Investigator accuses GE of accounting fraud

The financial investigator who first blew the whistle on Bernie Madoff has now accused GE of a $38-billion accounting fraud.

Gregory Meyer and Mamta Badkar had the news for The Financial Times:

An accounting fraud “bigger than Enron and WorldCom combined” is hidden inside General Electric, according to the financial investigator who sounded the first alarms over Bernard Madoff’s Ponzi scheme.

GE, which dismissed the claims as meritless, saw its shares fall as much as 15 per cent after publication of a 170-page report by Harry Markopolos. He alleged that the industrial conglomerate’s accounts concealed a $38bn fraud in its insurance and oilfield services businesses. “I think that they’re a bankruptcy waiting to happen,” Mr Markopolos told CNBC.

Mr Markopolos is known for his — largely unheeded — warnings on the Madoff Ponzi scheme in the years before it imploded in 2008.

He and his team provided an advance copy of their report on GE to a hedge fund and said they would share profits from any market moves their allegations set off.

Larry Culp, GE’s chief executive, called that arrangement “market manipulation — pure and simple”. In a statement, he said: “The fact that he wrote a 170-page paper but never talked to company officials goes to show that he is not interested in accurate financial analysis but solely in generating downward volatility in GE stock so that he and his undisclosed hedge fund partner can personally profit.”

CNN’s Paul R. La Monica said GE suffered its worst day on the stock market since 2008:

General Electric fought back Thursday night after the company was accused of fraud and its stock experienced its worst one-day percentage drop since April 2008.

General Electric shares plunged more than 11% Thursday after Harry Markopolos, who is famous for blowing the whistle on Bernie Madoff’s Ponzi scheme in 2008, accused GE of orchestrating a massive fraud.

GE CEO Larry Culp on Thursday bought 252,200 shares at $7.93 per share, a purchase worth almost $2 million, according to an SEC filing. The buy helped bump GE’s share price around 2% in after-hours trading. Culp’s ownership of GE stock nearly doubled this week after an earlier purchase Tuesday — he now owns more than 1% of the company’s outstanding shares.

GE Board Director Leslie Seidman called the fraud allegations “baseless” and “inflammatory” in an interview on CNBC’s “Closing Bell” Thursday evening. She said Markopolos’ claims do not “reflect the GE I know.” Seidman chairs of the board’s audit committee.

Markopolos said in a report released Thursday that GE was hiding nearly $40 billion of losses in its insurance business. He said this is the largest case of accounting fraud he and his team have investigated.

Christine Wang and Kate Rooney from CNBC reportedthe report Markopolos made was commissioned by a hedge fund:

A U.S. hedge fund, that Markopolos wouldn’t name, paid Markopolos to conduct and publish his report, and Markopolos told CNBC that he was getting a “decent percentage” of profits that the hedge fund would make from betting against GE.

Leslie Seidman, a GE board director and chair of its audit committee, also pushed back on the Markopolos report, which she said contained “numerous novel interpretations and downright mistakes about the actual accounting requirements.”

“In his own words, he stands to personally financially benefit from today’s significant market reaction to his report, and he is selectively front-running widely reported regulatory processes and rigorous investigations without the benefit of any access to GE’s books and records,” Seidman said.

The report went through a list of accounting irregularities that Markopolos says amount to a $38 billion fraud, equivalent to more than 40% of GE’s market capitalization. Much of the report focuses on GE’s business of reinsuring long-term care insurance providers.