Houston-based oilfield services major Baker Hughes a GE company on Aug. 15 saw its stock price tumble by almost 6% to its lowest level in almost eight months after its majority shareholder General Electric Co. was accused of committing "bigger fraud than Enron" and using Baker Hughes to do it.
Baker Hughes' stock price on the New York Stock Exchange fell from $22.01 per share Aug. 14 to $20.71 per share Aug. 15 following the release of a 175-page report by fraud expert Harry Markopolos alleging General Electric did not change accounting practices in 2018 so it could hide a $9.1 billion loss.
General Electric, which called the claims "meritless," saw its stock price sink by more than 11% on Aug. 15.
GE merged its oil and gas division with Baker Hughes in a $7.4 billion acquisition in June 2017. Although General Electric held 62.5% of the merged company's stock, Baker Hughes remained independent and continues to trade independently.
Markopolos said General Electric in 2017 accounted for its holdings in the combined company as a Non-Controlling Interest, which was consistent with the merger transaction.
In a November 2018 stock sale, GE reduced its ownership stake in Baker Hughes to 50.4%, which Markopolos said required a change in accounting practices used since it had become an investor in the company strictly. Instead "GE improperly continued to account for its shares in BHGE as a Non-Controlling Interest in 2018," the whistleblower said.
"Maintaining a 50.4 percent interest in BHGE is a sham transaction with no business purpose done solely so that GE can create the false impression that GE has a reason to keep $9.1 billion in losses off of its books in 2018," Markopolos said.
In an Aug. 15 statement, GE said "we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims. GE operates at the highest level of integrity and stands behind its financial reporting."
"As a majority shareholder of BHGE, we are required to report BHGE on a consolidated basis under U.S. GAAP, contrary to what Mr. Markopolos alleges," the company said. "Further, consolidation of BHGE by GE includes additional disclosure of BHGE's results made through BHGE segment results reporting in the notes to GE's consolidated financial statements," the company said.
General Electric said when its split from Baker Hughes is complete, the sale of interest below its current majority position will result in a loss of approximately $7.4 billion as of July 26.
Baker Hughes, which reported an adjusted net income of $104.0 million for the second quarter, did not respond to requests for comment.