General Electric Fraud: Who should you trust Harry Markopolos or GE?

Harry Markopolos, fraud investigator raised an alarm of massive fraud by GE, General Electric, committing $38 billion amounting over 40 per cent of its market capitalization. Harry released a 170-page report yesterday where he mentioned each detail of the massive fraud claimed to be bigger than Enron.

Harry’s report is focused on GE’s insurance business, also he stated that the company is going to file for Chapter 11 bankruptcy soon. "Make no mistake, GE's current and past employees are the victims here as are GE's lenders, vendors and customers, all of whom have to deal with the aftermath of accounting fraud," Markopolos said in his report. "The only winners are GE's fat cat executives who enrich themselves with underserved bonuses as they drove this once-proud beacon of American business in the ground."

After the release of Harry’s report, the company faced a huge decline in the share market. GE shares fell by 11 per cent, the steepest drop in over a decade.

The report stated, the company is struggling to recover from the downturn in its power generation business that has marred results for more than two years.

This was one side of the story where Harry Markopolos claiming this biggest fraud. But the Giant, GE, is denying about the fraud and dismissed the report. Yesterday, the company addresses the report.

“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, General Electric, which may generate profits should the price of GE securities decrease.’”

GE addresses the allegations and clarified the doubts.

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.