GE shares plunge 15% after Madoff whistleblower claimed the company is a ‘bigger fraud than Enron’ and a bankruptcy waiting to happen
- Fraud investigator Harry Markopolos published bombshell report on Thursday
- Accused GE of hiding $38.1 billion in potential losses and concealing debt
- Markopolos previously blew the whistle on Bernard Madoff’s Ponzi scheme
- Now he is working for an undisclosed hedge fund that bet against GE stock
- Shares in the company plunged as much as 15% after the report was released
- GE blasts the investigator’s allegations as ‘meritless’ and ‘unsubstantiated’
General Electric shares fell as much as 15% on Thursday after fraud investigator Harry Markopolos, who blew the whistle on Bernard Madoff’s Ponzi scheme, said GE was concealing deep financial problems.
In a 175-page report, Markopolos accused GE of hiding $38.1 billion in potential losses and asserted that the company’s cash situation was far worse than it had disclosed.
‘GE’s true debt to equity ratio is 17:1, not 3:1, which will undermine its credit status,’ Markopolos said in the report, which was commissioned by an undisclosed hedge fund that has taken short positions on GE stock.
The report says GE is insolvent and asserts that its industrial businesses have a working capital deficit of $20 billion.
In a statement to DailyMail.com, GE blasted the allegations as ‘meritless,’ adding: ‘The company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims.’
Harry Markopolos, an independent financial fraud investigator, is seen in a file photo. In a 175-page report, Markopolos accused GE of hiding $38.1 billion in potential losses
A file photo shows the General Electric logo. General Electric’s stock is tanking after a report which claims the company has been misleading investors
The report echoes the assertions of some of Wall Street’s more skeptical analysts, who have long raised alarms about GE’s low cash flow, frequent accounting charges and writedowns and what they describe as opaque financial reports.
The report adds that ‘GE’s $38 billion in accounting fraud amounts to over 40% of GE’s market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds.’
In a statement GE said: ‘We remain focused on running our business every day and … will not be distracted by this type of meritless, misguided and self-serving speculation.’
GE said it ‘stands behind its financials’ and operates to the ‘highest-level of integrity’ in its financial reporting.
GE said Markopolos was known to work for unnamed hedge funds that typically benefit from short selling a company’s stock.
A disclaimer in the report stated that it was drafted by Forensic Decisions PR LLC, which will get compensation from a third-party entity that could benefit from a decline in GE’s share price. The report did not name the entity.
Speaking on CNBC on Thursday, Markopolos said he would receive a percentage of any profits generated by the report, but declined to provide details about the compensation or name the fund involved, which he said was ‘a midsized U.S. hedge fund.’
GE CEO H. Lawrence Culp Jr and wife Wendy are seen at an event in New York City in 2015
GE shares were down 11% at $8 in morning trading.
In the past two years GE has announced more than $40 billion in asset writedowns and accounting charges. The company also has said its accounting is being investigated by the U.S. Securities and Exchange Commission and the Department of Justice.
The report details GE’s exposure to long-term care insurance, the subject of a federal class-action lawsuit awaiting a decision on GE’s motion to dismiss.
It says GE’s financial statements about its insurance business do not correspond to those of eight insurers that Markopolos says hold about 95 percent of GE’s exposure.
Markopolos is best known for alerting regulators in the early 2000s to signs that money manager Bernard Madoff’s investment firm was a Ponzi scheme, a deception in which unusually high returns for early investors are generated with money from later investors. Madoff was arrested in 2008 and later sentenced to 150 years in prison for the fraud.
John Hempton co-founder of the Sydney, Australia-based Bronte Capital hedge fund, wrote in a blog post Thursday that GE’s 14.7% average profit margin in recent years was in line with the returns of its industrial peers, not ‘too good to be true’ as Markopolos alleges.
‘GE remains the unequivocal leader’ in medical imaging and jet engines and its currently depressed profit margin will likely rebound, he wrote, adding, ‘Harry’s report is silly. The market should ignore it.’
GE’s full statement in response to allegations of accounting fraud
‘The claims made by Mr. Markopolos are meritless. The Company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims. GE operates at the highest level of integrity and stands behind its financial reporting. We remain focused on running our businesses every day, following the strategic path we have laid out.
‘Mr. Markopolos openly acknowledges that he is compensated by unnamed hedge funds. Such funds are financially motivated to attempt to generate short selling in a company’s stock to create unnecessary volatility. The report states that his company ‘entered into an agreement with a third-party entity to review an advanced copy of the Report in exchange for later-provided compensation….those positions taken by the third-party entity are designed to generate profits should the price of GE securities decrease’ and ‘members of the Company are personally in possession of securities, derivatives, and/or other financial instruments of, and/or relating to, GE, which may generate profits should the price of GE securities decrease.’
Addressing Mr. Markopolos’ allegations:
· GE Insurance: We believe that our current reserves are well-supported for our portfolio characteristics, and we undertake rigorous reserve adequacy testing every year. The future implementation of the GAAP insurance accounting standard does not align GAAP and statutory reserves as Mr. Markopolos alleges, but rather will be dependent on a number of variables that will not affect statutory accounting, which drives our funding requirements.
· BHGE accounting: As a majority shareholder of BHGE, we are required to report BHGE on a consolidated basis under U.S. GAAP, contrary to what Mr. Markopolos alleges. Further, consolidation of BHGE by GE includes additional disclosure of BHGE’s results made through BHGE segment results reporting in the notes to GE’s consolidated financial statements. BHGE is also a stand-alone SEC registrant with its own separate SEC filings under Form 10-Q and 10-K as a separate company. In the most recent 10Q, GE disclosed the loss upon deconsolidation of BHGE from a sale of our interest (taking us below our current majority position) would be approximately $7.4B as of July 26, 2019.
· GE’s liquidity: Contrary to Mr. Markopolos’ allegations, GE continues to maintain a strong liquidity position, committed credit lines, and several executable options to monetize assets. The Company ended the second quarter with $16.9B of Industrial Cash excluding BHGE, $12.5B of liquidity at GE Capital and access to $35B of credit facilities. As it relates to GE’s leverage targets, as the Company has previously stated during 2Q earnings, it expects to make significant progress towards these goals by the end of 2020.