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7.7.21   4:29 PM

Anyone who's sat through a business journalism class or forensic accounting seminar has probably heard an instructor implore: "Read the footnotes!" The disclosures buried at the end of financial filings are often a goldmine of information that corporations would prefer to slip under the rug. But digging through them can be a time-consuming and labor-intensive process, and the news cycle tends to favor quick and easy headlines. Too often, interesting items in the footnotes go unnoticed. 

Michelle Leder stands as a proud exception to that rule. A business journalist who once wrote for The Tampa Tribune and Bradenton Herald in Florida, Leder fashioned herself into an expert on SEC filings, and always paid special attention to footnotes. She enjoyed the work so much and became so skilled at it that she wrote a book, Financial Fine Print: Uncovering a Company's True Value, and launched investigative business news site Footnoted. 

Footnoted was eventually purchased by Morningstar. She bought it back from the financial research company two years later.  Now an opinion writer for Bloomberg in addition to running Footnoted, she continues to plunge into filings and uncover interesting details, such as a string of provocative tidbits in Robinhood's recently filed S-1.  Those included an employment letter promising a $4.2 million signing bonus and "buckets of options" for Dan Gallagher, a former SEC commissioner who became the chief legal official for the trading app. She also found a note showing that payment for order flow, which caused regulatory issues for Robinhood in the past, represented 75 percent of all revenue in 2020 and 81 percent of revenue in the first quarter of 2021. 

We caught up with Leder and she talked more about how she came to create Footnoted as an antithesis to clickbait, and what other intriguing items she found lurking deep in Robinhood's filing.

This transcript has been edited for length and clarity.

  • Inspired by Nell Minow and Diana Henriques to dig into footnotes


    Business of Business: Well, just to start, can you kind of explain the story of Footnoted, how it came to be? What its business model is or was? And yeah, just kind of what it's all about?

    Michelle Leder: Yeah, so I've been doing Footnoted, for quite a long time. It's actually 18 years now. So I am original, like the "OG" of financial blogging, or maybe a grandma of financial blogging. I started after writing a book that came out in 2003. So just about 18 years ago, it came out in the fall, like, you know, late August, early September of 2003. And it was called Financial Fine Print

    My background was as a daily journalist, a daily business journalist. And so I wanted a way to continue the conversation with people. When you're writing a book, it's the type of thing that you write the book, and then maybe nine months later, it's actually published. And so there's a very long lag between, like, between what you've reported and when it actually sees the light of day. Twitter wasn't around in 2003. But, you know, now you just find something interesting, you tweet it out, it's instantaneous, right?

    So, you know, this was a way, you know, back then it was a way to sort of continue the conversation. And I didn't really start out thinking, "this is going to be a business model." This was really just a way to kind of hold myself accountable. To continue reading SEC filings. As a younger journalist, I had always been fascinated by SEC filings. I had someone as a mentor, you know, Nell Minow [vice chair of ValueEdge Advisors], who is an amazing woman. And, you know, she talked, she gave a presentation all about digging into SEC filings and what that meant. And I remember hearing that as a young reporter, and it just fascinated me that you can find all this stuff in SEC filings.

    And around the same time, I had also heard a presentation by Diana Henriques who was one of the star reporters for the New York Times. She has since retired from the Times, but you know was the driving force behind the Bernie Madoff stories. She had given a somewhat similar presentation also about how the documents would set you free, and to really focus on the documents. And the two of those together really got me started on this path of really digging into SEC filings.

    Some of it was also from my own investing experience. I had to had, at that point in my career, I had been out of college about 10 years. So I had worked at daily newspapers, and as a business journalist the whole time. And so I thought that, you know, I knew a lot about investing. And I got burned on shares of Qwest Communications. And I bought it and watched it go up and up and up, and then all of a sudden, it fell. And, you know, the shares were worth, you know, less than what I paid for them, which of course, you always want to avoid.

