General Electric Co (GE) on Thursday tumbled the most since 2008 after a prominent financial examiner working with a short seller accused the company of “accounting fraud.”
GE CEO 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 that GE would need to increase its insurance reserves immediately by US$18.5 billion in cash — plus an additional noncash charge of US$10.5 billion when new accounting rules take effect.
GE is also hiding a loss of more than US$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. “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 was not enough to stem the share plunge at a company long criticized for its murky finances.
Culp, who took the helm in October last year, has vowed to improve transparency while also seeking to fix the power equipment unit and halt a slide that erased more than US$200 billion from GE’s market value in the two-year period ending on Dec. 31 last year.
“The short report accurately depicts a GE culture that historically hid losses and deceived investors,” Melius Research LLC analyst Scott Davis 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 percent to US$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 percent.
GE had climbed 24 percent this year through Wednesday, following a 57 percent plunge last year.
Following the close, GE climbed 3 percent in late trading after the company said that Culp had purchased about US$2 million in shares amid the rout.
He earlier this week bought US$3 million in the wake of a steady decline since GE reported earnings at the end of last month.
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 that the analysis included “novel interpretations and downright mistakes” about accounting requirements.
Markopolos is working with a third party he did not 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.
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