General Electric Co. shares plunged Aug. 15 after Harry Markopolos, the investigator who exposed Bernie Madoff's Ponzi scheme, accused the industrial conglomerate of running a decadeslong accounting fraud to conceal the extent of its financial woes, claims that the company called "meritless."
Markopolos, who was investigating GE for an unnamed hedge fund, released a 175-page online report alleging that the company was hiding $38.1 billion in potential losses that may just be the "tip of the iceberg" and that its cash situation was "far worse" than disclosed in GE's 2018 financial report.
The purported losses include a $9.1 billion noncash loss tied to GE's acquisition of Baker Hughes due in 2018 and $18.5 billion in new cash immediately needed to boost the reserves of GE's long-term-care insurance unit. Another $10.5 billion noncash charge is also due in the first quarter of 2021 to equalize GE's statutory and GAAP reserves, the report said.
"These impending losses will destroy GE's balance sheet, debt ratios and likely also violate debt covenants," Markopolos said in the report, which projected GE's debt-to-equity ratio to hit 17:1 after accounting for the potential losses, compared with a 3:1 ratio in the second quarter.
Markopolos alleged that GE is insolvent, with its industrial businesses having a working capital deficit of $20 billion.
Markopolos said the accounting fraud dates to 1995, with the company changing its financial statement reporting formats every few years. He added that GE provides only top-line revenue and bottom-line profits for its business units, leaving out certain items.
In a statement, GE said Markopolos has no direct knowledge of the company and dismissed his allegations as "unsubstantiated." Markopolos said his report, which took seven months of research, looked at GE's financial statements for the past 17 years and used publicly available sources.
"GE operates at the highest level of integrity and stands behind its financial reporting. We remain focused on running our businesses every day, following the strategic path we have laid out," said the company, which revealed in October 2018 that it was under investigation by the SEC and the U.S. Justice Department for a $22 billion goodwill charge for a 2015 acquisition.
The conglomerate also said its current reserves are "well-supported" for its insurance portfolio and that its liquidity position remains "strong."
GE also questioned the intent of the hedge fund that Markopolos was working for. "Such funds are financially motivated to attempt to generate short selling in a company's stock to create unnecessary volatility," the company said.
GE shares were down more than 12%, to $7.91, shortly after 1 p.m. ET.
Following the fraud allegations report, GE CEO Lawrence Culp Jr. bought nearly $2 million worth of GE stock, according to an Aug. 15 filing. Culp purchased 252,200 shares for $7.93 each.
Culp also bought 331,684 GE shares for $9.04 apiece on Aug. 12, it was revealed earlier in the week.