceled 624 flights over three days, found (and fixed) flaws in five other aircraft and the FAA ordered additional inspections for other airlines as well. The flying public was, to put it mildly, more than a little shaken, at least temporarily.

And the cost for Southwest Airlines? About $5 million. Except, no, wait — all those canceled flights also meant the company saved a bunch of fuel, which offset its other costs. So make that about $2 million. Or, to put it another way, the incident was immaterial to Southwest’s financial condition and results of operations. Moreover,

“management concluded that there were no known facts or circumstances related to the incident that were reasonably likely to have a material impact on the Company’s future financial condition and results of operations.”

In other words, from a financial and a disclosure perspective, the whole incident was a non-event. We only know this, in fact, because someone at the Securities and Exchange Commission wondered why Southwest never even mentioned the incident in the quarterly report it filed on April 25.

That someone was apparently SEC branch chief Lyn Shenk, or someone on his staff, who sent the initial inquiry to Southwest, in the form of an SEC comment letter on April 28 [PDF], and we tip our hat to him. The SEC has caught a lot of flak lately, but this is one example of someone at the SEC asking about something missing from the filings. And as we know firsthand, it’s often a lot harder to find what’s not there than what’s staring you in the face.

On one level, Southwest makes a good case (in its May 11 response to the initial SEC letter) that the event was a non-event, as far as operations go: The canceled flights represented just 7% of Southwest’s total for the three-day period, and “approximately two-tenths of one percent of the Company’s expected second quarter 2011 flight schedule.” Most affected passengers were put on other Southwest flights (though we imagine not without at least a little inconvenience).

“Although the incident has received media attention, its financial impact on the Company has been no more significant than the immaterial impact of ordinary course events such as weather-related events. Therefore, the Company concluded that it did not have a Form 10-Q disclosure obligation based on the known financial impact at the time of filing.”

Southwest also notes that its 10-Q filing came only after the National Transportation Safety Board had already said the company’s maintenance and inspection schedules were up to date, and after the company concluded it was an isolated incident.

“In addition, the Company saw no evidence that the incident had negatively affected customer demand.  Therefore, the Company concluded that there were no known facts or circumstances related to the incident that were reasonably likely to have a material impact on the Company’s future financial condition and results of operations.”

Finally, according to Southwest, evidence points to a manufacturing issue for the specific aircraft, “rather than a design issue with respect to the aircraft type as a whole or any inspection deficiencies on the part of the Company.” There may still be insurance ramifications — talks were apparently under way with the airline’s insurance carrier in May — but if Southwest decides to repair the plane, its costs would be capped at $1 million under its insurance contracts.

“If the Company were to make the decision to not repair the aircraft, its financial liability would also be immaterial, due to the combination of the insurance coverage in place and the fair value of the reusable major components, considered in conjunction with the existing net book value of the aircraft.”

So. No harm, no foul? That’s how it would seem — the SEC closed its review of the filing on June 15 [PDF], apparently without further ado.

We understand the reasoning in each of the specifics. And yet, looking at the big picture, it seems surprising that an event on that scale — that got that kind of attention and caused that much consternation among regulators, passengers and others — turns out to be a complete non-event for the airline involved.

Image source: JL Johnson via Flickr

Not quite two weeks ago, we passed the midpoint of 2011, marking a perfect opportunity to continue ignoring our New Year’s resolutions — and to check in on that marvel of modern investing, the Edgar database at the Securities and Exchange Commission.

Edgar, of course, is the SEC’s ever-growing trove of corporate disclosures — as it turns out, it stands for “Electronic Data-Gathering, Analysis, and Retrieval” — and needless to say, it’s near and dear to our hearts: Without it, we’d still be spending a lot of time mucking about with filing cabinets and getting paper-cuts. So early this year, we had our friends at Morningstar Document Research (neé 10-K Wizard) crunch some statistics from the 2010 filing year, and they’ve been kind enough to do the same for the first six months of this year.

Overall, no surprise, filings are up over the same period last year, by about 5%, to 375,909 in the first half of the year.

