52°F
weather icon Clear

Whistleblower accuses GE of fraud, misleading investors

NEW YORK — A whistleblower who warned regulators about Bernard Madoff’s Ponzi scheme is now accusing General Electric of misleading investors, sending the company’s stock on a downward spiral.

Investigator Harry Markopolos accused GE on Thursday of engaging in accounting fraud worth $38 billion, saying the company is hiding massive losses and heading for bankruptcy.

The issues he outlined lie primarily in GE’s troubled Capital unit, a financial services division often seen as a black hole in the company. The Capital unit holds commercial and personal loans, as well as insurance policies that include coverage of long-term care.

In his report, Markopolos suggests that an accounting rule change for insurance liabilities and a significant lack of reserves to cover long-term care liabilities will push GE to take a $29 billion hit.

GE called Markopolos’s claims unsubstantiated and meritless, saying its reserves are well-supported and the company undergoes rigorous testing annually to ensure its reserves are adequate.

“GE operates at the highest level of integrity and stands behind its financial reporting,” the company said in a statement. “We remain focused on running our businesses every day, following the strategic path we have laid out.”

Boston-based GE’s shares closed Thursday down $1.02, or more than 11%, at $8.01.

In an apparent move to underscore management’s confidence in the conglomerate’s future, GE reported after the close of trading that its CEO, Larry Culp, had bought about 250,000 shares of GE stock.

Markopolos disclosed that an unnamed hedge fund paid him for access to his GE report before it was released, revealing that he will be paid through a percentage of the trading profits. Asked about the potential conflict of interest, he told CNBC “I need to get paid. I have a family to support.”

Markopolos first became suspicious of GE’s accounting when he attended industry luncheons where portfolio managers and analysts said they didn’t believe GE’s numbers could be true because they met or beat earnings estimates every quarter, year after year.

He said the $15 billion hit GE took two years ago when it miscalculated the cost of caring for people who lived longer than expected was “a nasty market surprise and it’s about to get $29 billion worse.” He said GE should have taken action to boost its reserves years earlier to cover its unfunded long-term care liability, but instead waited until a new management team was in place.

GE is not alone in underestimating the reserves needed to cover long-term liabilities. Private companies and public pension funds alike have struggled to keep up with the growing cost of providing health care to an aging population that’s living longer than expected.

“You have to be really kind of smart about the way you write these policies to begin with,” said Joshua Aguilar, an equity analyst at Morningstar who follows GE. “Your hands are tied. You can’t go back and rewrite premiums.”

Morningstar has long believed that GE’s assumptions about how it would cover those liabilities were too aggressive, but that’s an industrywide problem.

“Does it rise to the level of fraud? My answer to that is, ‘No,’” Aguilar said.

Markopolos also said GE misclassified its investment in Baker Hughes, an oil and gas business. He said that by misclassifying its ownership stake, GE hid a $9.1 billion loss last year. GE said it disclosed potential losses of $7.4 billion related to Baker Hughes in a recent federal filing and stood by how it classified the business.

Independent of Markopolos’ report, GE Capital was already facing investigations, including an inquiry by the Securities and Exchange Commission about the previous $15 billion hit.

Markopolos is known for his role as the whistleblower who warned the SEC about Madoff’s Ponzi scheme, but those claims were initially ignored by regulators.

