AP/Haraz N. Ghanbari
- A whistleblower in the Madoff Ponzi scheme case released a report that alleges General Electric’s accounting practices are "Enronesque" and says the conglomerate is "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," accounting expert Harry Markopolos said.
- GE sank as much as 8% Thursday following the report’s release.
- Watch GE trade live here.
General Electric traded as much as 8% lower early Thursday after Madoff whistleblower Harry Markopolos raised concerns about the company’s finances in a 175-page report.
Markopolos alleged the company has been hiding its financial issues for years through fraud, frequent changes to its financial statements’ formatting, and hiding numerous costs. The website hosting the report calls GE’s actions "an Enronesque business approach that has left GE on the verge of insolvency."
"This is my accounting fraud team’s ninth insurance fraud case in the past nine years and it’s the biggest, bigger than Enron and WorldCom combined," the report said.
It refers in part to the 2001 scandal that led Enron — an American energy company based in Houston — to bankruptcy after it was discovered executives used accounting loopholes and special-purpose entities to inflate the company’s value.
The group of accountants led by Markopolos claim to have already found $38 billion in fraud, and called the figure "just the tip of the iceberg."
"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," the report said.
Markopolos and his team primarily focused on GE’s long-term care insurance business. Through investigation into GE’s competitors in this sector, the team alleged GE is keeping huge losses hidden from investors through false regulatory statements. Markopolos also alleged the conglomerate’s oil and gas unit, Baker Hughes, practiced unethical accounting.
GE issued a statement Thursday calling the allegations "serious and unsubstantiated." It rebuked Markopolos’ statements on GE’s insurance and Baker Hughes businesses, and said the conglomerate holds a "strong liquidity position."
"The claims made by Mr. Markopolos are meritless," a GE spokesperson told Markets Insider. "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."
Markopolos is an accounting expert who made waves after revealing irregularities in Bernie Madoff’s investment strategy, later known to be a Ponzi scheme. Since then, Markopolos has uncovered inconsistencies in the insurance industry and released a book on his work investigating Madoff.
GE opened Thursday at $8.71 per share, up about 15% year-to-date.
The company has 10 "buy" ratings, 10 "hold" ratings, and four "sell" ratings from analysts, with a consensus price target of $11.22, according to Bloomberg data.
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Source: Business Insider – bwinck@businessinsider.com (Ben Winck)