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General Electric shares plunged more than 11% Thursday after Harry Markopolos, who is famous for blowing the whistle on Bernie Madoff’s Ponzi scheme in 2008, accused GE of orchestrating a massive fraud.
GE CEO Larry Culp on Thursday bought 252,200 shares at $7.93 per share, a purchase worth almost $2 million, according to an SEC filing. The buy helped bump GE’s share price around 2% in after-hours trading. Culp’s ownership of GE stock nearly doubled this week after an earlier purchase Tuesday — he now owns more than 1% of the company’s outstanding shares.
“In fact, GE’s $38 billion in accounting fraud amounts to over 40% of GE’s market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds,” Markopolos wrote in the report, referring to the scandals that eventually helped bankrupt energy giant Enron in 2001 and long-distance telco WorldCom in 2002.
GE strongly denied Markopolos’ allegations.
“GE has been running a decades-long accounting fraud by only providing top line revenue and bottom line profits for its business units and getting away with leaving out cost of goods sold” in addition to various other expenses,” Markopolos claims.
Seidman suggested in the CNBC interview that Markopolos misunderstood the company’s accounting practices.
“I think that the basis on which the report was developed is questionable at best,” Seidman said. “We are in full compliance with accounting standards in the US. We prepare them with a rigorous process. I, as the chair of the audit committee, have access to the people and the books and records at GE and I stand behind the financial reporting of this company.”
GE was not immediately available for further comment about the Markopolos claims. But in its statement, the company took issue with Markopolos’ allegations about accounting in its insurance unit, saying that “current reserves are well-supported for our portfolio characteristics.”
GE also defended how it accounts for its BHGE stake and added that it has “a strong liquidity position” — with ample cash and access to credit lines.
The company noted that “Mr. Markopolos openly acknowledges that he is compensated by unnamed hedge funds” and added that these funds are “financially motivated” to profit from short selling the stock, a move that could push shares lower and “create unnecessary volatility.”
Still, Markopolos points out in his report that he is not making any investment recommendations, adding that “GE’s current and past employees are the victims here as are GE’s lenders, vendors, and customers all of whom have to deal with the aftermath of an accounting fraud.”
Markopolos is far from the only one critical of GE’s accounting.
KPMG declined to comment about its business relationship with GE because of “client confidentiality requirements.”
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