GE misreporting finances by $38B, Madoff whistleblower claims

Dive Brief:

Harry Markopolos, an accountant who had given an early warning to the SEC about Bernie Madoff's Ponzi scheme exposed in 2008, says industrial giant GE is misreporting $38 billion on its financials.
That $38 billion is equal to 40% of the company's market value and, according to Markopolos, is being hidden by GE's use of accounting tricks that mask troubles in its insurance unit and its oil and gas business.
Once the irregularities are taken into account, Markopolos claims, the company's debt-to-equity ratio will go from 3:1 at the end of the second quarter to 17:1, which he called "woefully deficient” in a 170-page report he shared with news outlets.

Dive Insight:

GE CEO Larry Culp, in a statement released Thursday and reported by the Wall Street Journal, called the report an effort to destabilize the company's stock. “This is market manipulation—pure and simple,” Culp said. “Mr. Markopolos’ report contains false statements of fact, and these claims could have been corrected if he had checked them with GE before publishing the report.”

In a statement GE posted to its website that elaborates on Culp's remarks, the company accused Markopolos of being motivated by personal profit, since the hedge fund he's working with has a short position on the stock and is "financially motivated to attempt to generate short selling . . . to create unnecessary volatility." The company's share price dropped 13% to $7.88, the Wall Street Journal reported.

According to Markopolos, GE is hiding large losses in eight long-term care insurance programs and will need $18.5 billion in cash to deal with upcoming claims in those programs, and another $10.5 billion to cover a non-cash charge due in 2021.

GE said in its statement the reserves for its insurance programs are "well-supported for our portfolio characteristics." The company has fully disclosed the losses associated with the programs, and is in a strong liquidity position. It also said it expects to make significant progress towards its leverage targets by the end of 2020.

"We are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims," the company said. "GE operates at the highest level of integrity and stands behind its financial reporting."

Markopolos made a name for himself by warning the SEC about the Madoff investment scheme in 2000, eight years before it made national headlines, but the SEC did not act on the warning. Markopols wrote about the government's failure to heed his warning in a book called No One Would Listen (John A. Wiley & Sons: 2010).