    And what was interesting to me, it was like, "What did I do?"  I had friends who were doctors or who were going through medical school at the time finishing there. And it was all like, "Well, what went wrong, let's do a post mortem." And what was interesting to me was that when I actually went through and read Qwest's 10-Q's, which I should have been reading, you know, I knew enough to read, but I didn't bother to do it.  Had I done that I would have sold the stock,  I would have seen enough red flags and those filings that I would have sold the stock and still made money.

    A lot of times what happens is that something is disclosed in a filing. And because it takes a lot of effort to get to it and not everyone does read the filings, you know, it can take like a couple of months until it becomes public knowledge or baked into the price.

  • How reading footnotes evolved into Footnoted


    And the business model, has that changed or shifted? I understand it was bought by Morningstar, and then you bought it back? How did that work exactly? 

    So the the business model initially, there was no business model. When I first started the site in 2003, it was really just to support the book. And for the first I think, like two years, the first page that you saw when you landed on Footnoted was basically the book homepage. Even though I was doing the blog every day, I basically made a point of writing something about an SEC filing every single day, it was like a, it was a tab off of the main Footnoted site.

    It was only after it started picking up around 2005, maybe 2006, after I've been doing it a couple of years, the Wall Street Journal called it "a blog for those in the know." And that's when I started to get more serious about it. I moved the blog, the content to the front of the first page landing page of the site. That's when I started. 

    I would say, like, the first two years, there was no business model. And then slowly, I became, you know, I focused on the business model. It became pretty clear to me that, you know, a lot of people were giving me advice like, "Oh, you should just write about Apple, and, you know, Apple and Google and that kind of thing, like write about three or four different companies." And that didn't really interest me, I really wanted to write about the broader set of companies.

    My first my very first post was about Delta Airlines, which was interesting. If I go back to like, August of 2003, it was it was about Delta Airlines. That was the business model. It became pretty clear to me there was no clickbait, no SEO model for SEC filings. A lot of people were going in that direction, if you think back to the late 2000s, it was all about getting clicks, and all about clickbait. And, you know, that really stayed the model, quite frankly, for the next 10 or so years.

    It's only been relatively recently that people have moved more toward the subscription model, especially smaller publications. I would consider myself a smaller publication.  But you know, it was all about getting eyeballs. The bottom line is that you're only going to get a certain number of people who are interested in SEC filings no matter what. I think it's fascinating, but, you know, it's not Kim Kardashian by any stretch of the imagination.

    But do you have subscribers, right?

    I did. Yeah.  I started a subscription-based model early on, and I think that was maybe around like, 2008, right after the market kind of imploded. It was not a good time to start a subscription model. And so I was doing that. And then Morningstar came along and bought the site in 2010. And I worked for Morningstar for the next two and a half years. And then I bought it back from them. 

    It turns out a lot of mergers, and it turns out this is sort of the dirty secret in M&A, they just don't work out. They don't work out for the founder, especially if you're a founder, and who's very passionate about your product. You know, and you get swallowed by a larger organization, of course, there's going to be changes, right? That's what happens that's normal. And some of those changes are good. And some of those changes are a little bit harder to swallow. When it's something as close something that you've built yourself. And I think a lot of founders, quite frankly, struggle with that.

    I'm sure you've interviewed other founders who, you know, have also had the same situation. I sold because it seemed like a good idea at the time. And, you know, things didn't work out quite the way that I had hoped them to work out. And so I went back on my own, being independent and that's where I've been, really, for the last eight years or so. We had a high-priced product that was primarily going to hedge funds and other institutional investors. We were doing custom research for a number of institutional investors as well. So it was going very well. 

    So there's been ups and downs on the road to entrepreneurship, obviously. I'm still very passionate about SEC filings and what you find in them. And, you know, I think that they're important for, you know, maybe not like just a passive investor to read. But if you're actively buying stocks, you need to be knowing what's going on at the companies that you own.

  • The best stuff buried in Robinhood's filing


    Right, right, of course. Yeah, I mean, I remember from journalism school people talking about making sure you read the footnotes, but having the discipline to do that is really pretty exceptional. Where do you find the most interesting footnotes? 