But the biggest filings are also getting bigger: While the top 20 filings in the first half of 2010 totaled 52,514 pages, the top 20 so far this year add up to 56,571 pages, an increase of just under 8%. And the most prolific filers are sending the SEC more documents: 16,412 of them from the top 20 companies, up 9% from the first half of 2010, when the figure was 15,028 filings. With that kind of growth, among other factors, you can imagine why Mary Schapiro wants a budget increase.

When it comes to counting filings from individual companies, the most prolific companies are financial firms, hands down. Both this year and last, BlackRock (BLK) made the most filings, at 2,368 (or roughly 18 for every weekday of the year so far, including holidays). It also held the top spot last year, with 2,313 filings. This year’s top-five were rounded out by Barclays (BCS), FMR (also known as Fidelity), Bank of America (BAC), and JP Morgan Chase (JPM); also in the top 10: Morgan Stanley (MS), Credit Suisse (CS), and of course, Goldman Sachs (GS). Last year’s list for the first half looked much the same, though we note that Goldman crept up to No. 10, at 669 pages, from No. 14 at 481 pages.

The only non-financial company to crack the Top 20 is International Speedway (ISCA), which operates famous race-tracks at Daytona and Talladega, among others. At $1.5 billion in market-cap, the company racked up a whopping 669 filings — or 455 documents for every $1 billion in market-cap. By contrast, despite its overall volume, BlackRock filed just 63 documents per $1 billion in market-cap. International Speedway has at least cut back a little: During the first half of last year, it churned out 867 filings. (This paragraph has been corrected from an earlier version. See below for details.)

Two other companies stand out among the most prolific filers: LendingClub Corp., with 780 filings, and Prosper Marketplace, with 443 filings. Neither are publicly traded, but both are in the same business: peer-to-peer lending, in which the companies match borrowers up with investors willing to front them what are typically relatively small sums. Neither company is huge in terms of lending power — LendingClub boasts of arranging just over $307 million in loans to date, a pittance compared to even some of the individual revolving credit agreements underwritten by a company like Wells Fargo. But because of the numbers of loans each company arranges, they have a lot of filings like this one from Prosper (which can make mildly interesting reading if you’re into that sort of thing).

Of course, number of filings is just one way to count volume — we also looked at the biggest filings by page-count and by file size.

Page-counts have swollen dramatically. Last year, the top two filings for the first half clocked in at a little over 3,500 pages — 3,763 for a 485BPOS from Janus Investment Fund, and 3,592 for an S-4/A from Allied Waste Industries (AW). By contrast, this year’s top page-count came from enzyme-maker Verenium (VRNM) (which sold its biofuels unit to BP last year), an amended 10-Q of 6,280 pages, and two other filings came in over 4,000 pages (a 10-Q from can-maker Novelis (NVL) and an S-4 from golf- and country-club operator ClubCorp Club Operations Inc.). We’ll let you slog through them yourselves to see if they’re worth the page-count.

Among the other big non-financial and non-real-estate companies making long filings with the SEC: solar-cell maker BrightSource Energy (which filed a 2,695-page S-1/A), cruise-line operator NCL (which filed for an IPO last fall, with two S-1/A filings totaling 5,109 pages), and Bluestem Brands (BSTM), once known as Fingerhut Direct Marketing, which specializes in selling all manner of gizmos and necessities to lower-income shoppers, with an S-1 weighing in at 2,123 pages.

Unlike the most prolific filers, which tend to be major financial firms, the bulkiest filings don’t always come from the biggest companies. In fact, quite the opposite, judging by file size — the number of megabytes of data taken up by the filing on the SEC’s computer systems. Tiny First Asia Holdings Ltd. (FAHLF), a Hong Kong nutritional-supplement company with a market-cap of $35.3 million, produced the biggest filing of the first half of 2011, with whopping 202-megabyte, graphics-heavy 8-K, followed by equally small Northport Network Systems (NNWS), with a market-cap of $35.7 million and a 10-K weighing in at 162 MB. None of the other standalone companies in the top 20 by file size boast market-caps over $100. (Most of the heftiest filings are from investment or separate-account trusts, including 11 separate filings over 85 MB from what appears to be the separate-account business of Jackson National Life Insurance.)

