Shares in General Electric slumped dramatically on the New York Stock Exchange on Thursday 15 August 2019 in the wake of the publication of claims the company is a bigger fraud than Enron. It is being claimed that GE has been running a decades long accounting fraud by only providing top line revenue and bottom line profits for its business units and getting away with leaving out cost of goods sold, SG&A, R&D and corporate overhead allocations.
It is being suggested by an independent research firm called Forensic Decisions PR that the company has committed fraud of some $38bn, equivalent to more than 40% of GE’s market capitalisation. It is a fact that GE’s accounting practices are under investigation by the US SEC and the Department of Justice
However, part of the significance of these claims lies mainly with the person who is making them – research analyst Harry Markopolos. When he speaks now, Wall Street pays attention. There was a time when it didn’t but Markopolos is the ‘whistleblower’ who exposed Bernie Madoff’s Ponzi scheme.
Within General Electric, Markopolos’ firm Forensic Decisions PR says it has discovered ‘an Enronesque business approach that has left GE on the verge of bankruptcy’.
It should be noted that the research done by Markopolos has been carried out at the behest of an unnamed US hedge fund. Speaking to CNBC, Markopolos said he ‘promised confidentiality’ and that he was getting a ‘decent percentage’ of the profits the fund will presumably be making by shorting GE shares.
GE has vigorously refuted the claims made by Markopolos, saying: “The claims made by Mr. Markopolos are meritless. The company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims. 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.
"Mr. Markopolos openly acknowledges that he is compensated by unnamed hedge funds. Such funds are financially motivated to attempt to generate short selling in a company’s stock to create unnecessary volatility. The report states that his company ‘entered into an agreement with a third-party entity to review an advanced copy of the Report in exchange for later-provided compensation….those positions taken by the third-party entity are designed to generate profits should the price of GE securities decrease’ and ‘members of the Company are personally in possession of securities, derivatives, and/or other financial instruments of, and/or relating to, GE, which may generate profits should the price of GE securities decrease.’”