GE’s not wild about Harry

You remember Harry Markopolos, don’t you?

He was the forensic accounting sleuth who figured out what Bernie Madoff was up to well before anyone bothered to act on it. He reported his suspicions about Madoff’s massive Ponzi scheme to the SEC in 2000. It wasn’t until late in 2008 that the Feds came knocking at Bernie’s swank door. And everything came tumbling down around his ears – and the ears of everyone who’d ever been associated with him.

Well, Harry has spoken again, and this time he’s not taking on a flimflam man. He’s going after General Electric which, although it’s fallen from the top 10 standing it held for years, remains one of the world’s largest companies.

To put it mildly, Harry is not wild about GE.

In fact, in a report issued last week, he accused the company “of massive fraud,” and:

… is warning that the company could be in serious financial trouble -- and even go bankrupt -- if the economy turns south.

"GE is one recession away from Chapter 11. Their balance sheet is in tatters," Markopolos told Julia Chatterley on CNNi's "First Move" show Friday.

"We'll see how solvent they are at year end, and we'll see if they make it into 2020," he added. (Source: CNN)

Yowza. No more GE? No more bringing good things to life?

Predictably, once the wise man who was way ahead of the curve on Madoff spoke ill of GE, the market did its thing. In the wake of the Markopolos pronouncement last Thursday, the company’s share price plummeted. GE stock bounced back on Friday, nearly regaining what had been lost. We’ll see what today brings. (The market has, of course, been generally crazy, what with trade wars, recession fears, and the inverted yield curve…)

At the center of the whistleblower’s blown whistle is a claim that GE has $40B worth of accounting fraud hovering around its insurance business, as well as some problems “with how it accounts for its stake in oil services firm Baker Hughes.” One might say that Markopolos is pretty sure that GE is trying to live up to its “imagination at work” tagline in all the wrong places.

In the report, Markopolos claims that GE (GE) is a bigger fraud than Enron and WorldCom, which both went bankrupt following accounting scandals in the early 2000s.

Enron and WorldCom. Now there are a pair of doozies. A company I worked for during the dot.com boom was in talks with Enron around doing some sort of partnership, and at one point I had to review some sort of account plan. Despite my genius boss explaining how brilliant Enron’s business was – and that boss had actually been a rocket scientist – I never quite got what they did and how they made their money. I chalked it up to my own stupidity when it came to intricate financial situations. But maybe, just maybe, I could have been a Harry Markopolos if I’d played my cards right.

There has been plenty of pushback against Markopolos, both from GE and from others in the industry (researchers and short sellers), which claim that Markopolos is being somewhat duplicitous, in that he works for an investment company that is short selling GE and, thus, has every incentive to trash GE. In the tweeted words of a  Citron Research, a “firm that specializes in exposing problems”, Markopolos’ report:

…"was the worst that activist short selling has to offer. Aggressive accounting is not fraud." Citron added that the Markopolos report was "disingenuous all the way through."

GE’s CEO, Larry Culp, made a show of faith by buying $2M worth of GE stock. Old Lar has a lot to gain if GE stock price gets and stays up there, as most of his compensation package is tied to market performance. He stands to make hundreds of millions of dollars if the price is right.

Meanwhile, Markopolos pushed back on the pushbacks, insisting on his purity, proclaiming himself as “a seeker of truth.”

"If I see accounting fraud, I go after it," he said.

Sort of like an inverted Willie Sutton, who famously replied to a question of why he robbed banks by saying “because that’s where the money was.”

Both Markopolos and GE are cooperating with the SEC and DOJ on the matter. (GE has also been working with regulators reviewing its accounting practices for more than two years now.) We’ll see what kind of love the market gives GE today.

Suffice it to say, ain’t no one at GE who’s wild about Harry just about now.