General Electric whistleblower: 'I think I have a few smoking guns' Harry Markopolos reveals fraud

the corporate story of the day is certainly General Electric in a 175 page report posted online forensic accountant Harry Markopolos and his fraud team alleged that GE is committing 38 billion dollars in accounting fraud Harry joins us now to discuss Harry thanks so much for coming by to talk about your work I just want to start with what why today right why was August 2019 the day that this all came together for you we were talking earlier about you know the stock price has shown considerable stress and so where does this report come and and why are we sitting here today talking about it it took seven and a half months for my research team to compile this report and simply we were done with it we completed it so in thinking about the genesis of that report I mean you mentioned in the report that you know you remember in the 90s talking about Jack Wells's you know so-called wizardry with the the earnings per share number so seven and a half months on this report but just over the last couple of years is a story that you had been looking at think about hearing from people on I had done another case last year related to a Ponzi scheme it led me to another insurance company that was cooking its books on long-term care and that's how we discovered GE so we pulled their statutory filings with the restate regulators and we saw that they were not telling the truth about their insurance losses that's why we went public Harry you would note that yes G is cooking its books and they are illiquid right now how do you write those conclusions we did the current ratio they don't provide a current ratio and their annual report who does that who misses that they also don't provide a working capital schedule let me tell you everybody else provides one we had to compile those basic accounting 101 schedules and we saw that GE has 60 billion in current liabilities and only 40 billion in current assets their current ratio is 0.67 they don't seem very solvent to us that working capital deficit looks to be minus 20 point three billion sure they're gonna sell biopharma yes they're gonna sell Baker Hughes GE for 11 or 12 billion dollars but a lot of that money has to go to working capital so what you're saying is don't believe the income statement don't believe the cash flow statement correct there's already been a lot of scrutiny of this company obviously over the past several years we've seen the stock really collapse over the past five years decade really why do you think other people haven't found this stuff I mean there's already been a lot of negative disclosures about the company I think many analysts cover at least in Wall Street they cover a dozen or two dozen companies they don't have the time to devote seven and a half months with a team on one name we did we did put the investment in and also the Wall Street analysts are trained with MBAs maybe Chartered Financial Analysts but they're not Certified Fraud examiner's they're not trained in forensic accounting my guys are how did you do this by the way we're you know it's been disclosed that you're working with a hedge fund on this did they fund your efforts were they self-funded what was your sort of financial interest in all of this we self-funded there's three ways that my team gets paid number one through the SEC whistleblower program they pay ten to thirty percent the Department of Justice pays up to fifteen percent to one point so you pay after though right so you don't have to make that initial investment you made the initial investment seven and a half months of our own time and money no one paid us to do this report I want to break it down so that all of us can understand in simple terms the magnitude of what you've uncovered and assuming that it is accurate and headed where you say it's headed just from the insurance side of this those long term care policies they face a twenty nine billion dollar liability and the allegation is they book the premiums all is well without disclosing to people who were investing those liabilities going forward and it'll take twenty nine billion 18 billion has to go on the books today just to set that portion of the business right it's 18 and a half billion cash immediately to the Kansas insurance Department that's how far they're behind a ten and a half billion dollar gap charge it's non-cash by the first quarter of 2021 is accounting rules change and if they don't do this what happens to people who need those funds but then there's the greater liabilities that you get into here not only their debt that has to be repaid for all of this but there's the pensioners there's 27 billion an unfunded pension liability so if this company goes belly-up my basic question to you is do we face a contagion if the US government doesn't somehow step in the PBGC doesn't have perhaps the kind of money to cover just the pension portion of this GE shares are in the GE pension fund that's gonna be a problem as far as the twenty seven point two billion in pension liabilities it looks like they're 80 to 90% funded depending on if you look at the gap funding ratio if you look at the ERISA funded ratio so 80 to 90 cents on the dollar looked like they can be paid okay what do you say to to GE CEO Larry Colby came out essentially with the statement this afternoon calling you and your team marquee manipulators but he has also come out in the past week and bought a nice slug of stock I would say that you rule number one of investing is never buy into an accounting fraud so you're saying the CEO of GE has bought into an accounting fraud yes so he do you think he's hiding something or is he covering up a bigger problem inside of GE their financial statements are almost unreadable so he can't read the financial statements I doubt it you said earlier anybody again you said earlier in your ass a direct question should a moat be held accountable should Welch be held accountable should they be charged criminally statute of limitations is six years so they can't bail em out could but Welch is free and clear well past you think they ordered it do you have anything that shows you because you've turned over documents is there anything that shows that the upper c-suite knew exactly what it was doing I had no inside information as to GE I'm not dealing with any of their employees I use public available records so I can't speak to what happened with MGE and the company has said one of its criticisms that I came out with today it said we don't know this guy he never approached us directly he never asked us to comment on any of his findings why didn't you who wants to talk to the fraudsters to engage in a cover-up and why let them know where that where our investigation has led there are things I've held back just for law enforcement because I don't want to tip our hand so you're saying there are things that you know or you believe you know that are not in today's report there are several things that are just law enforcement only when you say law enforcement only helped us understand what that could be do you have a smoking gun I think I have a few smoking guns yes you mentioned in the report that you didn't catch everything what do you mean by that accounting fraud is a mosaic we're not on the inside only Jesus know where the skeletons are buried we dug up several 38 billion worth there's probably a lot more now I do want to we've talked about the statement from alaric hope we do have a full statement here I want to show just to our viewers where he mentions that market manipulation says ge will always take any allegation of finance misconduct seriously but this is market manipulation talking Harry about your report pure and simple mr. Markopolos says report contains false statements of fact in these claims could have been corrected if he had checked them with GE before publishing the report so Harry and then we you know it continues fact that he wrote a paper but never talked to the company goes to show that he's not interested in accurate financial analysis but solely in generating downward volatility in the stock so that he and his undisclosed hedge fund partner can personally profit certainly you knew the company was going to respond yes you your report has their response within the last four or five six hours Ben what you expected I mean what were you kind of thinking here knowing you did not want to speak with the company before publishing and then knowing they would have sort of this strategy today we use their own financial statements that they published to compile our report we use regulatory filings with the state regulators of the different insurance Commission's everything is publicly available it's their words I gave you the page numbers we use their words against them so it essentially is is the CEO and Larry Colt the CFO is on her way out are they well they just covering something up here I believe so why is the CFO suddenly leaving so what's going to happen these we have seven people 75 years and older and you talk about the eighths 86 87 percent of the people who bought these policies these long term care policies are now going to be needing this money what happens to them because the money's not there if 14 percent of the people filed policy claims have filed already and 86 percent of the people have not then a 15 billion dollar reserve hit in January 2018 is nowhere near enough and it's now each state regulates these insurance policies so that can be kind of confusing but you explained it really well you compared them to I think it was unum so for every dollar that GE received in premium what do they now face going forward to pay and then explain to me what unum in the same kind of metric has so that it we can see this visibly last year 2018 the loss ratios for GE zerack unit with 527 percent further you flick Union fidelity subsidiary that has old reinsurance it was two hundred eighty percent to put that in perspective you know 90 percent ninety one percent loss ratio for unum for every dollar of premiums they took in they paid out 91 cents in claims to policyholders so they made a profit for Prudential they took in $1 premiums they paid out 80 cents for General Electric they took in $2 premiums they paid out $5 and 27 cents an Iraq and two dollars and 80 cents and you flick that's a big problem for them they can't sustain it because the losses are growing exponentially now when you talk about the estimates linked to these long-term care policies there are just estimates at this point as you say you've compared it to other comfortable policies at other companies but it it's not a short in other words it's not a certainty that there will be these losses correct a people age people unfortunately have Alzheimers medical cost inflation keeps growing people are living longer all the assumptions that were these policies were based on turned out to be wrong they were counting on an 8% lapse rate last year the lapse rate was 0.5% point 5 percent half a percent and so these people are persistent in keeping these policies and paying the premiums ge is only taking in eleven hundred and thirty three dollars in premiums each year per policy and if you look at Prudential they're taking in about $2,800 those are huge shortfalls for GE they're basically taking in forty one point six percent of the premium dollars that Prudential is on the hook for 2.9 times more on lifetime benefits the regulator's that you've turned these documents over to have they given you any indication as to their timeline what they're doing and how long ago did you give this information to them I'm not at liberty to discuss what what we said to law enforcement and when we said it you can rest assured that we did turn this case over to law enforcement we are good citizens we're there to protect the public and certainly the pension holders and the long-term care policy holders did you turn it over today or was it within the last month too much you've been doing this for seven recently okay you mentioned the report that G is headed toward a potential bankruptcy what's the time on on that and what would that look like I'm just looking at what happened to Enron and world Kong once allegations of accounting fraud surfaced the companies were filing bankruptcy within about four months so we'll see what happens here and then I want to ask about the Boston inside of this I think there's an interview gave earlier today talking about you know you're from Boston GES moved their headquarters up there I mean was it as simple as they were in the neighborhood and then you said oh I remember hearing about them like the the kind of the ties between they're moving into your neighborhood and you saying oh here they are in the 90s people were talking in Boston the analyst communities as Chartered Financial Analysts Society of Boston where I was past chairman people would talk at the luncheons about GE was cooking their books they were meeting her beating earnings every quarter under Jack Welch that's impossible to do because the accounting the economy goes up and down and GE only went up well so to the Welch point when we've talked about you know Larry Koch is the current CEO Jeff ml would have been the CEO inside that six-year window and statute of limitations John Flannery how to turn there when you look at that leadership you know progression is there any one of these CEOs that you feel is kind of the heart of where the company has gone today right was someone the culture that one of those guys put in place is that what they're dealing with now Jeff I'm ill made disastrous purchases of Alstom horrible heat optic the market there along with oil and gas with Baker Hughes disastrous acquisitions 22 billion dollar right down on Alstom all at once in November they could have taken smaller writedowns earlier they don't they wait until the very end if you notice long-term care they could have taken right downs in 2012 certainly no later than 2015 the wait till 2018 it's a 15 billion dollar number they were a lot of smaller right downs they should have and could have taken they just refused to do honest book bookkeeping these kinds of bookkeeping mistakes or fraud can they take place without the people in the c-suite ordering it or knowing about it could someone you know maybe the chief financial officer do this without an Immelt or someone higher knowing they're doing it fraud takes many forms I wasn't in the c-suite to be able to comment intelligently on that all right you know what you put forth here today do you believe other people are there's the c-suite should they be held criminally liable or is it the accounting department if you look at sarbanes-oxley the people that certified the financial statements are the CEO and the CFO if they knew about accounting fraud it was willful it's the 20 years in prison that's the sentence if they didn't know it's 10 years that's under saravanan's Oxley it's time that people are held accountable and presumably there could be civil lawsuits even if as we talked about the statute of limitations has expired for some of the former executives at the company yes there's always civil remedies so you're saying the CEO has signed off on false statements I don't see how those statements are accurate given our research their accounting is totally non transparent they give you revenues and they give you profits with no expenses in between who does that why hide that it's so that you can't do comparative statistics and analysis versus other companies in their industries I know you don't like the timeline but I got to imagine from what I'm hearing you say again if it's all accurate ge is not around it's in Chapter 11 what in three months six months I think that's the next chapter in Gia's history um we talked about the the hedge fund that you're working with her that they're shorting the shares are you personally shorting the shares as well no not at all I don't have any trading positions all right this hedge fund is paying a percentage you just okay I cannot they asked for confidentiality I did not partner with them they never helped us with the research they looked at our product all they wanted to do was have an advanced look at our research but you said you're getting a percentage of the profits they get from shorting the stock and we're also getting paid from the SEC whistleblower program many decades from now what's next for you after this I have other accounting fraud cases lined up there's plenty out there and so I'm just gonna go after them one at a time I have a really good team I'll probably do one case a year are they on the scale of a company I mean GE is a huge company but I are we going to have you back in here for another yes I have some that are smaller and maybe only thirty fifty billion in market cap I have some that are well over 100 billion or market cap all right Harry Markopolos thank you so much for stopping by

