Madoff whistleblower Harry Markopolos details fraud allegations against General Electric

this would go a lot farther if you would say who you're working for and what the positioning is on the stock like I can't I promised confidentiality it's a hedge fund it's a midsize hedge fund us face I do you want to talk about how you first came to realize this issue years ago as a analyst in the Boston community I would sit down in analyst lunch and everybody would talk about GE and how they were cooking their earnings they never missed earnings for one quarter ever under Jack Welch and of course then again Ryan all all right go on and then everybody said it 3% of the S&P 500 we should benchmark it because if we only have 1% we're short two percent and we would underperform because G took off like a rocket on fake numbers all right here's the thing though since since ml we've had two different executive teams come in take over they said they've lifted the veil that there's more transparency here what you're essentially alleging in this report is that there's still issues here they're still not reporting correctly raising red flags around the current executive team what are you seeing right now that no one else or most other people on Wall Street have missed I mean everybody has been looking at the stock in the numbers the numbers are missing is they purport top-line revenues bottom-line profits and nothing in between like expenses research and development selling general administration costs research and development it's all missing including cash flows they don't provide working capital it's the only company in that industry that doesn't provide working capital in fact GES working capital is minus twenty point three billion their current ratio is point six seven if you word searched current ratio in their annual report it doesn't appear name a company that does that that's accounting 101 how severe is the problem that your is this a question of they need to raise a bit of capital or if everyone was fully aware of the issue that they would go bankrupt they took a fifteen billion dollar Reserve hit in January 16 2018 for long term care they have another eighteen point five billion in immediate cash needs for reserves we proved that in our report they also have a ten point five billion non cash reserve hit that they need to take on their gap books that's going to be a loss and destroy their equity ratios I need to do that by the first quarter of 2021 when new accounting rules take place so you you've seen your report that this is akin to an Enron and world come combined obviously a lot has changed since those two scandals what do you believe is the role of the Public Company Accounting Oversight Board what's the role of their external auditors for all of these people missing the mark here yes the gatekeepers that consistently failed Wall Street look at the global financial crisis all the bank's got a clean bill of health from the big four accounting firms and from the regulator's and it turns out they had hundreds of billions in toxic assets sitting offshore and special-purpose vehicles that no one saw including the rating agencies you didn't speak with the company why not I prefer just use the financial statements I didn't want to let them know what's coming I didn't want to engage have them engage in a cover-up and destroy documents I mean it begs the question there's gonna be some criticism out criticism out there that you know given the fact you are working with an undisclosed hedge fund given the fact of the stock is 6% lower today that even if these allegations don't turn out to be true that you know there's still a conflict of interest here how do you counter that I needed I needed to get my team engaged and I put a team of experts on this the public deserves to know the shareholders deserve to know I've been a big advocate for investor protection I've done in many cases on behalf of investors including the foreign currency cases I did the cases against many Ponzi schemes including Bernie Madoff and several other billion dollar-plus hedge funds I could have been Fonzie's I put a lot of people in prison over the years and I'm just continuing that trend and I need to get paid I have a family to support in terms of the long term care business certainly that's been raising quite a number of eyebrows is such a huge skeleton that came out of the closet back in March they had their quote unquote teaching I think a lot of folks on Wall Street were expecting maybe those reserve numbers to be increased when they didn't it was seen as something of a turning point for the stock how did you get to your numbers and why do you think the current numbers are wrong we went to the statutory filings of 8 GE reinsurance counterparties from long term care and we pulled the regulatory filings for the years 2013 to 2018 and we saw all the losses falling onto GES books and we saw how much premium dollars they were taking in and what their loss ratios were ge is losing 5 dollars and 27 cents for each dollar of premium income they are taking in those losses are unsustainable and they're growing at an exponential rate for 2018 they grew at 60% rate it's growing exponentially and it's going to make this company probably file for bankruptcy the two things this is a dynamic is not specific to GE right it's an industry dynamic the way people live longer we've been over this already they've been they've telegraphed this to a large degree so how is it any different than unum and AIG and if the liabilities take place over several decades why would you think it charge for that now why wouldn't you be able to take a charge of that over time usually you reserve in advance so that you can invest the money in the bond market and earn returns on it so that you have the money to pay claims when they come due and GE hasn't done that so they're not going to have the money in the future to pay these claims and that's going to lead to bankruptcy for GE and if you want to compare it to Unum Williams loss ratios for 2018 were 90 percent which means they took in a dollar premiums and paid out 90 cents so they were profitable for Prudential 81 percent for GE 527 percent many times greater it's unsustainable and it's growing did you look at Genworth as well that was a company that was spun out of GE but back in 2004 and some of the LTC reinsurance business was tied to their CNO did the right thing last August they took a six hundred million dollar reserve increase and their difference between their GAAP filing numbers and the statutory reserve requirements are now zero that company came clean a year ago they took the best long-term care off of GES books and all the toxic stuff remained back at GE in 2004 I think one of the things that's also surprising to the street right now is is the the claims you're making around around money and the way the company is accounting for Baker who used to break that down for us Baker Hughes is a variable interest entity accounting requirement GE owns fifty point four percent they control the voting but they don't control the cash flows of the assets Baker Hughes at twenty two billion in revenue last year they have fifty two billion in assets GE put it on their books and a consolidated basis they should not have they should have taken eight nine point one billion dollar hit to hurt non-cash it to earnings in 2018 they need the restate they are not allowed under faz B rules to consolidate those cash flows they do not control the money how is stepping back to the initial findings you mentioned it started in the 90s awkward Jack Welch and Jeff they melt into your eyes confess it