(Bloomberg) -- General Electric Co. tumbled the most since 2008 after a prominent financial examiner working with a short seller accused the company of “accounting fraud.” GE Chief Executive Officer Larry Culp called the claims “market manipulation -- pure and simple.”
Harry Markopolos, who had raised concerns over investment manager Bernie Madoff before his fraud was exposed, said GE will need to increase its insurance reserves immediately by $18.5 billion in cash -- plus an additional noncash charge of $10.5 billion when new accounting rules take effect. GE is also hiding a loss of more than $9 billion on its holdings in Baker Hughes, an oilfield services company, Markopolos said.
“These impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants,” Markopolos said in a report Thursday. “GE’s cash situation is far worse than disclosed in their 2018” annual report to regulators.
GE dismissed the claims as “meritless” without providing a point-by-point rebuttal. That wasn’t enough to stem the share plunge at a company long criticized for its murky finances. Culp, who took the helm in October, has vowed to improve transparency while also seeking to fix the power-equipment unit and halt a slide that erased more than $200 billion from GE’s market value in the two-year period ending Dec. 31.
“The short report accurately depicts a GE culture that historically hid losses and deceived investors,” Scott Davis, an analyst at Melius Research, said in a note to clients. “GE has no credibility at all in responding to the report today as inaccurate. The truth is GE is using a set of assumptions, the short report uses another. We don’t know where the truth lies.”
The shares plummeted 11% to $8.01 at the close in New York, the biggest drop since April 2008. The slide had triggered a trading restriction on short-sellers that takes effect when a decline exceeds 10%. GE had climbed 24% this year through Wednesday, following a 57% plunge in 2018.
Following the close, GE climbed 3% in late trading after the company said Culp had purchased about $2 million in shares amid the rout. He bought $3 million earlier this week in the wake of a steady decline since GE reported earnings at the end of July.
The Boston-based company defended its accounting in a statement by Culp and board member Leslie Seidman, who chairs GE’s audit committee.
“The fact that he wrote a 170-page paper but never talked to company officials goes to show that he is not interested in accurate financial analysis, but solely in generating downward volatility in GE stock so that he and his undisclosed hedge fund partner can personally profit,” Culp said of Markopolos.
Seidman said the analysis included “novel interpretations and downright mistakes” about accounting requirements.
Markopolos is working with a third party he didn’t identify and stands to benefit from bets that GE’s stock will decline. He and his colleagues are also seeking to collect a whistle-blower reward by reporting their findings to regulators. His analysis was reported earlier by the Wall Street Journal.
The financial analyst, who had worked for a rival investment firm to Madoff’s, wrote a book in 2010 about his efforts to expose the swindler. Markopolos now specializes in investigating possible fraud by companies.
Hedge fund billionaire Stanley Druckenmiller said he purchased GE shares Thursday. The implication that Culp and the new management team are engaged in intentional fraud is “outrageous,” he said by email.
Druckenmiller’s Duquesne, which owned 6.19 million shares as of June 30, had been shorting the stock on and off beforehand because the investor said he didn’t believe in previous management.
A 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 portfolio to those of Prudential Financial Inc.
The business has been difficult for virtually every company in the market. The policies, which emerged in their modern form in the 1980s, cover health-related costs that may not be paid by Medicare or standard health insurance, such as nursing home stays and visits by home health aides.
The products were undermined by faulty assumptions, such as how long people would live and how expensive their care would be. Meanwhile, insurers were burned by lower-than-expected returns on bond portfolios backing the obligations.
GE has 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 guidelines 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.
GE, which has revamped operations in recent years to focus on making jet engines, power equipment and medical scanners, last year disclosed a $6.2 billion charge tied to old insurance policies for long-term care. It also said its finance unit would pay $15 billion over seven years to fill a shortfall in reserves.
--With assistance from Joshua Fineman.
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