due diligence footnote

When reading a book at home you may opt to skip the footnotes. However, over the course of an investigation that’s where we sometimes discover hard-to-find but very important details for our cases. Footnotes in court cases, securities filings or financial statements can contain some of the most revealing pieces of information within the documents.

What could it mean when “the notes just don’t make sense…”

For anyone who followed the demise of Enron, you may recall that a footnote in the company’s 2000 financial statements described some very complex financial maneuvering, including the use of “special purpose entities” or SPEs. The footnote revealed a ballooning list of partnerships it was using to hide its debt. Through the partnership arrangements, Enron never put a dollar amount on its potential obligations, and even the arrangements were never fully disclosed. An analyst was once quoted as saying, “The notes just don’t make sense, and we read notes for a living.” However, it provided enough for investors to believe they were not looking at the entire picture. This led to a number of investigations, including by the SEC, the Department of Justice and Congress. And well, you know how that turned out for Enron…

Footnotes in lawsuits[1] or financial statements reveal interesting tidbits

Information in footnotes usually doesn’t lead to Congressional investigations but can still provide tidbits that aid our cases. Recently I was looking into a subject with an extremely common name, which led to many possible criminal cases and time spent weeding through a large number of filings to determine whether the cases were related to my subject or a namesake. One federal criminal case had a voluminous number of filings, but none listing personal identifiers that would help rule this case in or out as a match. Finally, a footnote provided enough information to rule this case out – it indicated the date the subject would have turned 18 – thus, giving me his actual birthday.

When reviewing lawsuits or financial statements, footnotes could also reveal information on an asset, liability, debt obligation, property lease, currency exchange rate at a particular point in time or references to additional lawsuits, to name a few.

A footnote to a footnote?

Footnotes in filings submitted to the SEC also contain a wealth of information on such items as corporate structure, related party transactions, dates an executive joined the company’s board or resigned, an executive’s salary, or use of a corporate jet or other company perks. Many times you can find information about an executive’s employment agreement or compensation.

Earlier this month, offshore contract drilling provider Transocean filed its proxy statement, which included what has been described as the $10 million dollar footnote, or the footnote to the footnote. When describing the compensation of Steven Newman, Transocean’s former president and CEO who stepped down in February 2015, there is a footnote next to “all other compensation,” which actually takes the reader to yet another footnote wherein Newman’s nearly $10.2 million compensation is further described as including $1.9 million in severance payments and $7.9 million in non-qualified retirement benefits. That’s certainly a footnote Transocean’s shareholders would not want to skim over.


[1] A Blog on footnotes isn’t complete without a footnote itself! A footnote might also help a judge explain a definition or some legal reasoning. In a $42 million patent infringement case filed against Taylor Swift over the song “Shake It Off,” a judge used footnotes to give the definitions of a “meme,” another one for the definition of GIF, and even explained that for the purposes of the particular opinion, “the Court is not drawing distinctions between ‘player’ and ‘playa’ and ‘gonna’ and ‘gon-e.'” In case you’re wondering, Judge Standish ultimately found in favor of Swift and the other defendants concluding her opinion in part, “…Braham may discover that mere pleading Band Aids will not fix the bullet holes in his case. At least for the moment, Defendants have shaken off this lawsuit.”

Pre-transaction due diligence: is a Google search enough?