Securities Attorney Briefing 16 August 2019

General Electric shares plunge after report alleges it’s a ‘bigger fraud than Enron’

General Electric shares sank Thursday after a Madoff whistleblower accused the conglomerate of using accounting tricks to mask the extent of its financial problems and called it “a bigger fraud than Enron.” Harry Markopolos, who alerted regulators about Bernie Madoff, published a report Thursday that said GE’s accounting irregularities added up to $38 billion. The investigator, who is collaborating with a hedge fund that wasn’t named, says GE understated its costs and liabilities and misled investors in its financial statements. The research, first reported by the Wall Street Journal, alleges the problems are focused on GE’s insurance business, asserting the company is short on cash. “GE will always take any allegation of financial misconduct seriously. But this is market manipulation — pure and simple,” chief executive Lawrence Culp said in a statement. “The fact that he wrote a 170-page paper but never talked to company officials goes to show that he is not interested in accurate financial analysis, but solely in generating downward volatility in GE stock so that he and his undisclosed hedge fund partner can personally profit.” GE shares fell 11 percent, to $8.01, on Thursday. The stock traded near $12 a year ago and $30 at the start of 2017. Researchers who reviewed GE’s financial statements from 2002 to 2018 alleged that the company does not have enough cash to cover claims on long-term care policies, which help people pay for nursing homes and assisted living. The report contends GE reported earnings when policyholders were young and not filing insurance claims, but then miscalculated how much it would have to spend to issue those benefits. GE does not have “adequate reserves” to cover the liabilities on its long-term care business, even though it boosted those reserves by $15 billion last year, according to the research. Markopolos, who declined to comment for this article, says GE is understating potential its losses on insurance claims, adding they will climb “at an exponential rate” and put the company at risk of bankruptcy unless it finds a way to cover the costs. More: