Harry Markopolos explains fraud accusations against GE

shares in General Electric are over six percent in the session so far that follows an 11 percent drop on Thursday G was once America's most valuable company now it's sending off a highly detailed accusation that it's perpetrating one of the biggest chords in American history in the statement the company said the claims made by mr. Markopolos are meritless the company has never met spoken to or had contact with him and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims after that huge share price drop on Thursday G Ciera Larry Culp thought almost two million dollars worth of stock while the chair of the Audit Committee said this is not the GE as I know joining me is Harry Markopolos the man behind those allegations he's a certified fraud examiner and best known is the madoff whistleblower fantastic to have you on the show good view you have credibility where spotting anomalies significant sized board is concerned and yet the share price is bouncing I make that around five billion dollars worth of loss wipes in the last 24 hours a lot less than 38 billion dollars do you make of what we're seeing already I look at the long-term and we'll see how solvent they are at year-end and see if they make it into 2020 how swiftly you think this could unravel a world common Enron they ended about four months after the frauds were publicized so we'll see how long GE has I mean we've been seeing them me write-offs the power business reserves against the insurance business which is at the heart of what you're saying is the problem here ultimately why now why why choose to investigate now we were doing another case last year against the long-term care insurance company and then we spotted all the losses from these insurance companies landing on GES books so we switched focus to GE because the fraud was so much bigger here so you're saying that the 15 billion dollars that they've set aside saying look people are living longer it's tough to get high interest rates to set against what we're seeing in this business it's simply not enough correct I took 15 billion they need to take twenty nine billion dollars more I mean that's a shockingly huge number and to be fair to GE they've said look in a worst-case scenario and their annual filing they said we could have to write down another 12 billion dollars still you know significantly short of what you're saying even nothing but negative surprises for years 22 billion for Alstom in November 15 billion in January 2018 a long term pier 773 million this quarter for energy grid they have big surprises they're always negative they should have been taking them all along in smaller chunks they wait to the last minute and they hide things from the market they're not gonna have to do this straight away though even if we're somewhere between zero and twenty eight billion dollars and MIT that's a huge are here the regulator's would give them a number of years surely particularly the accounting the accounting changes because ten billion dollars worth of this approximately it's due to accounting changes that's at least would be given time to adjust for that first quarter of 2021 they need to take ten point five billion dollar gap right down it's a non-cash charge so ever it's a county right but in eighteen and a half billion of media cash charge whenever the Kansas Insurance Department requested they had a fifteen billion dollar write down in January 2018 but they had no cash to pay it so they had a spread out over seven years that's the problem with GE their cash poor they say they have over seventy almost seventeen billion in cash the problem is their current liabilities are sixty billion so the cash is nowhere near enough I mean on page two of your report you say that only fourteen percent of G's long-term player claims have come in but don't the reserves that they've got against it account for eighty six percent of the claims to come there's eighty six percent more about to be filed in the years to come so fourteen percent of the claims led to a fifteen billion dollar write down what are the eighty six percent remaining what are they going to do to G's balance sheet that's the question Prudential is taking proper reserves Prudential is reserved much more deeply than ge ge just to catch up the Prudential would take nine and a half billion dollars so who's doing it right Prudential or GE GES losses last year in long-term care were five hundred and twenty seven percent loss ratio Prudential made money their loss ratio was only eighty one percent so they made a ton of money and she is losing a ton you're basically saying look this is not rocket science we are literally just comparing to others that operate similar businesses in the industry this is what they're doing and G simply isn't says they want to be number one and number two in every industry well they are last year they certainly were in long-term care for losses there Iraq insurance unit 527 percent their union fidelity unit 280 percent by comparison unum was at 90 percent Prudential at 81 percent talk about Baker Hughes because this is one where some analysts who cover this very closely I've said look they have said once their stake in Baker Hughes gets below 50% don't make it right down seven point four billion dollars is what they're saying at this stage so they do provide greater guidance on what's going on and they have been clear about this admittedly the share price for beta users drop significantly so likelihood the write the write down will have to be bigger but they're not being as unclear as you're accusing off the VIN this part the business arguably they were aggressive they should have taken the nine point 1 billion dollar mark to market laws non-cash in the 2018 year in financial statements they did not they're going to move that loss into this year and they're gonna take in cash from Baker Hughes that's fair they did not follow the accounting rules though the GAAP rules 50.4% is their share ownership but they don't control or benefit from Baker Hughes cash flows and so under the variable interest accounting rules they should have not consolidated last year and they should have marked at the market because with an asset available for sale so you're saying fine even if they are now being transparent it's just it's massaging its ugly accounting and this is basically what you're saying is and this is what many analysts have been saying that it lacks transparency it's there folks are very unreadable they keep changing their accounting formats they don't put in expenses they don't tell you a lot of information you're left guessing and that's you should never have to guess with a company that size at this point it's so negatively for so often what a regulator is saying to you because arguably if you are right then this is huge negligence similar to Enron by auditors by the regulator's here how has this been allowed to go on if what you're saying is is right is through I can't comment on our discussions with the regulators were law enforcement but they're going to be ongoing I'm sure they are still looking at it I mean they're looking at they've been looking at it since we saw the write down in the power business yes the SEC is probing GE civilly and then you have the Department of Justice probing them criminally so they do have some accounting issues about what you gain by doing this because the obvious criticism here is that you handed this information over to a hedge fund can you tell us which hedge fund I can't do that they wanted confidentiality it's a us-based East Coast hedge fund a very reputable company not normally known for us shorting actually they're paying a percentage of the net trading profits for early access to my report and I have two other means of payments one is the SEC whistleblower program and the other is the Department of Justice Berea whistleblower program where did they go short can you tell me that what do they go short they never told us what their trading I'm assuming its shares but I they don't tell me what or a win I'm I just do the report I'm a projects diameter I do not trade on Wall Street any longer that business 15 years ago but you are arguably trading this because you benefit you're taking a cut of the winnings here so indirectly I have tangental benefit correct are they still short and whatever they're doing so look at this and say you came out you made this big splash you accuse them of Forge you have credibility and spotting these things this hedge fund now could have benefited if they were short the shares of an 11% drop yesterday taken profit and they walk away I look at this as a month-long endeavor and we'll see how long GE lasted they make it in 2020 that'd be great for them we'll see who would you want to see prosecuted in this case because you're arguing that this goes right back to to Jack Welch this was a consistent scam effectively to mismanage the books and to effectively hide the underlying performance of the business from it from investors G has been cooking books for many decades Jack Welch acknowledges that in his autobiography I give you the page reference I gave you the direct quote and has continued to this day as far as prosecutions the statute of limitations is six years anybody who signed false financials or for help prepare for financials would presumably be brought to justice we will see how long does it take you mentioned by 2020 right now investors giving them the benefit of the doubt a whole host of I mean I've got a list of them of people that have come forward and said look we believe we believe in G we believe what they're saying that the CEO brought to me and shares what do you think of that people want to drink the kool-aid great if the CEO wants to buy into an accounting fraud great let them everybody gets to vote in the capital markets I'm looking at this long term if they make it to 2020 then can they make it through 2021 one there one recession away from chapter 11 how close do you think this is their balance sheet is in tatters their current liabilities are 60 billion their current assets are forty billion is that why you're comparing it to any woman you said it's worse than Enron and Wellcome put together simply because you're looking at this year's scale of the losses here this is the market cap of the company yes and if you take a look there their cash flow negative how long can you burn cash and lower interest rates actually killed them it hurts their investments on their long-term care reserves and it also hurts them on their pension liabilities their pension liabilities have increased so much but long-term rates so low less than 2% their pension liabilities have ballooned from 27 billion - who knows what they are today could you have made a mistake Casteel point this is sensitive to a market environment we're talking about such huge numbers here it is 174 pages could you have made a mistake yes we are probably too low in our loss estimates but we're trying to give them the benefit of the doubt so this is you being conservative your loss estimates yes and to those that say you're a profit area you're a market manipulator what's your response I'm not I'm a fraud examiner I'm a seeker of the truth if I see accounting fraud I go after it will you come clean about the hedge fund the name of the hedge fund at some point or do they have to do that they would have to do that I would certainly hope that they would but it's up to them but you think this share price effectively is going to go to zero you think this is a broken company if it's going to go bankrupt yeah - 20 billion of working capital it's hard to see them surviving that their cash flow is negative this year if we enter a recession they're done sorry no doubt we'll talk to you again about this thank you so much for joining us on the show Harry Markopolos

