In a research report posted online Thursday, Harry Markopolos alleges the struggling conglomerate has masked the depths of its problems, resulting in inaccurate and fraudulent financial filings with regulators. The report, which numbers more than 170 pages and was reviewed by The Wall Street Journal, is a mixture of detailed financial analysis and sweeping claims.
Mr. Markopolos said, in an interview ahead of the report’s release, his group found GE’s insurance unit will need to bolster its reserves by $18.5 billion in cash and faulted the way the company is accounting for its oil-and-gas business. All told, he said, the accounting problems amount to $38 billion, or 40% of the conglomerate’s market value.
“GE stands behind its financials. We operate to the highest level of integrity in our financial reporting and we have clearly laid out our financial obligations in great detail,” a GE spokeswoman said in an email before the report was published. “While we can’t comment on the detailed content of a report that we haven’t seen, the allegations we have heard are entirely false and misleading.”
Mr. Markopolos said he and his colleagues are working with an undisclosed hedge fund, which is betting GE’s share price will decline. Mr. Markopolos’s group gave the investor access to the research prior to publication and will receive a portion of any trading proceeds. He declined to identify the hedge fund. The group also is sharing its findings with securities regulators, hoping to collect a cash reward as part of a whistleblower program, Mr. Markopolos said.
The group’s research indicates that GE is short on working capital—a key measure of liquidity—and that its cash situation is far worse than disclosed in its regulatory filings.
GE said it hasn’t been contacted by Mr. Markopolos and that the group’s report was produced to help short sellers profit by creating volatility in GE’s shares. “We will not be distracted by this type of meritless, misguided and self-serving speculation and neither should anyone in the investor community,” the GE spokeswoman said.
The Boston-based investor-turned-investigator warned the Securities and Exchange Commission about the Madoff investment scheme years before it became public, but was ignored. In a more recent campaign, Mr. Markopolos helped expose a foreign-currency trading scandal at several banks. He has helped spawn a cash-for-tips whistleblower industry.
GE is already under investigation by the SEC and Justice Department for potential accounting issues that have come to light in the past two years related to its insurance holdings and problems in its power division. The company has denied accounting fraud in response to lawsuits and said it is cooperating with investigators. GE has said it is considering switching auditors after using KPMG LLP for more than a century.
The Markopolos group said it plans to present its report to the SEC and to meet with federal prosecutors and investigators about its findings. In the report, the group says some information will be given exclusively to law enforcement.
MORE AT WSJ: