WHISTLE BLOWS ON GE. “an Enronesque business approach that has left GE on the verge of insolvency.” By Todd Horwitz, Bubba Trading.

 

More Trouble for GE?

General Electric shares fell more than 13 percent on Thursday morning after Madoff whistleblower Harry Markopolos targeted the conglomerate in a new report, accusing it of issuing fraudulent financial statements to hide the extent of its problems.

A website has been set up to disseminate the report, https://www.gefraud.com/ where Markopolos calls it “a bigger fraud than Enron.” The financial investigator, who was probing GE for an unidentified hedge fund, writes that after more than a year of research he has discovered “an Enronesque business approach that has left GE on the verge of insolvency.”

“My team has spent the past 7 months analyzing GE’s accounting and we believe the $38 billion in fraud we’ve come across is merely the tip of the iceberg,” Markopolos said in the 175-page report. Markopolos alleges that GE has a “long history” of accounting fraud, dating to as early as 1995, when it was run by Jack Welch.

One area of Markopolos’ case focuses on GE’s long-term care insurance unit, for which the company had to boost reserves by $15 billion last year. By examining the filings of GE’s counterparties in this business, he alleges that GE is hiding massive losses that will only increase as policyholders grow older. He claims that GE has filed false statements to regulators on the unit. Separately, he goes on to find issues with GE’s accounting on its oil and gas unit Baker Hughes.

Markopolos warns that GE losses are about to spike. The report says that GE needs $18.5 billion in cash immediately to deal with a wave of impending claims in the insurance unit. Further, it will need another $10.5 billion to address a non-cash charge that will come due by 2021. However, Markopolos doubts GE will be able to fulfill that cash need in a timely manner.

“These impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants,” Markopolos wrote. “After we accounted for the $38 Billion in accounting fraud GE’s debt to equity ratio goes from the 3:1 ratio it reported at the end of the 2nd quarter 2019 to a woefully deficient 17:1.”

All of this, the report says, makes it very unlikely that GE can become cash-flow positive by 2021. Markopolos told the WSJ that he is working with an undisclosed hedge fund, which has a short position, betting the stock will fall.

Todd “Bubba” Horwitz

IN ASSOCIATION WITH

Financial Markets and Political Commentary
 

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About the author

Todd Horwitz - Author of “Average Joe Options“. Todd began his trading career in 1980 at the CBOE. He was one of the original traders in the OEX & helped start the SPX. He is a member the CME where he trades S&P futures as well as foreign currencies & is a regular contributor to CNBC, Bloomberg, BNN, Fox & many other major news networks.