A whistleblower who first sounded on the alarm on Bernie Madoff’s Ponzi scheme in 2008 has now found a new target: General Electric. According to CNN, Harry Markopolos, a forensic accounting and financial fraud investigator, has claimed that the company is engaging in massive fraud, and its demise will be bigger than Enron.
In a report released on Thursday, Markopolos said that the company suffered $40 billion in losses, but was hiding the losses in its various insurance businesses. He also claimed that it was one of the largest cases of fraud he had ever investigated, including Enron and WorldCom.
“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,” Markopolos claimed.
“In fact, GE’s $38 billion in accounting fraud amounts to over 40% of GE’s market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds,” Markopolos added.
Enron was, at one time, the biggest bankruptcy in American history, with $63 billion in assets. In addition, the company gave a majority of their employees’ savings plans relied on company stock. When Enron went out of business, not only did 15,000 people lose their jobs, but also their savings.
WorldCom was also an incredible bankruptcy scandal, and took Enron’s crown as largest bankruptcy at the time.
Highlight: Harry Markopolos on $GE: "We saw they were not telling the truth about their insurance losses. That's why we went public. … Rule no. 1 of investing is don't buy into an accounting fraud. … Their financial statements are almost unreadable." Full interview (1/2): pic.twitter.com/d5SewBXAJe
— Yahoo Finance (@YahooFinance) August 15, 2019
The fact that Markopolos believes that General Electric faces an even larger disaster has spooked many on the market, and GE stocks tumbled to their lowest point in over a decade after Thursday’s announcement.
GE hasn't been down 14% in a single day since Oct 19, 1987. This is not a joke.
— Carl Quintanilla (@carlquintanilla) August 15, 2019
To combat the market anxiety, GE CEO Larry Culp bought 252,200 shares at $7.93 per share, a purchase worth almost $2 million. In addition, GE released a statement, denying any and all claims of fraud.
“The claims made by Mr. Markopolos are meritless. The Company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims,” it read.
That said, the insurance market has been a difficult industry for many companies in the United States. This is because health care costs are growing faster than expected; in addition, more and more policyholders are becoming knowledgable in their rights, meaning that they are collecting more benefits, according to Barron’s. From the financial side, low interest rates mean that the investment returns expected by insurance companies are also lower than expected.
Meanwhile, GE has also pointed out that Markopolos has a contract with hedge funds, and therefore might not be a completely impartial judge.