Given how often we chastise companies for saying too little, you might think these dramatic volumes would warm the cockles of our disclosure-loving hearts. Not so: A time-honored route to befuddling investors is to swamp them with vast amounts of boilerplate and useless information. Take one of those Jackson National documents, a prospectus filed on April 27: At 91 MB and 633 pages (not including more than 20 pages of exhibits), it would take more than 10 hours to read it at a page a minute — and we challenge the lawyers and accountants who wrote it to go through it that quickly and still make sense of what they wrote.

Meantime, it’s back to work for us — we have a lot of filings to sift through.

Update: I goofed — as M. Kucera points out in the comments, ISCA had a market-cap of $1.5 billion at the time of writing, not $1.5 million as we initially wrote. The comparison of market-cap to number of filings for both ISCA and BlackRock were more or less correct, but reflect filings per billion of market-cap, rather than per million. It’s fixed now. My apologies — I’ll mind my decimal places more carefully next time.)

Image source: redjar via Flickr

That’s where the SEC’s Chairman, Mary Schapiro, and its Inspector General, H. David Kotz, were in the hot seat to answer questions for the Congressional Sub-Committee on Economic Development, Public Buildings, and Emergency Management (which falls under the auspices of the Committee on Transportation and Infrastructure) about the $556 million, 10-year lease that the SEC signed last summer for 900,000 square feet of space in D.C.’s Constitution Center.  (A video of the hearing is available here.)

The tone of the hearing was clear from the title of the Briefing Memo:  ”Oversight Hearing on ‘The Securities and Exchange Commission’s Fleecing of America:  Part Two.’” But while the title strikes us as political hyperbole (do people really suppose that SEC employees really intended to “fleece” Americans?), the facts related to the lease itself are a black eye on the agency charged with protecting investors. Moreover, given the current budget deficit woes and focus on government waste, it’s easy to understand why this was red meat for both Democrats and Republicans.

Opening the hearing, Chairman Rep. Jeff Denham (R – Calif.) took Schapiro to task for verbally approving the massive lease “based on a 10-minute, unscheduled meeting.” He continued, “It is inconceivable that the SEC bound the taxpayers to more than a half billion dollars based on back-of-the-envelope calculations that were inflated and just simply wrong.”

Last summer, the passage of the Dodd-Frank Act led the SEC to predict that it would need to hire as many as 800 new staffers to handle all the extra work that the legislation would mandate. But when Congress finally hammered out its appropriations, it didn’t give the SEC the money it needed for a big staff expansion. And in between those two points in time, the SEC signed the Constitution Center lease.

The evidence suggests that Schapiro herself didn’t personally push for the space at Constitution Center (according to both a witness and Schapiro’s written testimony). But she did set certain parameters including that the new space be within walking distance of the SEC’s existing headquarters near Union Station, which is primo real estate in D.C.

Yesterday, Schapiro said she got some really bad advice and recommendations from employees in positions of authority, who gave her an “urgent recommendation” that led her to believe that the Constitution Center space was the only suitable space that was still available, and that the SEC was at risk of losing the space because competing parties were poised to swoop in and lease it first.

Inspector General Kotz’s written testimony, rooted in conclusions formed after his staff read more than 1.5 million emails (and we thought that we read a lot of stuff) and interviewed 29 people, puts the blame primarily on the SEC’s Office of Administrative Services (OAS), which

“…conducted a deeply flawed and unsound analysis to justify the need for the SEC to lease 900,000 square feet of space at the Constitution Center facility. Specifically, we found that OAS grossly overestimated (by more than 300 percent) the amount of space needed for the SEC’s projected expansion and used these groundless and unsupportable figures to justify the SEC’s commitment to an expenditure of approximately $557 million over 10 years.”

And that’s not all the SEC did wrong. Other flaws included negotiating a ”single source” contract over the course of just a few days, back-dating an important document (the “Justification and Approval” form), and signing that form after the lease had already been signed.

