A report was released last week by Harry Markopolos, working for an undisclosed hedge fund, that alleged that General Electric has masked the depths of its problems and, as a result, there are “inaccurate and fraudulent financial filings with regulators.”
According to WSJ writers who viewed the 170-page report, there is a mixture of detailed financial analysis and sweeping claims. When interviewed, Markopolos cited the need for GE’s insurance unit to bolster its reserves by $18.5 billion in cash and claimed that the accounting problems amount to $38 billion, roughly 40% of GE’s market value. CEO Larry Culp was straightforward in his response, saying, “This is market manipulation – pure and simple.” Culp stated further, “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.” But, then, that seems to have been the point, verified by Markopolos himself who reported that he and his colleagues are working with an undisclosed hedge fund, which is betting GE’s share price will decline (ref. WSJ). One struggles to figure out how this is legal, not to mention ethical. GE has responded to the claims by saying that the company “has a strong liquidity position, committed credit lines, and several executable options to monetize assets.” As we have discussed in earlier posts, the company has gone through two difficult years but has shown signs recently of stability and has increased its financial guidance for the first time in years. During the past two years, the SEC has had questions about the accounting issues in the insurance holdings as well as in the power division. Because GE has been responding to those official queries openly, it seems particularly adverse for a private group to mount their own claims that have not, to date, been substantiated. An earlier article in the WSJ citing those unfortunate claims cited that fact by saying, “the claims are quite likely wrong, but they will still hurt the company.” That sounds about right.