GE stock dropped 11.3% today as General Electric (NYSE:GE) was accused of concealing serious financial mishandling.
Opaque Financial Reports
The accusations were made by fraud investigator Harry Markopolos, who also blew the whistle on Bernard Madoff’s Ponzi scheme. In a 175-page report, Mr. Markopolos claimed that GE was hiding $38 billion USD in potential losses and that the company’s cash and debt positions were much worse than the company had stated. “GE’s true debt to equity ratio is 17:1, not 3:1, which will undermine its credit status,” Markopolos said. GE stock currently sits at a year-low of $8.01 following the release of the report.
The report also claims that GE is insolvent and reiterates assertions from some Wall Street analysts who had previously raised alarms about GE’s low cash flow, frequent accounting charges and write-downs, and what they describe as opaque financial reports.
“GE’s US$38 billion in accounting fraud amounts to over 40 per cent of GE’s market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds,” the report says.
Larry Culp, CEO of GE, retaliated against Markopolos’s report by claiming it was “market manipulation – pure and simple,” because Markopolos stood to profit from short-selling linked to its release. Short sales, which are bets that a share price will drop, of GE stock have risen 17% in the last month alone according to S3 Partners, a New York-based financial analytics firm. A disclaimer in the report stated that it had been drafted by Forensic Decisions PR LLC, which will get compensation from an unnamed third-party entity that could benefit from a decline in GE shares.
Henry Markopolos is well known for exposing financial fraud after blowing open the Madoff Ponzi scheme in 2008. That particular case resulted in Bernard Madoff being sentenced to 150 years in jail and being ordered to pay $170 billion USD in restitution.
What Next for GE Stock?
GE stock has faltered somewhat this year, especially following the grounding of Boeing 737 MAX airliners around the world for which GE manufactures the engines, which saw 16% shaved from GE shares in March. If the claims made in today’s report are justified, then the future is looking extremely bleak for GE stock and the company as a whole. However, the counterclaims made by GE management against Markopolos’s conflicting interests also show some evidence of truth and as a result, today’s news should be taken with a grain of salt.
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