General Electric Co. fell the most in nearly four years after a prominent whistle-blower working with a short-seller accused the company of masking financial problems. The company called the claims “meritless.”
Harry Markopolos, who had raised concerns over investment manager Bernie Madoff before his Ponzi scheme was exposed, said GE has understated liabilities in its insurance unit and hasn’t properly accounted for its investment in Baker Hughes.
GE’s insurance unit will need to increase its reserves immediately by $18.5 billion in cash with an additional noncash charge of $10.5 billion when new accounting rules take effect, Markopolos said in a report Thursday. He also alleged that GE isn’t properly accounting for its interest in Baker Hughes, an oilfield services company.
The allegations complicate GE CEO Larry Culp’s efforts to regain investor trust following years of strategic missteps and stock declines at the company. Since taking the helm in October, he has sought to reduce risk in the finance operations, fix the power-equipment unit and stanch the flow of bad news that erased more than $200 billion from GE’s market value in the two-year period ending Dec. 31.
The shares plunged 13% to $7.85 at 11:09 a.m. in New York, the biggest intraday decline since late August 2015. The decline triggered a trading limitation on short-sellers that goes into effect when a drop exceeds 10%. GE had climbed 24% this year through Wednesday, following a 57% plunge in 2018.
GE defended its accounting, calling Markopolos’s allegations “meritless.”
“We are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims,” the Boston-based manufacturer said by email. “GE operates at the highest level of integrity and stands behind its financial reporting.”
Markopolos is working with a hedge fund he didn’t identify and stands to benefit from bets that GE’s stock will decline, according to the Wall Street Journal, which reported earlier on the accounting report. Markopolos and his colleagues also hope to collect a whistle-blower reward by reporting their findings to regulators, the Journal said.
Another prominent short seller, John Hempton of Bronte Capital, dismissed Markopolos’s analysis as “silly.” While Hempton said “GE is a deeply problematic company,” he recommended that investors ignore the report.
To calculate the $18.5 billion figure, Markopolos compared GE’s reserves for its long-term care insurance business to those of Prudential Financial Inc.
GE previously said that the new insurance accounting standard, which it called a “complex change,” could “materially” affect its financial statements. The Financial Accounting Standards Board has announced new standards that would tweak how companies account for certain insurance contracts such as long-term care policies. The board has endorsed delaying implementation of the new standards by one year to 2022.
By Tony Robinson and Katherine Chiglinsky