General Electric (GE) could be saddled with so much legacy operational overhang and financial unknowns at its various industrial and insurance businesses, even the top person signing off on the quarterly financial statements may not truly understand how bad a situation the company is in right now.
Or so says Bernie Madoff turn GE whistleblower, Harry Markopolos.
“Their financial statements are almost unreadable,” Markopolos said on Yahoo Finance’s The Final Round. “I doubt it,” Markopolos remarked when asked if GE CEO Larry Culp is able to understand the company’s financial statements. “I don’t think anybody can [understand their financial statements].”
In a scathing new 170-plus page research report, the financial fraud expert and certified financial analyst (CFA) alleges GE is committing accounting fraud.
If Culp has been unable to fully grasp the depths of GE’s problems, as suggested by Markopolos, that could pose problems on at least two fronts.
For starters, Culp has been an aggressive buyer of GE’s stock during its startling decline over the past week or so. Culp scooped up about $2 million of GE’s stock (priced at $7.93) following the 11.9% drubbing on Thursday, according to a new regulatory filing. That came on the heels of him buying close to $3 million of the stock (priced $9.04) on August 12. The purchase was a show of confidence in GE’s turnaround, a source told Yahoo Finance.
Culp is the third largest individual shareholder of GE, behind fellow board members Ed Garden and James Tisch according to Bloomberg data. Despite the recent purchases, Culp still owns well under 1% of GE’s outstanding stock.
But if GE’s accounting isn’t up to snuff and some dark days lay ahead, per claims made by Markopolos, Culp’s investment (and that of many others levered to GE) could become worthless.
Meanwhile, Culp, soon to be outgoing Chief Financial Officer Jamie Miller, former long-time CFO Jeff Bornstein, and former CEOs John Flannery and Jeff Immelt are the ones that have signed off on numerous GE quarterly reports. Under Section 302 of the Sarbanes-Oxley Act, it states “the CEO and CFO are directly responsible for the accuracy, documentation and submission of all financial reports as well as the internal control structure to the SEC.”
SOX, as it’s known on Wall Street, imposes criminal penalties on executives for "knowing" or "willful" violations. The statute of limitations for violating SOX is six years, putting all of those aforementioned GE executives in the potential line of fire from regulators.
“I had no inside information into GE, I am not dealing with any of their employees — I used publicly available records,” Markopolos said when asked if he knew if any GE executives willfully made false claims. “I believe I have a few smoking guns on GE,” Markopolos noted, adding that information was held back from the report for law enforcement.
GE downplays allegations
GE obviously doesn’t see it Markopolos’ way.
GE declined to make any member of its executive team available for an interview before and after Yahoo Finance’s live interview with Markopolos, but sent statements refuting the claims to Yahoo Finance via email. One of those statements was from its chairman and CEO Larry Culp.
“GE will always take any allegation of financial misconduct seriously. But this is market manipulation — pure and simple. Mr. Markopolos’s report contains false statements of fact, and these claims could have been corrected if he had checked them with GE before publishing the report,” Culp said in a statement. “The fact that he wrote a 170-page paper but never talked to company officials goes to show that he is not interested in accurate financial analysis, but solely in generating downward volatility in GE stock so that he and his undisclosed hedge fund partner can personally profit.”
Markopolos told Yahoo Finance that he didn’t reach out to GE because he “didn’t want to engage in a cover up. Who wants to talk to fraudsters,” he added, noting that GE’s financial statements were used to compile the report. “We used their words against them.”