Despite a full on assault by the Bernie Madoff whistleblower — turn General Electric (GE) whistleblower —Harry Markopolos, investors remain hesitant to listen to the collective positive spin.
GE’s stock cratered 12% on August 15 on damning new research by Markopolos on the state of the industrial giant’s finances. The stock rallied about 10% on August 15 as GE forcefully rebutted Markopolos’ financial fraud claims and CEO Larry Culp disclosed he bought $2 million worth of stock in a show of support.
As far as reading the market’s tea leaves goes, it’s unclear who to believe at this point.
The financial fraud allegations
In a scathing new 170-plus page research report, financial fraud expert and chartered financial analyst (CFA) Markopolos alleges GE is committing accounting fraud.
Markopolos — whose research on GE is allegedly being used by a hedge fund that reportedly shorts the industrial giant’s stock —dubs the company “GEnron.”
“I believe I have a few smoking guns on GE,” Markopolos told Yahoo Finance’s The Final Round, adding that information was held back from the report for law enforcement. He added that it took seven and half months to complete the report and it was “self-funded.”
Markopolos said the next chapter for GE is Chapter 11 bankruptcy.
Several allegations from Markopolos’ report includes:
GE has committed a $38 billion fraud primarily by hiding losses.
GE will not be cash flow positive by 2021 as executives have suggested.
GE is not liquid right now.
A recession could tip GE into Chapter 11 bankruptcy.
Backlash from assorted GE loyalists quickly emerged.
GE’s charm defensive
On August 19, GE’s investor relations chief spoke out, after what looked to be a barrage of inquiries by interested parties this past weekend.
“Finally, some of questions I’ve been receiving go straight to the heart of GE’s culture, so let me be clear: we operate with absolute integrity and stand behind our financial reporting,” Steve Winoker, GE’s vice president of investor relations, wrote in his latest newsletter. “We are focused on delivering on our strategic priorities and we remain committed to providing accurate, complete and timely financial information to you. Our team remains confident in our company’s long-term strengths; in addition to the executive and director stock purchases I mentioned last week, GE Gas Power CEO Scott Strazik also purchased another 34,836 shares on Thursday.”
The same day another GE friend emerged to downplay Markopolos’ findings.
“Most everything that was alleged has already been discussed internally and externally,” former GE Vice Chairman Bob Wright said on Yahoo Finance’s The Ticker. “It was like bringing out old laundry and getting it out there as if nobody knew what it was. They did a twist on it. They made it seem like it was fraudulent. They made it seem like it was illegal.”
But despite the charm offensive, GE’s stock has still underperformed following Markopolos’ research.
Meanwhile Wall Street — likely fearing a loss of access to GE’s top brass — mostly came out in defense of GE. One very prominent GE analyst Yahoo Finance talked with, however, remains concerned about the company’s financials and the stock’s outlook.
With a source telling Yahoo Finance that Markopolos has a response coming soon to GE’s rebuttals, this firestorm is unlikely to die out anytime soon.
GE has repeatedly declined to make anyone from its C-suite or board of directors available to Yahoo Finance for an interview. Instead it has pointed to various statements made by Culp and other executives.