Don't miss the big stories. Like us on Facebook.
Business Videos
Amazon blocks sale of N95 masks to public - VIDEO
Amazon established a new section of its website where U.S.-accredited hospitals or state or federal agencies can apply for supplies. N95 masks, surgical masks, facial shields, surgical gowns, surgical gloves and large-volume sanitizers are among the restricted items. (Las Vegas Review-Journal)
Cars line up for over 4 miles for food
Cars were lined up along Sahara Avenue from Palace Station to South Rainbow Boulevard for food distribution sponsored by Three Square and Central Church in Henderson.
US weekly jobless claims jump to 6.6 million - VIDEO
The U.S. Labor Department reported 6.6 million people filed for unemployment insurance in the past week. A reported 10 million people have filed over the past two weeks. (Las Vegas Review-Journal)
When will self-employed get unemployment money in Nevada? - VIDEO
President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act into law March 27. It allows states to expand unemployment insurance benefits, including to independent contractors, self-employed and gig workers. (Las Vegas Review-Journal)
Free Business Updates
For more information head to: https://www.reviewjournal.com/vegas-business-updates/
Walmart’s new safety measures at stores: Checking temperatures - VIDEO
In an effort to intensify safety measures in their stores, Walmart and Sam’s Club will check the temperatures of all employees as they arrive for work. (Kevin Cannon / Las Vegas Review-Journal)
Macy’s to furlough majority of 130,000 employees amid coronavirus closures - VIDEO
On March 30, Macy’s Inc. announced their decision to furlough a majority of their employees and instead move to the “absolute minimum workforce needed.” (Las Vegas Review-Journal
An empty Las Vegas Strip from the air - Drone Video
For the first time in forever, the famed Las Vegas Strip is closed for business amid the coronavirus pandemic. (Michael Quine/Las Vegas Review-Journal)
Nevada construction continues as coronavirus spreads
When Gov. Steve Sisolak ordered Nevada businesses closed, he let construction workers stay on the job, deeming homebuilding and other construction “essential” lines of work.
US weekly jobless claims soar to record-breaking 3.28M - VIDEO
The U.S. Department of Labor released the shattering numbers on Thursday. Jobless claims had been as low as 282,000 the previous week. The 3.28 million jobless claims for last week is more than double the 1.5 million new claims that analysts were expecting. (Las Vegas Review-Journal)
Worker at Allegiant Stadium tests positive for COVID-19
Construction of Allegiant Stadium is unlikely to affected by the coronavirus outbreak that is having an impact on just about every industry across the Las Vegas Valley. (Michael Quine/Las Vegas Review-Journal)
Casino companies burning through millions daily
RJ reporter Bailey Schulz talks about how much Las Vegas Casino companies are losing and how the Emergency bill could help if they run out of money or need help recouping what was lost.
Albertsons, Walmart, Amazon increase pay amid coronavirus impact - VIDEO
Grocery stores and other retailers have raised employee pay as they work to meet customer demand during the coronavirus pandemic. (James Schaeffer / Las Vegas Review-Journal)
Las Vegas police tells nonessential businesses to respect the shutdown - VIDEO
The Las Vegas Metropolitan Police Department reminds businesses in Clark County that all nonessential businesses are to be shut down as mandated by Nevada Gov. Steve Sisolak, due to the coronavirus crises. (Las Vegas Metropolitan Police Department)
Amazon Prime delays are now as long as a month - VIDEO
As of Sunday, many nonessential items ordered with Prime delivery are showing an April 21 delivery date. (Las Vegas Review-Journal)
Fed announces unprecedented actions to stabilize markets - VIDEO
The Federal Reserve announced several new measures on Monday. Among the announced programs is a further commitment of $300 billion "supporting the flow of credit" for Main Street businesses. (Las Vegas Review-Journal)
Lee’s Discount Liquor stores close on Sunday - VIDEO
Lee’s Discount Liquor stores across the Las Vegas Valley closed at 3 p.m. Sunday, March 22, the company announced on Twitter. (Las Vegas Review-Journal)
Local Businesses Message To Customers After Closing - Video
Local movie theaters and stores leave signs on their doors for customers as businesses close after being ordered to shut down.
Valley businesses react to mandatory order to shut down - VIDEO
All non-essential businesses in the Las Vegas Valley have to shut down. We spoke with store owners who would remain open for the benefit of the community and others who were still confused as to why they had to close. (James Schaeffer / Las Vegas Review-Journal)
Nevada casino closures impact 206K workers, AGA finds - VIDEO
About 206,000 direct casino employees in Nevada are without work after Gov. Steve Sisolak’s Tuesday mandate, according to the American Gaming Association. (James Schaeffer / Las Vegas Review-Journal)
More Las Vegas Valley grocery stores offer early hours for seniors - VIDEO
A growing list of Las Vegas Valley retailers are offering special shopping hours for seniors in light of the COVID-19 pandemic. (James Schaeffer / Las Vegas Review-Journal)
Nevada casinos closing for 30 days following state order - VIDEO
Gov. Steve Sisolak’s unprecedented order on nonessential Nevada businesses will shut down 440 licensed casinos. (James Schaeffer / Las Vegas Review-Journal)
Wynn CEO and Dr. Rebecca Katz go over coronavirus - Video
The Wynn CEO Matt Maddox and Dr. Rebecca Katz give a warning about the coronavirus in Las Vegas and around the world.
The Bellagio casino floor cleared as guests get ready to leave hotel - VIDEO
The Bellagio casino floor cleared as guests get ready to leave hotel (James Schaeffer / Las Vegas Review-Journal)
Tourists upset with MGM Resorts' lack of closure notice - VIDEO
Tourists like David and Emma Walker, who are visiting from Scotland, found out about MGM Resorts' property closures through Google, instead of the Luxor where they are currently staying. The Walkers are upset with how MGM has handled the situation by not making their customers aware of the closures first. (Cassie Soto/Las Vegas Review-Journal)
All Las Vegas MGM casinos, hotels to temporarily close - VIDEO
MGM Resorts International announced Sunday it is temporarily suspending operations at all Las Vegas properties “until further notice” effective Tuesday. (James Schaeffer / Las Vegas Review-Journal)
Caesars begins layoffs during coronavirus crisis - VIDEO
Documentation obtained by the Review-Journal shows Caesars Entertainment Corp. has begun laying off employees amid reduced travel demand from the coronavirus pandemic. (James Schaeffer / Las Vegas Review-Journal)
Traveling through Las Vegas airport during coronavirus pandemic - VIDEO
Passengers travel through the McCarran International Airport in Las Vegas on Thursday, March 12, 2020, amid concerns of the coronavirus pandemic. (Las Vegas Review-Journal)
MGM Resorts to temporarily close buffets amid coronavirus fears - VIDEO
MGM Resorts International will temporarily close its Las Vegas buffets, effective Sunday amid growing coronavirus fears. (Al Mancini and James Schaeffer / Las Vegas Review-Journal)
Las Vegas home prices break bubble-era record - VIDEO
After more than 13 years, Las Vegas house prices have finally eclipsed their bubble-era peak. (James Schaeffer / Las Vegas Review-Journal)
THE LATEST
Nevada construction watchdog group forms as coronavirus spreads

The group will monitor safety protocols at job sites, collect data on workforce and safety personnel, and assemble teams that could be dispersed to build field hospitals and convert hotels or housing into hospital overflow units, according to a news release.