with all of this as Larry Culp potentially started to find some of the problems himself given the write downs we've seen given the adjustments we've seen anybody who signs those financials as a CEO of CFO is culpable so you're coming after the current management team right now on March seventh they had an insurance teachin they could have come clean they could have shown you the H reinsurance deals and what the losses were in dollars in percent they did not it would have been easy to do I did they didn't show you that the losses increased sixty percent year-over-year and they're growing rapidly I want to go back to what you said about your relationship with the hedge fund manager why promise confidentiality and working with them what's the point of keeping that a secret it was their request not mine how much do you see on the benefit Amy we get a percentage of the trading profits based on the quality of our research so we're letting Wall Street vote on our research they can read the report decide for themselves what's the percentage of profits it's decent it's good size and at some point if they release you from an anonymity will you then disclose who who's paying you of course we also be taking your findings to the authorities you're alleging already no wrongdoing already done what's been their response I prefer not to comment been favorable I do a lot of good cases for the government so what do you think happens next in terms of the timeline here is it a big capital raise in the offer what do you what do you predict WorldCom and GE and Enron last about four months once their accounting for odds Rick's posed we'll see how ge does are they going to come clean are they going to provide usable financial statements to the analyst community so we can see all the numbers I'm wait let's wait and see so you're looking for a broad Restatement of years going back how far I say at least last three preferably the last five with transparency a totally clean set of books with lots of details like expenses are dsdna everything a big part of your complaint is the degree to which they've changed their reporting format over the years right so it makes it difficult to go back and have cops they don't provide simple things like profit percentages for the aircraft leasing unit they don't provide the off-balance sheet financing in the leasing unit this there's got to be tens of billions in off-balance sheet financing sitting lurking off balance sheet that the rating agencies aren't taking in new health ge came out with a very long statement explaining why they they don't agree with your assessment one of the things they they point out is liquidity and I just want to get it on the record here as well that contrary to the allegations GE continues to maintain a strong liquidity position committed credit lines several executable options to monetize assets goes on to talk about sixteen point nine billion of industrial cash excluding Baker Hughes in the second quarter twelve and a half billion of liquidity of GE Capital access to thirty five billion in credit facilities and it goes down the list are you saying that those numbers are wrong are you saying that those numbers are fudged what it what are the allegations here because there they don't agree with your assessment here obviously if GE had cash in January 2018 when they took a fifteen billion dollar Reserve hit with the Kansas Insurance Department they would have been able to fund all fifteen billion at once instead they had a request a special forbearance from Kansas to pay that money over seven years so they couldn't afford fifteen billion I don't think they can afford eighteen and a half billion if they had cash they would have used it I think their cash for you think they're going bankrupt I think that they're a bankruptcy waiting to happen what's your assessment of their level of leverage if properly stated and have you been in touch with the banks that they have come into it I don't work for the banks I work for the American investor public GES leasing unit for aircraft they're showing profit margins twenty four to forty one percent over the last three years you can't do that without a lot of off-balance sheet borrowing so I think the numbers are very much fudged what has the reaction been I would imagine you've heard from a number of analysts and a number of investors this morning with wittiest numbers coming out very favorable from The Wall Street community that I know the people in the hedge fund business have been getting a lot of text I sort of shut that off I just want to concentrate on the interview and answer questions for the American public and educate them well and and for your people who were paying you let's be honest about that I mean but but the question I mean some will ask how you outsmarted analysts on the buy side and the sell side who've had access to a lot of this information for years I think the difference is I'm a certified fraud examiner I'm trained in forensic side all the big forensic accounting cases the big ones like Enron and world come Adelphia I've met the CFOs to cook the books at those companies have learned how they've studied under them and learned how they cook the books I know what questions to ask and they know what to look for in the balance sheet in the income statement so I'm trained forensic Lee we're Wall Street the analysts many of those guys and gals they cover a dozen or two dozen stocks they don't have the time to spend seven months with a highly dedicated team focusing on one company and that's how we solve it so if all of this is true when we don't know that it is to be it all due respect is it a failure of the research community it is and of course a failure on the part of the external auditors and the actuaries to cover GE and and of course the rating agencies they've but those people have always been late to the party at the rating agencies are just coming back to the time line you said you first got into this into the 90s yet this has been a seven-month process more recently so why the time gap in between what catalyze you to work on this in the last seven months was it the the incentive provided to you by hedge fund no it was when General Electric move their headquarters to Boston they completed that move in 2018 when you move to my hometown you're running a scam I'm gonna come after you it was that simple because they moved to Boston it was that that was the impetus for me personally I like to take a personal interest in my cases and I said you know I've no they've been a fraud for decades I think I'm gonna do something about it now that they're in Boston but with all due respect again 'harry for you then framing it that this is the work done for American public at large American investors and then you play the boston card and you're getting remarried that there's some mixed messaging there in terms of what your ultimate motivations are GE was the biggest employer in Erie Pennsylvania where I grew up that was where their transportation division made locomotives I have relatives that work there and are on pension from General Electric I have a lot of friends as well in my hometown that are getting those pensions there's a million people that rely on GE for their paycheck or pensions or healthcare benefits they need to know what is your message to them right now today I mean we know quite a number of people right CNBC NBC used to be in part owned by GE we know a lot of people that will be impacted by this report as well and allegations in it what would your message be to them as we see the stock cost six percent right now read the report and demand accountability you

