An accounting expert who raised red flags
The Ponzi scheme has a new goal:
In a research report posted online on Thursday,
claims the conglomerate is struggling has masked the depth of its problems, resulting in inaccurate and fraudulent financial filings with regulators. The report, which has more than 170 pages and was reviewed by The Wall Street Journal, is a mix of detailed economic analysis and sweeping claims.
Mr. Markopolos said in an interview ahead of the release of the report, the group found that GE's insurance unit would need to bolster its reserves by $ 1
“GE is behind the economy. We work with the highest level of integrity in our financial reporting, and we have clearly detailed our financial obligations, a GE spokesman said in an email before the report was published. "Although we cannot comment on the detailed content of a report that we have not seen, the allegations we have heard are completely false and misleading."
Mr. Markopolos said he and his colleagues are working on an undisclosed hedge fund, which is betting that GE's stock price will go down. Markopolo's group gave the investor access to the research before publication and will receive a portion of any trading revenue. He refused to identify the hedge fund. The group also shares its findings with securities regulators, and hopes to get a cash reward as part of a whistleblower program, Markopolos said.
The group's research indicates that GE has low working capital – a key measure of liquidity – and that the cash situation is far worse than was disclosed in its regulatory filings.
GE said that it has not been contacted by Mr. Markopolos, and that the group's report was produced to help short sellers make money by creating volatility in GE's shares. "We will not be distracted by this kind of merciless, deceptive and self-serving speculation, nor will anyone in the investor community," the GE spokeswoman said.
The Boston-based investor-turned investigator warned the Securities and Exchange Commission about the Madoff investment scheme years before it went public, but was ignored. In a recent campaign, Markopolos helped expose a foreign currency scandal in several banks. He has helped spawn an alert industry with cash for tips.
GE is already under investigation by the SEC and the Department of Justice for potential accounting problems that have emerged over the past two years related to the insurance portfolio and issues in the power division. The company has denied accounting fraud in response to lawsuits and said it is cooperating with investigators. GE has said it is considering switching auditors after using KPMG LLP for more than a century.
The Markopolos Group said it plans to present its report to the SEC and meet with a federal prosecutor and investigators on the findings. In the report, the group says that some information will only be given to law enforcement.
A SEC spokesman declined to comment.
After two difficult years, GE has shown signs of stability in its operations this year and recently pushed higher financial guidance for the first time in many years. From the perspective of an investor investing in the share price, much of the decline in the GE share has already occurred. Shares are close to $ 9, where they have spent much of 2019. The share price was over $ 30 at the beginning of 2017 and close to $ 7 at the end of 2018.
The Markopolos Group includes
co-founder of MMS Advisors, forensic accountants who specialize in the insurance industry. The group worked for seven months to analyze GE's accounts.
Mr. Markopolos said he will publish the report now because the group has just finished the work. It had been working on another insurance case when GE's insurance problems saw it, he said.
The group claims that GE's long-term insurance holdings are a greater responsibility than the company allows. The report estimates GE will need to increase its insurance reserves by $ 18.5 billion in cash and incur a $ 10.5 billion expense due to an accounting change required by 2021.
These figures are at the top of a reserve raise of 15 billions of dollars already taken by GE seven years to cover exposure to long-term care policies, which cover expenses such as nursing homes and assisted living. Policies have proven to be a problem for many insurance companies. The companies drastically underestimated the number of future claims and how long people would draw on coverage before they died.
Mr. McPherson said the group found problems with GE's long-term insurance by reviewing statutory insurance filings, financial documents required by state regulators that require different accounting than annual financial statements.
The group went back a decade, and because GE's long-term care business involved reinsurance policy issued by other insurance companies, it also investigated the underlying filings with the other insurance companies.
The report claims that insurance premiums paid to GE are low compared to rivals who typically receive and that GE receives no premiums at all on more than a quarter policy, because these contracts are considered paid in full. The group says that even after the $ 15 billion increase, GE's reserves are well below what would be expected for such a troubled policy group.
GE in the first years front-loaded gains from long-term business of collecting premiums when policyholders were small, the group argues, but failed to properly record reserves as it covered the population and the requirements ran at higher levels than originally anticipated.
In March, GE executives were arranged for a conference call to assure investors that they had managed the insurance business. GE said it planned to push to raise political premiums and shift investments to increase returns and that it had sufficient reserves to meet expected requirements. "We think our assumptions are appropriate overall,"
chief of the insurance unit, said that time.
The Markopolos Group also claims that GE's ownership of the Baker Hughes oil and gas business is not properly accounted for, and that the company should have posted $ 9.6 billion in losses on its investment. Last year, GE recorded a $ 2.2 billion loss on the sale of shares of Baker Hughes stake, reducing ownership from 62.5% to 50.2%.
In SEC filings, GE has revealed that sales below 50% will trigger it to stop reporting Baker Hughes financial performance as part of its own and record the loss on the remainder of the investment. GE said the paper loss on the remaining investment was about $ 7.4 billion as of July 24, according to the company's 10-Q report.
Mr. Markopolos said that Baker Hughes' stake is now "strictly an investment" and that as of 2018 GE has been wrong to record the loss, thus inflating its financial results. GE should simply record the value of the investments in the company, said Markopolos, a change he said could burden GE's debt agreements.
GE replies that as a majority shareholder of Baker Hughes, it is required to report consolidated results for Baker Hughes, under approved accounting principles. GE says it provides more transparent reporting by including Baker Hughes' income and expenses and assets and liabilities, rather than just providing a value for the investment.
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