Unlike other notable examples of bureaucratic waste, heads may (metaphorically) roll over this one. Kotz testified that steps are underway to discipline “two senior individuals” and possibly a third individual, and that may include firing them. The matter has also been referred to the Department of Justice, which will determine whether criminal charges are appropriate.

Nothing lets Schapiro off the hook, nor is she trying to escape blame. After testifying that she was “extremely disappointed” by the flaws in the SEC’s leasing processes, she added:

“As Chairman of the SEC, I am ultimately responsible for the actions of the agency. I can assure you that the SEC will address the issues identified by the IG aggressively and transparently. As I have said previously, the true test of an organization is not whether things go wrong, but how the organization responds to problems and whether its leaders take such opportunities to make necessary improvements.”

So far, two-thirds of the Constitution Center space has been leased to other tenants, and the General Services Administration (GSA) has identified “prospective tenants with leasing needs that may align with the available Constitution Center space.” Schapiro has also asked the GSA to assume future leasing responsibility for the SEC, which makes sense, since it handles that task for other agencies.

Even if tenants are found for the entire space, the whole incident raises serious questions about an agency charged with monitoring these sorts of things for publicly traded companies. Anything that makes the SEC look weak and impotent (or, perhaps weaker and more impotent) is bad for investors and needs to be resolved quickly.

Image source: The Securities and Exchange Commission

It’s hard to fathom that people are already forgetting what caused our economic crisis (the conclusions of the bi-partisan Financial Crisis Inquiry Commission are here), but some members of Congress make us wonder about that.

We listened to a telephone news conference yesterday convened by ShareOwners.org, Consumer Federation of America (CFA) and the Council of Institutional Investors (CII).

All three non-partisan, not-for-profit organizations say that a battle of “David v. Goliath” proportions is going on in Washington, and they want to educate Americans about the disastrous consequences that will occur if the budgets of Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are slashed.

The bottom line? Americans need to tell their legislators that they vociferously oppose any funding cuts, the groups say.

“The roughly $80 million in combined cuts proposed for these two agencies isn’t even pocket change in the context of the overall federal budget deficit,” said Barbara Roper, director of investor protection for Consumer Federation of America.  ”On the other hand, cuts of that magnitude would severely erode the ability of these two agencies to rein in the type of Wall Street excesses that helped to land us in our current fiscal difficulties.”

The proposal Roper is talking about would cut $25 million from the SEC’s $1.12 billion budget, and $56.8 million from the CFTC’s $168.8 million budget.

While the cuts would be “harmful” to the SEC, they would “decimate” the CFTC at a time when it is “taking on the gargantuan task of regulating a roughly $300 trillion U.S. over-the-counter swaps market,” Roper said. At its current funding level, she said the CFTC can write the rules needed for the implementation of the Dodd-Frank Act, but it won’t have the resources necessary to enforce those rules.

In President Obama’s proposed 2012 budget, funding for the SEC and the CFTC actually increase (an explanation is in this article); however, Roper said that user fees completely pay for the increase, which means the increase will have no impact on the federal deficit – a point that SEC Chairman Mary Schapiro confirmed on Feb. 14. Likewise, reducing the SEC’s budget won’t help to reduce the federal budget, because the Dodd-Frank Act mandates that any budget reductions be matched by reduced user fees.

The proposed funding cuts have their proponents, though. Late last month, Rep. Scott Garrett (R-NJ), the Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, issued a press release stating:

“During our country’s current debt crisis, all branches of government – including Congress – have to tighten their belts and find ways to make their money go further.  A dramatic spending increase to fund the SEC and CFTC, as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation’s problems can be solved with more spending, not more efficiency.   Government agencies must learn to operate effectively within their budgets like American families and businesses do every day as we work to get our fiscal house in order.”

Roper countered that the “efficiency” argument is fallacious; the agencies – which were underfunded for decades – are most inefficient when they lack the resources they need to effectively keep an eye on Wall Street. But that’s not easy: While the giant Wall Street firms can easily afford the latest, greatest technology, government agencies charged with their oversight are stuck with technology that is obsolete.