Channel: CNN Business

Views: 120,245

Rating: 4.8122516 out of 5

Keywords: allegations, latest, accusations, CNN Business, cnn business, business, harry markopolos, CNNB, us news, CNN, fraud, GE, videos, first move, general electric, julia chatterley

Id: MGvsXPY26KI

Length: 10min 49sec (649 seconds)

Published: Fri Aug 16 2019

Reddit Comments

[u/WillTheGreat]

Why is it surprising GE is failing? They sold off all of the profitable parts of their portfolio since the 90s, and decided to invest and catch the top of everything they touched since 2000s. Then used the remaining money on a buyback. Retirees with GE in their portfolio should've paid attention, but no... "It's GE!"

[u/iggy555]

God she is so hot. That red dress and dark hair with that accent. 🍆 💦

[u/SlenderGordun]

I remember all the articles throughout the last year as GE was dropping. "Is nOw ThE tImE tO bUy GE?!"

[u/WatchingyouNyouNyou]

Last few minutes are sweet. I love how she tightened her lips and leaned back when as he gave an answer to her question "Could you have been wrong on this?"

[u/ozzyteebaby]

What if you buy puts on a company and their share price goes to 0?

[u/Robbbin_Hood]

When I saw his involvement with the CFA and CFE, that was enough to lead me to believe that he would not be pursuing this publicly without having considered the implications.

He has enough "skin in the game" that I don't think this is just some meritless stunt to make money.

[u/SmallPotGuest]

So it will be business as usual until all comes down in fire in a matter of days. Not an easy bet to make.

[u/_felix_felicis_]

Galaxy brain play would be: everyone drops their GE life insurance policies thinking GE won't be able to pay them - then GE doesn't have to pay out for any of those policies even though it collected money for decades. GE rebounds and stock price climbs for decades. Markopolos buys calls in 6 months and goes long, makes billions.

[u/[deleted]]

I like how he mentions that GE (and many other companies) are keeping their debt roll-overs off the SEC balance sheet reporting.

Super under rated.