Late Monday, the Wall Street Journal reported that Groupon was under scrutiny by the U.S. Securities and Exchange Commission regarding its plans to restate its earnings.

No surprise, because it seems that Groupon has been under the SEC’s microscope since the moment it filed its first prospectus last summer. As has been well reported, Groupon had to revise its IPO filings several times in response to SEC questions.

But after the Journal story, I went back to read the exchange of correspondance letters between the SEC (here) and Groupon (here) to see just how rough the process was. Turns out: Pretty contentious.

The SEC sent its first letter on June 29 that ran to 14 pages and raised 73 separate issues regarding the first version of the S-1. Some of these were mundane stuff, like requesting art work be included, or moving the location of CEO and founder Andrew Mason’s letter to a different section. Others pointed out inconsistencies, like saying in one place Groupon was investing in tech that would give it competitive advantages, while saying elsewhere that many other competitors offered essentially the same service. Then there was the issue of Eric Lefkofsky, co-founder and Executive Chairman, making a comment to Bloomberg that Groupon would be “wildly profitable.”

But others sections raised more interesting questions, such as the one I and many others asked about why Groupon spent most of the $1.1 billion it raised last year on buying employees stock:

“You disclose on page 56 that you raised net proceeds of $1.1 billion through the sale of  common and preferred stock and that you used $941.7 million of these proceeds to redeem shares of your common and preferred stock, with the remainder being used to fund acquisitions and for working capital and general corporate purposes.  Please explain why you used most of the proceeds of these stock sales to redeem stock rather than to fund your aggressive growth strategy.”

Groupon responded in July 14 with its own 39-page letter trying to addressthe SEC’s numerous issues.

Regarding the Lefkofsky comment, Groupon blamed Bloomberg:

“The Company hereby advises the Staff that the reported statement does not accurately or completely reflect the comments or views of Mr. Lefkofsky.   Accordingly, and with due respect to the Staff’s request, the Company will not attempt to reconcile the alleged isolated statement with the comprehensive disclosures in the prospectus.  Mr. Lefkofsky did not arrange for, or agree to, an interview with Bloomberg and did not understand that his brief conversation with the reporter in question was on the record.  Mr. Lefkofsky’s disavowal of the reported statement as an accurate and full assessment of his views and his good faith intent to avoid any publicity relating to the Company is evidenced by the Company’s request that Bloomberg not publish the alleged statement.  As that request was not honored, the Company would propose to address any confusion or possible reliance on the reported statement with a clear caution to prospective investors that it should be disregarded as not fully or accurately reflecting Mr. Lefkofsky’s views and that any investment decision should be made based solely on the information contained in the prospectus.”

Regarding how it chose to spend the $1.1 billion, the company said:

“The Company advises the Staff that the decision to use such net proceeds to redeem shares was made by management and the board of directors based on an assessment that the Company’s projected cash flow from future operations would be sufficient to support the Company’s growth strategy.”

Otherwise, Groupon for the most part agreed to make numerous changes, big and small, to better define some terms and cut out others. It only pushed back in a couple of instances.

But the SEC wasn’t done. In a 9-page letter sent July 22, the SEC took issue with a number of Groupon’s responses and issued another 37 requests for more information and expanded disclosures. The SEC wanted more details about how and why Groupon recognized revenues, why it couldn’t provide more data about its subscribers, how it was accounting for marketing expenses, and its refund policy (!).

On Aug. 10, Groupon shot back another 17-page letter, for the most agreeing to provide additional data and make requested changes. In some cases, it pushed back, such as the SEC’s repeated request for information on “unintentional subscribers,” or people who entered their email address because they couldn’t figure out how to access the Groupon site. Groupon replied:

“The Company respectfully advises the Staff that first-time visitors to the Groupon website may view deals without providing their location and email address by clicking on the Groupon logo in the middle of the browser page. The Company respectfully submits that individuals who do not wish to be or remain subscribers may unsubscribe at any time. As a result, the Company believes the number of unintentional subscribers is not significant relative to the total number of subscribers.”

There seemed to be some progress, but on August 19, the SEC sent another 6-page letter with 23 issues. In this case, the SEC appeared concerned that Groupon was not disclosing enough details on its international operations where revenue was growing, but losses were apparently growing faster. They also wanted to know why the company did not count as compensation its move to buy shares back from Mason above their “in excess of fair value.”

Groupon responded with additional information on August 29, and things seemed to be moving ahead.