“One of the things that would make these agencies more efficient is if they could invest in technology,” Roper said. But one of the first things to go as a result of their inadequate funding is investment in technology that would make them more efficient.”

Roper believes that the efforts to cut funding to the SEC and the CFTC “…have less to do with promoting efficiency and more with gutting reforms.” She added, “There is no way that [the CFTC], with just a $168.8 million budget, can simultaneously take on responsibility for a market seven times the size of the one they currently regulate while cutting their budget on something of the order of 30 percent.”

We called Rep. Garrett’s office yesterday afternoon to get the Congressman’s response to some of these issues, but no one returned our call.

But to us, Roper’s warning sounds a lot like Santayana’s. “If we learned nothing else from the financial crisis, we should have learned that unless regulators have the authority and resources they need to rein them in, Wall Street will run amok, and average Americans will end up bearing the cost,” she said.

Image source: blog.TheFolderStore.com

We were reminded of that feeling when we asked our corporate siblings at Morningstar Document Research to pull some numbers on SEC filings. The numbers, which have not been made public before, really illustrate both what we try to do here at footnoted and why a service like MDR (formerly known as 10KWizard) is so valuable to anyone who needs to read filings regularly.

Last year, there were 631,239 total filings at the SEC. That was up slightly from the 624,197 filed in 2009. Roughly 1/3 of those were insider-related filings (Forms 3,4 or 5). The other 2/3 were a hodge-podge of routine filings like 10-K, 10-Qs and 8-Ks and more specialized filings like S-4s, which are more commonly used for mergers. As you can see from this chart, the number of filings hit a peak of 750,000 in 2007, the year before markets began to unravel.

Here are a few other interesting stats that the folks at MDR pulled too:

We were fascinated — and a bit blown over — when we got these stats yesterday. But it also reminded us about the monumental task we face regularly as we try to keep up with the flow of filings. Just like the little Dutch Boy, who thought he could save his country, we feel like we’re doing something truly important. But it’s not always easy.

————

Want to get more actionable insight into what’s really hiding in the filings? Check out Footnoted Pro: Interesting. Actionable. Profitable. Learn more here.

Yesterday, five separate Confidential Treatment orders (in SEC lingo, they’re called CT-ORDERs) were filed by AOL, or at least filed in response to requests by AOL to keep information in their filings under wraps. It’s been over two years since we last footnoted about CT Orders, so we’re not sure if the SEC now keeps stats on how many are requested vs. how many are granted, though we have a call in to ask and will update when/if we get an answer. (See below for update.)

One of things that’s particularly frustrating about these sorts of filings is that while the SEC began making their existence known several years ago, you really have to dig through past filings to find out what exactly is being kept secret. And even then, it’s not exactly clear.

Take this one (pdf) for example. While the filing lists the 11 exhibits that are subject to confidential treatment, you actually have to go back to the filing (in this case a Form 10-12B) and look for the exhibits, which don’t seem to be attached to the original filing, which means you know no idea what’s worth the hush-hush treatment. But with this CT-Order (pdf), which refers to exhibits in this 10-Q that AOL filed back in August, you can see that this request is related to AOL’s “Interactive Marketing Deal” with Google. Our friends at Business Insider have written about this a bit and picked up on our tweet yesterday when we first spotted this in the filings.

A quick search of the filings shows over 1,500 CT-Orders have been granted over the past year. Now some of those probably are real secrets in the true sense of the word. The type that might get Wikileaks juices going. But it’s hard to imagine that most of them aren’t things that investors in these companies really have a right to know. Which makes this nothing more than a gift from the SEC — one far more valuable than a $25 gift card.

Update: We heard back from the SEC, and a spokesman says the agency has received about 1,500 requests a year over the past five years. It has granted about 95% of those. Happy holidays, indeed!

Image source: buba69 via Flickr

———

Want to see the more actionable information that’s hiding in the filings? Check out FootnotedPro. For more information or to inquire about a trial subscription, email us at pro@footnoted.com.

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

————

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.

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

————

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.