Channel: CNBC Television

Views: 240,989

Rating: 4.8409176 out of 5

Keywords: Squawk on the Street, CNBC, business news, finance stock, stock market, news channel, news station, breaking news, us news, world news, cable, cable news, finance news, money, money tips, financial news, stock market news, stocks, General electric, ge stock, ge price, general electric stock, general electric scam, general electric fraud, ge fraud

Id: 2VCtB3E0JB0

Length: 13min 35sec (815 seconds)

Published: Thu Aug 15 2019

Reddit Comments

[u/Mattseee]

All Bostonians are townies at heart.

Interviewer: You said you first got into this in the 90s ... what catalyzed you to work on this in the last 7 months? Was it the incentive provided to you by a hedge fund?

Markopolos: No, it was when GE moved their HQ to Boston. When you move to my home town and you're running a scam, I'm gonna come after you. It was that simple.

Interviewer #2 (incredulous): Because they moved to Boston?!

Markopolos: That was the impetus for me, personally. I like to take a personal interest in my cases. I said, I know they've been a fraud for decades, I think I'm gonna do something about it now that they're in Boston.

[u/TheCavis]

The full report (PDF) for anyone interested or who can understand a lot of financial terms.

[u/[deleted]]

Can't wait for the biopic starring Bob Odenkirk