GE Is New Target of Madoff Whistleblower

An accounting expert who raised red flags about Bernie Madoff ’s Ponzi scheme has a new target: General Electric Co.

Source: WSJ | Published on August 16, 2019

In a research report posted online Thursday, Harry Markopolos alleges the struggling conglomerate has masked the depths of its problems, resulting in inaccurate and fraudulent financial filings with regulators. The report, which numbers more than 170 pages, is a mixture of detailed financial analysis and sweeping claims.

In an interview, Mr. Markopolos said his group found GE’s insurance unit will need to bolster its reserves by $18.5 billion in cash, and he faulted the way the company is accounting for its oil-and-gas business. All told, he said, the accounting problems amount to $38 billion, or 40% of the conglomerate’s market value.

“This is market manipulation—pure and simple,” GE Chief Executive Officer Larry Culp said in a statement that was released midday Thursday. “Mr. Markopolos’s report contains false statements of fact, and these claims could have been corrected if he had checked them with GE before publishing the report.”

GE stood by its financial reporting and said the Markopolos report was produced to help short sellers by creating volatility in GE shares. Mr. Culp accused Mr. Markopolos of being motivated by personal profit rather than accurate financial analysis.

GE’s shares dropped 11% to $8.01, a seven-month low, in Thursday’s trading. That is the largest percentage decrease since April 2008. Mr. Culp bought $2 million of GE stock at $7.93 a share Thursday, after buying $3 million worth at $9.03 Monday. A spokeswoman said the purchases reflect his confidence in the company.

Mr. Markopolos said he and his colleagues are working with an undisclosed hedge fund, which is betting GE’s share price will decline. Mr. Markopolos’s group gave the investor access to the research before publication and will receive a portion of any trading proceeds. He declined to identify the hedge fund. The group also is sharing its findings with securities regulators, hoping to collect a cash reward as part of a whistleblower program, Mr. Markopolos said.

Asked Thursday to respond to GE’s criticism of his motivation and methods, Mr. Markopolos was dismissive. “Who contacts the bad guys so they can cover it up,” he said.

The group’s research indicates that GE is short on working capital—a key measure of liquidity—and that its cash situation is far worse than disclosed in its regulatory filings.

GE responded that it has a “strong liquidity position, committed credit lines, and several executable options to monetize assets.” The company said it ended the second quarter with $16.9 billion of cash at its industrial business, excluding Baker Hughes, and $12.5 billion of liquidity at GE Capital.

The Boston-based investor-turned-investigator warned the Securities and Exchange Commission about the Madoff investment scheme years before it became public, but was ignored. In a more recent campaign, Mr. Markopolos helped expose a foreign-currency trading scandal at several banks. He has helped spawn a cash-for-tips whistleblower industry.

GE is already under investigation by the SEC and Justice Department for potential accounting issues that have come to light in the past two years related to its insurance holdings and problems in its power division. The company has denied accounting fraud in response to lawsuits and said it is cooperating with investigators. GE has said it is considering switching auditors after using KPMG LLP for more than a century.

The Markopolos group said it plans to present its report to the SEC and to meet with federal prosecutors and investigators about its findings. In the report, the group says some information will be given exclusively to law enforcement.

An SEC spokesman declined to comment.

 

Are you retail Agent Looking for a Quote?