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Saturday, Feb 4, 2023

Reading the Fine Print

Most people’s eyes glaze over as they pore through the legalese of public company filings. And that’s just fine with top executives, who sometimes bury embarrassing details and questionable decisions in the footnotes of the documents they are required to file with the Securities and Exchange Commission. But for former business journalist Michelle Leder, the footnotes are the focus. The 48-year-old La Crescenta woman has turned her news sense and fondness for minutiae into a business that exposes bloated salaries, financial obfuscations and regulatory investigations. Her company, footnoted, sells the information she finds through a premium subscription model, charging clients such as hedge funds, institutional investors, law firms and regulatory agencies $10,000 each for annual subscriptions to footnoted’s proprietary content. Her subscribers rely on Leder’s SEC savvy to give them an edge on the markets. “They’re looking for something that’s going to generate alpha,” Leder said, using Wall Street lingo to describe an investing advantage. And indeed, over the years footnoted has dug up some doozies. There’s the time in 2010 that Abercrombie & Fitch paid its chief executive, Michael Jeffries, $4 million not to use the corporate jet. Or the 2009 decision by Chesapeake Energy Corp. to use $12.2 million of corporate funds to purchase Chief Executive Aubrey McClendon’s map collection, relying on his own dealer’s valuation of the antiques. The Oklahoma City-based oil and gas company’s board later turned on McClendon over some controversial borrowing practices; he resigned in 2013 after an SEC investigation. That outcome was just one example of the value footnoted delivers, said Nell Minow, a corporate governance expert currently serving as vice chair of ValueEdge Advisors, a consulting firm based in Portland, Maine. “Michelle’s discovery of the outrageous map collection purchase at Chesapeake turned out to be the reddest of red flags, an early indicator of a board that was completely incompetent, as revealed by a series of poor decisions and failed oversight,” Minow said. Growing pains Footnoted was founded in 2003, after Leder left a decade-long stint at daily newspapers to write a book, “Financial Fine Print: Uncovering a Company’s True Value.” She had become fascinated with SEC footnotes after a stock she purchased tanked and she realized too late that there were clues in the filings that should have warned her to sell her shares. Wall Street veteran Ted Oglove, who pioneered investment research methodology in his seminal book, “Quality of Earnings: The Investor’s Guide to How Much Money a Company Is Really Making,” called Leder’s book an important contribution to the field. “It probably should be in the colleges as a supplementary text on wading through these complicated footnotes,” he said. In order to capitalize on the book-tour publicity, Leder started a blog, which eventually morphed into footnoted.com. It promises subscribers – in a footnote, naturally – that Leder is, “sifting through public company filings so you don’t have to.” But like most early Internet founders, Leder struggled to monetize the site, beginning by selling online advertising. “It became clear around 2007 or 2008 that advertising was not the way to go,” she said. Then, after she started selling annual subscriptions for $1,000 each in fall 2008, she realized that business model wasn’t going to work either. That’s when Leder began talking to Morningstar Inc. about a business relationship. In 2010, the Chicago investment research firm bought footnoted for an undisclosed price and Leder moved her family from New York to Chicago to run the site for them for the next two years. But the arrangement wasn’t a good fit for either side, and Leder bought the company back in late 2012. The following year she moved to California, following her husband, Scott Cooper, a storyboard artist for DreamWorks Animation SKG Inc. in Glendale. The couple has a 5-year-old son. “For the next six months, I rebuilt the site and then relaunched it in March 2013 with a focus on institutional investors,” she said. So far the site is bringing in less than $1 million in annual revenue but it is profitable for Leder, who contracts with five freelancers who contribute content from markets around the world. She is periodically approached by private equity investors about selling but said she doubts she will. “I like the flexibility I have as a small business,” she said. “I honestly hope I never have to work for somebody else again.” Natural irreverence Leder’s day typically begins early when she knows many public companies will be filing their proxy statements or quarterly reports, or releasing the last-minute flood of paperwork she terms the “Morning Morning Dump” or the “Friday Night Dump.” Out of the 650,000 annual filings made with the SEC, footnoted closely follows the documents generated by roughly 200 ticker symbols, looking for particular words and phrases. “We’re constantly updating the site and we allow customers to subscribe to our alerts, so if we write about a company they care about, they’ll get an email,” Leder explained. She won’t say how many subscribers she has or who they are, due to confidentiality agreements. “Hedge funds are notoriously secretive. They guard the services they use and how they use them,” she said. The fact that hedge funds pay Leder to do work they could ostensibly handle in-house may seem odd. But Minow said it’s not hard to understand given the hegemony of Wall Street culture. “There’s a strong herd mentality that allows elements that should be central to securities analysis to be overlooked all the time. Like, if the CEO’s father is on the compensation committee, it’s probably an issue,” Minow said. “It’s almost as if securities analysts are trained not to rock the boat, which is why we had the sub-prime (mortgage) crisis.” Going against the grain comes naturally to Leder, who grew up in Brooklyn with an accountant father and a mother who worked for non-profit organizations. “I like being able to solve a puzzle and I’ve always been a bit of a contrarian. When I was writing the book, I was thinking about (disgraced energy giant) Enron. They spent all this time trying to show you how wonderful they were but in the end, the emperor had no clothes. It’s part of my personality to enjoy looking underneath the covers and pulling back the curtains.” While she applauds the added transparency in financial markets since the 2007 market crash, however she’s not a fan of regulation for regulation’s sake. Congress reacted to the crisis by passing the Dodd-Frank Wall Street Reform Act, but sometimes the details don’t make sense. And even after years of chronicling executive pay excesses, Leder said she’s not persuaded that providing the ratio of CEO pay to the average worker’s pay is going to make that much of a difference. “And I would certainly argue that compensation is an important factor if someone’s getting overpaid for not doing much work, but it’s very subjective,” she said. “Maybe they’re not overpaid if the stock goes up 50 percent.”

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