General Electric (GE) stock has fallen on Thursday. Harry Markopolos is the whistleblower in the Bernard Madoff Ponzi scheme case. He stated that General Electric’s financial filings masked the extent of its problems.
Whistleblower calls out GE
In a 175-page report, Markopolos stated that the company is hiding potential losses worth $38.1 billion. The company’s cash situation could be worse than it disclosed in regulatory filings. Markopolos focused on General Electric’s long-term care insurance business.
GE’s fraud compared to Enron and WorldCom
The report said, “GE’s true debt/equity ratio is 17:1 not 3:1 which will undermine its credit status.” Markopolos said that the current ratio of 0.67 would raise ongoing concerns. The report also said, “This is my accounting fraud team’s ninth insurance fraud case in the past nine years and it’s the biggest, bigger than Enron and WorldCom combined.” Markopolos said, “GE’s LTC losses will continue rising at an exponential rate until it either files for bankruptcy protection or finds some way to out-earn its LTC liabilities.”
GE responds to whistleblower’s allegations
General Electric shares were trading down 9.5% until 12:15 PM ET compared to the S&P 500’s (SPY) gain of 0.19%. The company responded to the report. General Electric said, “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.” As reported by Reuters, General Electric said that it “stands behind its financials.” The company operates to the “highest-level of integrity” in its financial reporting. Did the report mean to create volatility in General Electric stock to benefit short sellers? They’re benefitting plenty based on today’s prices.
Markopolos probes GE for a hedge fund
Markopolos admitted that he’s probing General Electric for a hedge fund. However, he didn’t disclose the fund’s name. While talking to CNBC, he said, “I can’t — I promised confidentiality.” He also said, “It’s a mid-sized, U.S. based hedge fund.” Markopolos said that he gets a “decent percentage” of profits that the hedge fund would make betting against General Electric. General Electric is already under an SEC probe regarding its accounting practices.
Stock has fallen since second-quarter results
General Electric stock has been on a downward trend since its second-quarter earnings. The company’s results were better than expected on both the revenue and earnings fronts. However, analysts weren’t impressed with the company’s outlook. The stock has risen about 19% YTD.