    I spend a lot of time looking at 8-Ks, 10-Ks, 10-Q's, the proxy statements. The proxy statements are always very fascinating, because that's one of the few places where people talk about pay and compensation, right? And so, the same way, where you probably wouldn't ask me, "How much do I make a year," and I wouldn't ask you how much you make a year. In the proxy statement, it's laid out for anyone to see, and the types of things that you see in there are kind of amazing, quite frankly.

    You see just all sorts of crazy things, not just regular compensation, but you'll see like, apartments in Manhattan, like people paying $18,000 a month for, you know, an apartment in Manhattan. Or you'll see a CEO, or CFO or someone else up the ladder, you'll see people paying to move someone else's [belongings]. Pretty much anything you can think of, any perk you can think of, you will find it. I found it in proxy statements. So I like to say that proxy statements are the sexiest documents, even though most people don't think about SEC filings being particularly sexy.

    But they are really interesting, because you get like a window into compensation. I remember reading, you know, Apple's filing and looking at like Al Gore [a director at the company] getting like four or five different laptops, and I'm thinking like, okay, you know, it's just sort of like you find things like that, like, that's not the type of thing that a company is going to advertise. "Oh, we give our directors, you know, four or five laptops and an iPhone and this and that." 

    One of my favorite findings was at Chesapeake Energy, and that was where the company disclosed that it had bought a map collection from the former CEO, Aubrey McClendon and had spent like $14 million on an antique map collection that was owned by the CEO. They were displaying in the corporate offices.

    There was another one where a company bought a fish shack, they called it a fish shack, but it turned out to be a 5,000 square foot lodge. I think like a "shack" and 5,000 square feet should be mutually exclusive. But you know,  you just see crazy sorts of things in there. 

    That brings us to the Robinhood filing [Thursday]. I was looking through that S-1 And I, you know, I don't look at S-1's all that often. But you know, when I do they, you know, it's it's usually pretty interesting. And you saw that the general counsel had gotten like over a $4 million signing bonus. Now, I recognize that signing bonuses are in vogue right now. But still $4 million, signing bonuses, that's quite a hefty signing bonus. And on top of that, $30 million worth of options. And, you know, that's, that's, that's, you know, a lot of money for an attorney, for someone on the legal side of things, the legal talent.

    That raises a lot of interesting issues and questions. There were a lot of other interesting tidbits in that filing, too. It talked about how, you know, one of the co founders, Vlad Tenev had received a subpoena from the US Attorney's Office for a cell phone. I don't remember reading that anywhere else. I don't remember the company putting out a press release on that or saying this. It was like, buried on page 40 something of the S-1. That's the type of thing you're going to find in a filing.

    You tweeted several things, and they were all fascinating.

    Thank you. As I was reading it, I was just like, "What? What is this?" It was kind of like it was kind of like a little shocking to me. So hopefully I came across in the tweets.

    Yes, definitely. Are there any kind of sort of broad conclusions you can start to draw from some of these things that are disclosed, for instance, perhaps Robinhood might be expecting to be attacked by regulators for quite some time? Maybe that's why they might have wanted to pay a former SEC commissioner so much to be on their payroll? 

    Dan Gallagher's a smart guy. I'm sure I'm sure he went in there with eyes wide open and was like, "You know, this could be a potential problem. And I don't mind taking it on, but I'm gonna, you know, I mean...risk reward, right?" If someone asks you to go work at a nuclear reactor, are you going to do it for minimum wage? Are you going to expect a premium?  This is kind of like working at the nuclear reactor in a different way, shape and form. But you're dealing, you're dealing with  a company that has a lot of regulatory issues. They're very clear in their risk factors about the payment for order flow, the, you know, which is, you know, a major, major part of their business model. And then another major part of the business model is  crypto currency.

