"A bigger fraud than Enron": GE shares plunge after Madoff whistleblower releases damning report

The fraud investigator who blew the whistle on Bernard Madoff’s Ponzi scheme has accused General Electric of committing “a bigger fraud than Enron”, sending its stock into a tailspin.

The shares of the all-American conglomerate fell as much as 15 per cent on Thursday after Harry Markopolos published a report claiming GE is hiding deep financial problems. He later told CNBC that GE will “probably file for bankruptcy”.

The allegations prompted a sharp rebuke from GE’s chief executive. Larry Culp said the 175-page report contains factual errors and constitutes “market manipulation – pure and simple” because Mr Markopolos stands to profit from associated short-selling, or betting that its share price will fall.

In the report, Mr Markopolos accuses GE of hiding $38bn in potential losses and asserts that the company’s cash and debt positions are far worse than it has disclosed. He also says GE is insolvent.

The report echoes the assertions of some of Wall Street’s more sceptical analysts who have long raised alarms about GE’s low cash flow, frequent accounting charges and writedowns, and what they describe as opaque financial reports.

Mr Culp, the first outside leader of the company who took over in October, has made no secret of its woes.

The industrial businesses have seen a $2.2bn cash outflow so far this year, and Mr Culp said last month that GE may incur cash costs of $1.4bn this year from the grounding of Boeing’s 737 MAX jetliner. GE makes engines for the jet through a joint venture.

The company has also said its accounting is being investigated by the US Securities and Exchange Commission and the Department of Justice.

The report by Mr Markopolos alleges that GE faces $38bn in future expenses that it has not disclosed. “GE’s $38bn in accounting fraud amounts to over 40 per cent of GE’s market capitalisation, making it far more serious than either the Enron or WorldCom accounting frauds,” it says.

GE issued a statement saying: “We remain focused on running our business every day and … will not be distracted by this type of meritless, misguided and self-serving speculation.” GE “stands behind its financials” and operates to the “highest level of integrity” in its financial reporting, the statement read.

It also said Mr Markopolos is known to work for unnamed hedge funds that typically benefit from short-selling a company’s stock.

A disclaimer in the report states that it was drafted by Forensic Decisions PR LLC, which will get compensation from a third-party entity that could benefit from a decline in GE’s share price. The report does not name the entity.

Speaking on CNBC, Markopolos said he will receive a percentage of any profits generated by the report. He declined to provide details about the compensation or name the fund involved, saying only that it is “a mid-sized US hedge fund”.

GE shares closed down 11.3 per cent on Thursday – its biggest one-day drop in well over 11 years.

Mr Markopolos is best-known for alerting regulators in the early 2000s to signs that the investment firm of Mr Madoff was a Ponzi scheme – a way of rewarding early investors with unusually high returns that are generated with money from later investors. Madoff was arrested in 2008 and later sentenced to 150 years in prison.

John Hempton, co-founder of Bronte Capital, a Sydney-based hedge fund, wrote in a blog post on Thursday that GE’s 14.7 per cent average profit margin in recent years is in line with the returns of its industrial peers, not “too good to be true” as Mr Markopolos alleges.

“Harry’s report is silly. The market should ignore it,” he added.

Reuters