But then Groupon filed a letter on Sept. 2 regarding a phone call between the company and the SEC held on Aug. 31. The nature of the call was regarding Mason’s “leaked” internal email in which he bashed critics and naysayers who were questioning the company’s financials and business prospects (which it seems the SEC was doing as well!) The memo was first published by Kara Swisher on All Things D.

What did the SEC want to know? According to Groupon:

  • “Confirm that Andrew Mason’s e-mail was sent only to employees of the Company and indicate the date on which it was sent.
  • What steps did the Company take to limit dissemination of Andrew Mason’s e-mail by employees of the Company?
  • Provide an analysis of whether Mr. Mason’s e-mail constitutes a violation of Section 5 of the Securities Act of 1933.”

So what did the company say? Naturally, it blamed the damned Internet. Or rather, those pesky bloggers and other assorted journalists:

“Due to the inherently unmoderated nature of today’s Internet-based media, as well as the expanded coverage in print and broadcast media given to non-public companies, the coverage regarding both the Company’s business and the proposed offering involves a blend of traditional reporting and analysis and unbalanced speculation and commentary. Certain of the commentary regarding the Company’s business model and sustainability, in particular, has had negative effects on employee morale as well as the Company’s ability to attract and retain employees. In an effort to ease the concerns of its employees while being mindful of the Company’s quiet period restrictions, Mr. Mason sent a confidential e-mail to all of the Company’s employees in North America and senior managers of the Company’s international operations, as noted in the Company’s response to Comment No. 1 above.

The purpose of the e-mail was solely to improve employee morale and provide information to employees in response to erroneous media reports that brought into question the integrity of management and the Company’s ability to continue as a going concern.”

But the SEC apparently wasn’t satisfied, and this touched off a series of three calls among lawyers, accountants, Groupon execs, and SEC officials. The SEC variously wanted a better explanation of why Mason’s email didn’t violate securities laws; why the company’s decision to buy his stock above market value shouldn’t be counted as compensation; and lingering questions over the company’s financial presentation.

On some of the accounting issues, the company acknowledged it was struggling to respond:

“The materiality of the information presented, coupled with novelty of the accounting issues presented by the daily deal industry, including the challenge of evaluating this industry against the gross versus net criteria in the current guidelines, warrant some deviation from the strict construct of that standard—as has been the case with other industries and registrants. Moreover, the Company would welcome input from the Staff as to other forms of presentation that would provide investors with the requested information in as clear and consistent a manner.”

The company did lay out a fairly dense and detailed legal argument in defense of Mason’s email here:

“Mr. Mason’s e-mail was not a publication or publicity effort. As discussed above, it was a confidential communication not intended for public release, and it contained reminders to refrain from discussing any aspects of the Company’s business during the registration process.”

The company argues, also, that a search of Google News for stories about Groupon after the email leaked produced fewer results than searches before, indicating attention had declined, not increased. It also argued that it was a different case than the Playboy interview given by the Google founders or a New York Times interview by Salesforce.com and should not result in the SEC imposing a “cooling off period” before the IPOs or limiting Mason’s ability to communicate with employees.

Groupon also continued to insist that it was justified in not counting Mason’s stock repurchases as compensation.

After that, the SEC was apparently satisfied with the arguments regarding Mason’s email. But there was an additional phone call, and several more letters from Groupon and one more from the SEC on Oct. 3 raising more questions about definitions and disclosures.

So, how did this eventually get resolved? Well, apparently, it didn’t. Not exactly. Apparently still in limbo, Groupon filed an official request on Nov. 1 to have its registration declared “effective” even though the SEC might still have issues. There is no response filed from the SEC, though apparently it was granted because Groupon went public on November 4.

Of course, in the wake of the accounting revelations, last week, some are now asking whether the SEC should have allowed the Groupon IPO to go forward. Mason acknowledge he made “bush-league mistakes” before the IPO by misstating revenues. (Though in the exchange of letters with the SEC, Groupon had wanted to correct the mistake by adjusting numbers in the next quarter. The SEC insisted the company explicitly call it a revision, giving greater attention to its error).

But now, it seems, Groupon is in the SEC crosshairs after only a short break. And I can’t imagine the company has earned a lot of trust or goodwill from the agency up to this point. Whether that results in an even rockier review this time around remains to be seen.

While much of the spotlight will fall on Mason, it’s also important to remember that he was guided by a lot of attorneys accountants and investment bankers throughout this process. The company has paid them millions of dollars and fees. An investment that hasn’t provided a very good return.