GE rebounds after CEO acquisition, analysts defend the company

General Electric bounced back Friday after the CEO gained greater confidence by buying a large portion of the company's stock, and analysts defended the industrial giant.

GE's shares were up more than 6% Friday morning after the biggest fall since April 2008 a day earlier. GE shares had gained 11% on Thursday.

The stock began its downward spiral Thursday morning after Harry Markopolos, best known for pointing out irregularities with Bernie Madoff's investment strategy years before the ponzi scheme was suspended, published a report accusing GE of fraudulent accounting.

Culp, which took over the struggling industrial conglomerate last year, bought 252,200 shares for $ 7.93 each, according to a Thursday night filing with the SEC. The CEO has roughly doubled his stake in GE shares this week.

In the 1[ads1]75-page report, Markopolos accused GE of $ 38 billion in accounting fraud – "bigger than Enron and WorldCom together." He outlined a "long history" of accounting fraud at GE, which dates back to 1995, when it was run by Jack Welch.

"It's likely to make this company bankrupt," Markopolos told CNBC's "Squawk on the Street" on Thursday. "WorldCom and Enron lasted about four months. … we'll see how GE does."

An American hedge fund, which Markopolos would not name, paid Markopolos to complete the report. Markopolos told CNBC that he received a "decent percentage" of the profits the hedge fund would earn from investing in GE.

Culp, a former Danaher CEO, said the allegations were false and driven by incentives to make money from GE's stock decline.

"GE will always take allegations of financial mismanagement seriously. But this is market manipulation – plain and simple," he said in a statement. "Mr. Markopolo's & # 39; report contains false fact statements, and these allegations could have been corrected had he checked with GE before publishing the report."

Leslie Seidman, a GE board member and chair of the audit committee, also pushed back on the Markopolos report, which she said contained "numerous novel interpretations and direct errors about the actual accounting requirements."

"In his own words, he will personally be able to benefit from today's significant market reaction to the report," she said. . "He is selectively up front and runs widely reported regulatory processes and rigorous investigations without the benefit of access to GE's books and records."

Equity analysts didn't seem convinced that Markopolos had a cool-tight case, either.

Nick Heymann, head of William Blair's Global Industrial Infrastructure, said it was difficult to believe GE had deceived its financial reporting – especially after making several regulatory assessments of accounting and financial information for over two years.

"As such, we tend to find efforts to portray GE's current financial condition assuming that all three alleged cash or non-cash costs of a total of ~ $ 38 billion previously should have been recognized are, at best, unpleasant and at worst, most inaccurate, "Heymann said in a note to clients Thursday.

Citi research analyst and CEO Andrew Kaplowitz also supported GE, telling clients that while analysts "still digested" it, the report had "sufficient deficiencies" and Citi continues to believe Culp's ability to improve the company over time. Kaplowitz pointed to Culp's open-market share buyout Thursday, reflecting "high conviction that the allegations do not represent incremental unknown challenges."

"The 175-page report seems sensational and according to press releases, the author appears to have a financial interest in a GE stock loss, given a partnership with an undisclosed hedge fund," Kaplowitz said in a note to clients Thursday. we know that some of the allegations were already known and others & # 39; known unknowns & # 39 ;, leading to our conviction of the potential for stock dividends over time. "

Jim Corridore, Equity Analyst at CFRA Research, highlighted Markopolos and the anonymous hedge fund's motives for earning the stock decline.

"We have confidence in the increased transparency of GE's accounts under Larry Culp's management after years of financial turmoil under Jeff Immelt as GE's problems were created," Corridore said "We believe GE is moving towards improving its balance sheet and believes it has plenty of liquidity and access to capital markets to continue to operate and transition."

The conglomerate abruptly removed its former CEO and chairman John Flannery last year after just a year on the job and installed Culp as his successor. Flannery was appointed in August 2017, taking the reins from Jeff Immelt as GE's stock eroded regularly.

To be sure, some on Wall Street still have questions after the report.

Jay Gelb, chief executive and senior insurance equity research analyst at Barclays, said he was not yet able to say whether Markopolos' estimate of GE discrepancies was reasonable, "though there is certainly something about . "

An area in Markopolos & # 39; report focuses on is GE's long-term care insurance unit, which the company had to increase its reserves by $ 15 billion last year. By examining submissions to GE's counterparties in this business, Markopolos claims that GE is hiding large losses that will only increase as policyholders grow older. He claims that GE has made false statements to regulators on the device. Separately, he continues to find problems with GE's accounting for its oil and gas operations Baker Hughes.

Bank of America Andrew Obin said the charges appear to cover similar grounds as ongoing investigations by the US Securities and Exchange Commission, the Department of Justice and existing shareholder cases. While the company's valuation already assumes a meaningful disadvantage in GE's long-term insurance business, given current interest rates in the United States, they now have a more "conservative assumption about the discount rate on insurance."

Bank of America lowered its price target to $ 1 on Friday, citing ongoing market pressure on growth and margins in its power business, out-of-power "execution problems" and greater than expected capital requirements at GE Capital.

– CNBC & # 39; s Michael Bloom contributed reporting.