Harry Markopolos explains fraud accusations against GE

Summary

In this interview, Harry Markopolos, the man behind the allegations against General Electric (GE), discusses his claims of massive fraud within the company, highlighting financial mismanagement and deceptive accounting practices. Markopolos, known for exposing Bernie Madoff's Ponzi scheme, asserts that GE has been hiding substantial losses, particularly in their long-term care insurance business. Despite GE's defense, Markopolos argues that the company’s financials are deeply flawed, and the company may face bankruptcy unless drastic measures are taken. With regulators investigating, the future of GE appears uncertain, with Markopolos predicting its collapse if current trends continue.

Takeaways

• 😀 General Electric (GE) is facing significant allegations of fraud, with Harry Markopolos accusing the company of perpetrating one of the biggest financial schemes in American history.
• 😀 GE's share price has dropped dramatically, losing over $5 billion in a single day after the allegations, and the company has denied any wrongdoing, calling the accusations meritless.
• 😀 Markopolos, a certified fraud examiner known for exposing the Bernie Madoff Ponzi scheme, claims GE's financial troubles stem from under-reserved losses in their long-term care insurance business.
• 😀 Markopolos estimates that GE's reserve for these losses is insufficient by about $29 billion, citing a shortfall in how much the company has set aside for claims related to its insurance business.
• 😀 GE's accounting practices are under scrutiny, with Markopolos accusing the company of waiting too long to disclose losses and manipulating its financial statements, making them difficult to interpret.
• 😀 The company has been criticized for failing to reserve enough for losses compared to competitors like Prudential, which has taken more adequate steps to manage its reserves for similar risks.
• 😀 GE is in a precarious financial situation, with large liabilities (around $60 billion) compared to significantly smaller assets (around $40 billion), and a negative cash flow.
• 😀 Markopolos draws comparisons between GE's situation and the collapse of Enron, claiming that GE is close to bankruptcy, with a risk of Chapter 11 filings if things don't improve by 2020.
• 😀 Despite the negative financial outlook, some investors continue to support GE, with a few even buying more shares, believing in the company's turnaround prospects.
• 😀 Markopolos also mentions that the Securities and Exchange Commission (SEC) and the Department of Justice are investigating GE, with potential legal consequences if the fraud allegations prove true.

Q & A

What prompted Harry Markopolos to investigate General Electric (GE)?

Harry Markopolos and his team were initially working on another case involving a long-term care insurance company. During their research, they identified significant losses from GE's insurance operations, leading them to shift their focus to GE due to the much larger scale of the issue.

What is the main accusation made by Markopolos against GE?

Markopolos accuses GE of perpetrating one of the largest financial frauds in American history, primarily through the mismanagement and misrepresentation of its insurance reserves and liabilities.

What does Markopolos suggest about GE's accounting practices?

Markopolos claims that GE has been manipulating its accounting practices by hiding significant losses and using delayed write-offs to avoid taking responsibility for the full scale of its financial issues.

How does GE respond to the accusations made by Markopolos?

GE denies the accusations, stating that Markopolos' claims are meritless and that the company has never met or had contact with him. They also express disappointment that someone with no direct knowledge of GE would make such serious and unsubstantiated claims.

What is the significance of the $15 billion set aside by GE?

GE has set aside $15 billion to cover potential future claims related to its long-term care insurance business. However, Markopolos argues that this amount is insufficient, suggesting GE actually needs to set aside $29 billion more to properly address the scale of the problem.

Why does Markopolos compare GE to Enron?

Markopolos compares GE to Enron because, like Enron, GE has been hiding the true scale of its financial problems. Markopolos suggests that GE's fraudulent activities could lead to its collapse, similar to what happened with Enron after its accounting scandals were uncovered.

What does Markopolos believe about GE's long-term solvency?

Markopolos is skeptical about GE's ability to survive in the long term. He suggests that if the company makes it into 2020, it will face significant challenges, particularly with its cash flow and current liabilities, which could lead to bankruptcy or a Chapter 11 filing.

What is Markopolos' stance on the company's transparency?

Markopolos criticizes GE for lacking transparency in its financial reporting. He argues that the company frequently changes its accounting formats, hides expenses, and provides insufficient information to investors, leaving them guessing about the true financial state of the company.

What role does the hedge fund play in the allegations?

Markopolos reveals that he shared his report with a reputable hedge fund that agreed to pay a percentage of net trading profits for early access to his findings. However, he does not disclose the hedge fund's identity or specifics about their trades, leaving the details of their involvement vague.

What are the potential legal consequences for GE according to Markopolos?

Markopolos believes that if his claims of financial fraud are proven true, those responsible for signing or preparing false financial statements, including past executives like Jack Welch, could face prosecution. He notes that the statute of limitations for such actions is six years.