Channel: Yahoo Finance

Views: 389,514

Rating: 4.8628983 out of 5

Keywords: Yahoo Finance, Personal Finance, Money, Investing, Business, Savings, Investment, Stocks, Bonds, FX, Currencies, NYSE, Equities, News, Politics, Market, Markets, Market Movers, Midday Movers, The Final Round, General Electric whistleblower, GE whistleblower, General Electric, GE, Jack Welch, Larry Culp, Bernie Madorr, Enron, GE Whistlerblower, ge whistle blower, harry marokopolos ge, harry markopolos news, GE stock, GE fraud

Id: 3jE10T250bo

Length: 14min 56sec (896 seconds)

Published: Thu Aug 15 2019

Reddit Comments

[u/JimC29]

Large purchases by insiders. CEO bought 2 million dollars worth yesterday.

[u/jayy42]

Lots of people calling bullshit on the fraud allegations. The proper methodology for estimating long term care liabilities is highly debatable and the consolidated Baker-Hughes reporting is required by law! They may be in rough shape financially but fraud seems like a stretch to say the least. Today the market saw the 2nd wave of reactions on this report and the sock rebounded big time.

[u/lIgMA43]

Oof

[u/scottieducati]

Until we take corporate crime seriously like Iceland did, it’s just gonna keep coming.

[u/slool4]

Those journalists were great. That’s how every financial journalist should conduct an interview.

[u/aero23]

Really interesting, this is the stuff that got me interested in finance

[u/Dog_Gas_Whistle_Lite]

Greater Enron

[u/ryandstuff]

Markopolos is a badass

[u/gremiocopeiro]

Do you guys think this is true?