After it announced the sale of its PK AirFinance business on August 29, General Electric (GE) was the subject of more good news for investors. Yesterday, Reuters reported that a Manhattan federal judge had ruled out a lawsuit by investors accusing GE of hiding $24 billion in insurance liabilities and committing accounting fraud in its Power segment. But the matter isn’t over yet. The plaintiffs can still amend their complaint to include new facts.
The lawsuit, which was filed in late 2017, alleged that the company’s successive CEOs since 2013, Jeff Immelt and John Flannery, told investors that the insurance business had been sold, understating its exposure to LTC (long-term care) reinsurance liabilities. After the filing of the lawsuit, GE took on $6.2 billion in charges and vowed to provide $15 billion in reserves related to the legacy LTC liabilities.
Eyes on the Markopolos report again?
The fact that the judge allowed investors to amend the lawsuit puts the focus back on the Markopolos report. On August 15, Harry Markopolos, the Madoff whistle-blower, accused GE of committing a whopping $38 billion worth of accounting fraud in a 175-page report. The primary focus of Markopolos’s allegations was on GE’s legacy LTC liabilities. GE stock experienced an 11.3% fall on the day of the allegations—its biggest fall since 2008. Markopolos’s allegations include his belief that GE should take an immediate charge of $18.5 billion in relation to LTC reinsurance. He believes another charge of $9.5 billion should follow by 2021 when new regulations come in effect.
Since there are certain similarities in the investors’ and Markopolos’s allegations, and the Markopolos report is fresh information in the public domain, the plaintiffs could potentially use the report to amend their lawsuit.
Investors can also take cues from a Fitch report that ranked GE second among the 16 riskiest LTC insurers. Interestingly, it ranked Genworth Financial (GNW), a GE spin-off, the riskiest. The Fitch report seemed to affirm some of the concerns that Markopolos’s report, as well as the investor lawsuit, highlighted.
GE welcomes the ruling
In a statement emailed to Reuters, a GE spokesperson said, “We are pleased the court dismissed the vast majority of the claims against GE, including the securities fraud allegations related to the company’s legacy insurance business. We intend to vigorously defend the rest of the case and continue to believe the claims are without merit.”
Should GE investors celebrate?
Though GE seems to be ending an otherwise forgettable August on a positive note, its transformation is far from complete. The company still has billions of GE Capital assets to offload to become leaner.
Its legal troubles may also be far from over given that the judge is still allowing the plaintiffs to update the lawsuit.
The Markopolos report has also opened a Pandora’s box. The company will remain under public scrutiny for some time.
What are analysts saying?
Analysts have gotten a little less bullish about GE stock compared to the end of July. Its average target price, which was $10.78 at the end of July, now stands at $10.55, a 28% upside over its current price.