    What was interesting also is they said that something like over 50% of the out there payment for order flow revenues, and something like over 75% of total revenues came from companies they didn't have any contract with. And so you have to wonder, if, you know, and I'm assuming, because it's been well-reported that one of those companies is Citadel, but if Citadel senses that this is too much, this is too stressful for them, they could just pick up and leave. I'm sure they don't appreciate being dragged through the mud. They're a large investment fund. I'm sure they don't appreciate being dragged through the mud on this, like, you know, being tied to Robinhood and doing something that's potentially, maybe...I'm not saying that it's illegal or not..

    It's attracting attention from regulators. For whatever reason.

    Yes. If you look at it, there's all sorts of state regulators, the Attorney General in Massachusetts, looking at it. There's, you know, members of Congress, there's been hearings, there's the SEC. Yeah, you know, I mean, most people want to like walk the other way, run the other way from that kind of thing. And I guess, if you're going to run toward it, then you're just going to ask for a lot of money to be compensated.

  • J.Jill, and finding evidence in filings of gender-based pay disparities


    That makes sense. You also found some interesting things in the filings for J. Jill, which you mentioned in a column for Bloomberg, talking about the incoming CEO, the woman CEO being paid $300,000 less than the former male CEO. How did you go about determining that? 

    We see a lot of stories about women getting into the C-suite a lot more. And that's very encouraging as a woman. It's certainly great to see more women being promoted and making it to the top of the totem pole, so to speak, whether it's CEO or CFO. I started seeing a lot more women CFOs. And so I wanted to take a look at that, you know, there's very few women CEOs of let's say, you know, even Russell 1000 companies, but what I want to do is like, take a look at a lot of these CFOs and see, are they being paid the same amount as their male counterparts? 

    I first noticed this actually, back in 2012, when Ginni Rometty was named CEO of IBM, and she was being paid $300,000, less than the man she replaced, and it was just kind of sitting there in the back of my mind. And so recently I had found another example, at Merck, when they named a female CFO, and then the male who had been the man who had been CFO went up to become CEO, and his salary continued to be high, but then her salary was not as high as his was before.

    It's not obviously...if you have two people, you know, even though they have the same title, it can sometimes be, you know, someone's gonna have more experience and or less experience. But if someone is the CEO, they have a certain amount of responsibility. Especially at a large publicly traded company, and they should be, you know, paid the same as the man. If you want to say like, "Okay, well, she doesn't have as much experience." But like $200,000 or $300,000 less seems like, you know, less than it ought to be. I don't know what that number could be.

    One of the things I raised is a lack of experience or lack of opportunity, there aren't a lot of women who get to be CEO. And so in a major, large, publicly traded company, so maybe it's just that now,  it's still gonna take a little while, right? You still hear about the the pay disparity, you know, and women making less. But if it's happening at the upper echelons of American companies, what does that mean for sort of a middle level, like a marketing manager, or a finance manager or somewhere else a lot further down the pecking order.  I think it's really important to focus on this.

    I think that there ought to be some sort of pay parity. Maybe if it's not exactly because this person doesn't have as much experience, you know, but again, $200,000 to $300,000 less seems significant. What I found with Merck, for example, was you know, it's a, it's a Dow 30 company, and they have made a lot of progress. Their their board of directors has three women on it, which is very impressive. So, there's definitely some positives there. I don't mean to say it's all negative. But when you have a situation where, you know, a woman is making significantly less than the man she replaced, it does raise some questions about about that, and why the pay parity doesn't exist there.

    Right. And just backing up a bit, I meant to ask you initially, what got you into journalism in the first place? You didn't have a journalism degree, right?

     I had an economics degree. So I was always interested in business and business journalism. And so that's basically been the arc of my career is focused on business and business journalism.

    Where did you first start?

    I worked at the Tampa Tribune, that was my first job out of college. It no longer exists. Yes, shut down. Yeah, it was shut down when the St. Petersburg Times, which is now the Tampa Bay Times, bought the Tampa Tribune about four or five years ago, I can't even remember. And they shut it down. So and so I spent, like, you know, the first four years of my post college life down in Florida. It was a good place to be a journalist.

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