It’s pretty hard to deny that General Electric Co. (NYSE: GE) stockholders suffered a bloodbath on Thursday. The company’s shares had dropped 11% by the closing bell, following a scathing report on the company by whistleblower Harry Markopoulos, whose prior claims to fame include toppling Bernie Madoff, Enron and WorldCom.
GE CEO Larry Culp not only fired back with a charge of “market manipulation,” but he also spent nearly $2 million of his own money to buy more than 250,000 additional shares of GE stock at $7.93 a share. At an opening price early Friday of $8.54, Culp already has gained nearly $150,000 on his investment.
In a report posted online Thursday, Markopoulos charged GE with $38 billion in accounting fraud related to its reinsurance business for long-term care (LTC) policies issued by other insurers.
In a statement, 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.
In a statement issued Thursday, the company disputed Markopoulos’s allegations regarding its reserves requirement, its accounting for its majority stake in Baker Hughes, a GE Company (NYSE: BHGE) and its liquidity.
As Barron’s pointed out Friday morning, the cash drain Markopoulos alleges is coming is an investor’s biggest worry. Markopoulos claims “86% of GE’s LTC claims are ahead of them and the accompanying losses are growing at an exponential and unsurvivable rate.”
According to Markopoulos, GE needs $18.5 billion in cash essentially immediately to cover its reserve requirements, in addition to the $15 billion it already began contributing late last year. That’s the tricky bit, RBC analyst Mark Dwelle told Barron’s. Without detailed knowledge of GE’s reinsurance agreements — all of which are slightly different and remain undisclosed in full — comparing GE’s state-level filings to the filings of other insurers is like comparing a nectarine to a peach, they are close, “but they are not the same.”
In the late morning Friday, GE shares traded up about 6.3%, at $8.51 in a 52-week range of $6.40 to $13.25, and the 12-month consensus price target on the stock is $10.89.
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