General Electric Co. needs this like a hole in the head.

As the Boston company labors to rebuild its battered profits and tainted reputation, whistle-blower Harry Markopolos — he of Bernie Madoff fame — has released a report accusing GE of running a “decades-long accounting fraud” that he claims is bigger than the Enron scandal.

Markopolos posted his 174-page report online and gave an advance interview to The Wall Street Journal, whose story Thursday morning helped send GE’s stock down more than 9 percent to $8.16 in late afternoon trading.

He also shared the report prior to publication with a hedge fund that is betting GE’s stock price will collapse. Markopolos said he and his firm will get a cut of any profits that the undisclosed hedge fund earns on its GE wager, and he has provided information to federal securities regulators in hopes of collecting a whistle-blower reward.

In the introduction to his report, Markopolos wrote, “My team has spent the past 7 months analyzing GE’s accounting and we believe the $38 Billion in fraud we’ve come across is merely the tip of the iceberg. To put it into perspective, $38 Billion in accounting fraud is over 40% of GE’s market capitalization and we know we only found a portion of it.”


GE, which has just started to regain investor confidence under new CEO Larry Culp, slammed Markopolos in a statement, saying his claims have no merit.

“The Company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims,” GE said. “GE operates at the highest level of integrity and stands behind its financial reporting. We remain focused on running our businesses every day, following the strategic path we have laid out.”


On Monday, GE disclosed that Culp bought $3 million of the company’s stock, bringing his stake to 940,000 shares. I don’t think that was a coincidence.

So what’s going on here?

Has Markopolos — whose attempts to flag the Madoff scam were ignored by the feds until it was too late — gone over to the dark side by joining a hedge fund he won’t name in a short-selling campaign against GE? Or is the company, whose accounting practices are already under investigation by the Securities and Exchange Commission and the Justice Department, trying to cover up serious financial problems?

“Markopolos may have enjoyed the spotlight when his concerns about Madoff proved to be well-founded,” Peter Cohan, a Babson lecturer and GE shareholder, wrote in a Forbes column. “It remains to be seen whether he will be right about GE.”

Markopolos’s allegations of financial fraud focus on two areas: GE’s long-term care insurance business and its majority stake in Baker Hughes, an energy services company.

The report says the company “continuously failed to fund adequate reserves” for its long-term care policies, “taking billions in fake ‘earnings’ over a period of decades.” It estimates that GE needs to set aside an additional $18.5 billion to meet future claims and has used accounting tricks to create $10.5 billion in “phantom equity.”

In its statement, GE said, “We believe that our current reserves are well-supported for our portfolio characteristics, and we undertake rigorous reserve adequacy testing every year.”


For Baker Hughes, Markopolos says GE violated accounting rules to avoid booking a $9.1 billion loss in 2018. GE owns just over 50 percent of Baker Hughes and consolidates its results into its financial reporting. Markopolos argues that stake is “now strictly an investment,” which would require GE to take a loss on its holdings.

GE’s response: “As a majority shareholder of BHGE, we are required to report BHGE on a consolidated basis under U.S. GAAP, contrary to what Mr. Markopolos alleges.” The company also said it has disclosed that its loss from dropping its stake below 50 percent would be about $7.4 billion as of last month.

I agree with Cohan: It’s impossible to tell right now whether Markopolos is right. Accounting, especially for long-term care insurance, is complicated, and there are often competing views on what is proper.

But there is already smoke rising from GE’s financial reports, which is why the feds are investigating. And Markopolos has been right in other cases beyond Madoff, including one involving State Street Corp. and other banks on how they handled foreign exchange trading for pension funds and other customers.

GE will fight this one hard. It may prevail. But either way, it’s going to be ugly.

You can reach me at larry.edelman@globe.com and follow me on Twitter @GlobeNewsEd.