Business

Madoff whistleblower says GE is 'one recession away from Chapter 11'

Posted August 16, 2019 1:45 p.m. EDT
Updated August 16, 2019 2:04 p.m. EDT

— Harry Markopolos, the accounting investigator who accused General Electric of massive fraud on Thursday, is warning that the company could be in serious financial trouble -- and even go bankrupt -- if the economy turns south.

"GE is one recession away from Chapter 11. Their balance sheet is in tatters," Markopolos told Julia Chatterley on CNNi's "First Move" show Friday.

"We'll see how solvent they are at year end, and we'll see if they make it into 2020," he added.

GE shares plunged more than 11% Thursday, their worst drop since 2008, but rebounded Friday along with the broader market, surging nearly 9%. GE's stock is up 17% so far in 2019.

The explosive comments from Markopolos follow the release of a 175-page whistleblower report in which he and his team of investigators accused GE of nearly $40 billion in accounting fraud tied to its insurance business, as well as issues with how it accounts for its stake in oil services firm Baker Hughes.

In the report, Markopolos claims that GE is a bigger fraud than Enron and WorldCom, which both went bankrupt following accounting scandals in the early 2000s.

The company has shot back, saying Thursday the Markopolos claims are "meritless" and disputing his allegations of a looming cash crunch. "GE continues to maintain a strong liquidity position, committed credit lines, and several executable options to monetize assets."

The company also said it "expects to make significant progress" towards reducing its debt by the end of 2020.

As of June 30, GE had nearly $106 billion in debt on its balance sheet-- including liabilities from GE Capital -- and just $71 billion in cash.

Markopolos rose to fame as a whistleblower by correctly predicting that Bernard Madoff's money management firm was a fraud years before it collapsed in 2008.

GE isn't the only one pushing back on his most recent claims. Another firm that specializes in exposing accounting problems, Citron Research, took issue with the Markopolos findings too. The company said in a tweet that the report "was the worst that activist short selling has to offer. Aggressive accounting is not fraud." Citron added that the Markopolos report was "disingenuous all the way through."

And in a separate statement sent to CNN Business Friday, CEO Larry Culp said "GE will always take any allegation of financial misconduct seriously. But this is market manipulation -- pure and simple."

"Mr. Markopolos's report contains false statements of fact, and these claims could have been corrected if he had checked them with GE before publishing the report," he added.

Culp is putting his money where his mouth is. He bought $2 million of GE stock on Thursday, as did several other GE insiders, as a show of confidence in the company's future.

GE has been busy selling assets over the past few years to pay down debt and position itself as a leaner firm. Under the leadership of previous CEOs Jack Welch and Jeffrey Immelt, GE became too bloated. The company, which used to reliably generate solid earnings growth, started to miss Wall Street's forecasts -- causing its stock to plunge.

On Friday Markopolos told Chatterley that he continues to worry about GE's insurance business, adding that the company waited until the last minute to take writedowns.

He noted that other insurance companies, such as Prudential and Unum, have avoided similar problems by adding proper reserves to account for potential losses.

Markopolos also dismissed claims by GE that he will profiting from the fall in the company's stock price because he is working with a firm that is shorting GE stock -- betting that the price will go down so it can make money off of the decline.

He would not name the investment firm, saying simply that he's a "seeker of the truth."

"If I see accounting fraud, I go after it," he said.

Markopolos added that he's had "ongoing discussions" with the Securities and Exchange Commission and the Department of Justice about their investigations into GE's accounting.

GE has said in regulatory filings and during earnings conference calls with analysts that is cooperating with both the SEC and DOJ. The SEC declined to comment about the status of its GE probe. The DOJ was not immediately available for comment.