Harry Markopolos, the Erie native and financial fraud investigator who uncovered the $65 billion Ponzi scheme of financier Bernie Madoff, has issued a report on what he says is “a bigger fraud than Enron.”
The subject of his 175-page report, which was posted online Thursday, is the Boston-based General Electric Co., longtime owners of GE Transportation and the most widely held stock in the Erie area.
Markopolos, a forensic accountant who is a 1974 graduate of Cathedral Preparatory School, offered some perspective on what he described as $38 billion in accounting fraud.
“It’s the biggest, bigger than Enron and WorldCom combined,” he wrote, going on to claim that GE’s $38 billion in accounting fraud amounts to over 40 percent of the company’s market capitalization.”
According to Yahoo Finance: “At the center of his investigation are eight long-term care insurance deals that GE executed. The report alleges that GE has been hiding ‘massive loss ratios’ and ‘exponentially increasing dollar losses.'”
In the preamble to his report, Markopolos explains that GE is going to need a great deal of money to cover future losses for long-term-care insurance deals. The report says that GE needs $18.5 billion in cash immediately to deal with a wave of impending claims. He said the company will need another $10.5 billion to address another charge due by 2021.
“Of the $29 billion in new LTC reserves that GE needs, $18.5 billion requires cash immediately,” Markopolos wrote.
He goes on to explain the company’s cash situation is far worse than it has previously disclosed.
“My team has spent the past 7 months analyzing GE’s accounting and we believe the $38 billion in fraud that we’ve come across is only the tip of the iceberg,” he wrote.
His report can be read in its entirety at gefraud.com.
Both the markets and GE officials reacted swiftly to the charges. As of 11:10 a.m. Thursday, the company’s stock, thought to be held in the retirement plans of thousands of former GE employees in the Erie area, had fallen 12 percent to trade at $7.86 a share.
GE, which sold GE Transportation to Westinghouse Air Brake Technologies Corp. in February of this year, fired back with a statement to the media.
“The claims made by Mr. Markopolos are meritless,” GE said in a statement. “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.”
The statement goes on: “Mr. Markopolos openly acknowledges that he is compensated by unnamed hedge funds. Such funds are financially motivated to attempt to generate short selling in a company’s stock to create unnecessary volatility.”
Claims made by Markopolos are just that—claims made by his team. No civil or criminal charges have been made.
While many of the report’s claims of accounting fraud date back a number of years, they also overlap with the 22-month tenure of Jamie Miller, former CEO of GE Transportation, as GE’s chief financial officer.
The company announced in late July that Miller, who joined the company as chief accounting officer in 2008, would be stepping down as CFO. She remains with GE during a period of leadership transition.
“I deeply value the opportunities I’ve had at GE over the last eleven years,” Miller said in a statement issued at the time. “With the progress we’ve made and the stabilization beginning to take hold, the time is right for my transition.”
Thursday’s drop in stock price is only the most recent hit for the owners of what was once one of the world’s most highly regarded conglomerates.
Just three years ago this week, the stock was trading at $31.24 a share.