GE pushes back after whistle-blower calls it ‘a bigger fraud than Enron’

Harry Markopolos is best known for flagging Bernie Madoff’s Ponzi schemes.
Harry Markopolos is best known for flagging Bernie Madoff’s Ponzi schemes. Daniel Acker/Bloomberg News/File 2010

The long, slow turnaround of General Electric was finally taking shape. A troubled business line showed signs of stability, lingering accounting issues seemed to be in the rear view mirror, the stock was no longer in free fall. GE even raised its financial forecast for the year. And, on Tuesday, the company tidily resolved a simmering labor dispute.

Then along came Harry Markopolos.

Markopolos is a financial investigator with Boston roots, best known for flagging Bernie Madoff’s Ponzi schemes. On Thursday he dropped a bomb on GE: a 175-page report that identified $38 billion in accounting irregularities and labeled General Electric as “a bigger fraud than Enron.”


In response, the stock plummeted 11 percent, to close Thursday at $8.01 a share, its lowest point this year. Nearly $9 billion of market value, was gone in a matter of hours. The Boston-based company immediately fought back. Beyond denying the accusations, chief executive Larry Culp accused Markopolos of market manipulation because the investigator stands to profit from an unnamed hedge fund’s bet that the company’s stock price will fall.

Judging from the market’s reaction, many investors sided with Markopolos.

“This was a punch in the solar plexus,” said Mark Williams, a risk management expert at Boston University who has worked with Markopolos in the past. “They were getting investors behind them. . . . But the reality is, it took years for GE to create this problem, and it’s going to take years to get out of it.”

The relentless Markopolos may be the last person Culp wants on his trail, particularly as he tries to revive the company’s tattered reputation on Wall Street.

The at-times rambling report from Markopolos takes aim at everything from the crown jewel of the remaining GE businesses, its jet-engine operations, to executive compensation, accompanied by a fat-cat cartoon character. But the main focus is squarely on the way GE accounts for its financial headaches in insurance and its oil-and-gas affiliate, Baker Hughes.


And for a subject as potentially dry as accounting, Markopolos uses some vivid language.

“Accounting fraud is like being addicted to heroin,” he said in an interview with The Boston Globe. “Once you go down that path, you can’t pull the needle out.”

GE has been banged up in the past for its accounting practices, in particular for how it reserved money to cover liabilities tied to a long-jettisoned, long-term care insurance business.

In early 2018, GE disclosed a $15 billion shortfall in those reserves.

But Markopolos said the problem with long-term care insurance, used to cover nursing home costs, is even worse than that. GE, he said, is underestimating the amount of bills that will come due as policyholders get older and does not have enough money to cover them.

Based on his studies, Markopolos said, the company needs to set aside another $18.5 billion, plus billions more for a related charge because of accounting rules that take effect in 2021.

Then there’s Baker Hughes, the $7.4 billion bet that then-chief executive Jeff Immelt placed on the oil industry when GE reached a deal to acquire a majority stake in the company in 2016. Culp is now trying to unwind that stake, but Markopolos said that GE should be recording a $9-billion loss related to a drop in value in the Baker Hughes business.


Markopolos said he has long been suspicious of GE’s financial practices, dating to the 1990s under storied chief executive Jack Welch. He recalled attending lunches back then with other financial analysts in Boston, and the question always came up: How is it that GE was always able to meet or beat its earnings expectations?

Markopolos recently moved from the Boston area to Puerto Rico and got a chance to put his suspicions to the test. He was probing another insurance case when he stumbled across filings at state agencies with numbers from GE that he said looked suspicious. With all he has found, Markopolos said he is convinced GE’s liabilities far exceed its assets — a recipe for trouble. “Their books are a mess,” he said. “Whether it’s incompetence, or corruption, it doesn’t matter. Both are separate paths to bankruptcy.”

GE punched back, first with statements aimed at debunking the questions around long-term care insurance and Baker Hughes, then with Culp’s accusation that the report was “market manipulation — pure and simple.” (Markopolos has declined to name the hedge fund that will compensate him for the GE research.)

Culp castigated Markopolos for not checking with GE first, saying the failure shows Markopolos is not interested in accurate analysis and instead motivated by pushing the stock price down “so that he and his undisclosed hedge fund partner can personally profit.”

Peter Cohan, a management lecturer at Babson College who owns GE shares, said the market’s reaction shows GE still needs to do more to prove to investors that its accounting is sound. Cohan’s advice for GE? Have an independent investigation conducted of its accounting to remove all this uncertainty hanging over the stock.


For now, Cohan remains unconvinced that GE has put its problems behind it. “It seems like they were possibly turning a corner,” Cohan said. “[But GE’s stock] feels more like a lottery ticket than it did two weeks ago.”

When Culp said 2019 would be a “reset year,” this could not have been what he had in mind.

Williams, the BU professor, said he thought Culp had done a good job convincing investors about GE’s comeback. In particular, he cited Culp’s decision to buy nearly 332,000 shares in the company on Monday, a purchase valued at $3 million.

On Thursday, amid the tumult, Culp doubled down: He bought another big slug of GE stock, putting down $2 million to pick up 252,000 shares.

Now he is working to persuade other investors to do the same.

Williams worked with Markopolos in 2015 on an investigation into the MBTA’s pension fund. Markopolos, Williams said, has built significant credibility over the years in exposing creative accounting techniques. “If even half of what he’s saying is true,” Williams said, “then GE has a lot of trouble on their hands.”

Jon Chesto can be reached at jon.chesto@globe.com. Follow him on Twitter @jonchesto.