In One Chart - August 22, 2019
In One Chart: GE’s Other Inside Job
Last week, General Electric (GE) came under fire for an alleged accounting fraud that, if true, would constitute nearly 40% of the conglomerate’s $73 billion market cap.
When Harry Markopolos went public with his report and allegations of fraud, GE shares fell 11.3% on the day, its biggest drop since 2008.
In response, GE insiders and several market pundits have called Markopolos’s report false, simplistic, and suspicious, among other things. The investigator and his team were hired by an unnamed hedge fund with an assumedly large short position in GE to produce the report, then chose to go public with their findings instead of submitting them to regulators.
Allegations against GE and the company’s executives’ responses have largely been a ‘he said, she said’ storyline, but one interesting plot point is the actions taken by GE insiders, namely CEO Larry Culp, in response to the report — they’ve doubled down on GE stock.
Over the last week, Culp and four other GE insiders have bought up nearly 800,000 shares at prices ranging from $7.73 to $9.43 per share. As a result, Culp’s stake is now nearly 1.17 million shares, double what it was before Markopolos went public.
The chart below shows ten years of $GE price history alongside the growing number of shares owned by company insiders.
Usually when insiders buy or sell large chunks of their companies, outsiders ask, “What do they know that the rest of us don’t? Are we being misled?” But this situation may be a little different.
Culp, and the investing public, shouldn’t be so shocked by Markopolos’s claims. The public is well aware that GE’s accounting practices are already under investigation by the Justice Department and SEC, investigations with which GE says it is cooperating.
Markopolos’s separate investigations of GE and Bernie Madoff are apples and oranges. With Madoff, Markopolos was years ahead of investigators in spotting irregularities; as for GE, Markopolos is trailing regulators by more than a year.
So now we have to ask, is Culp desperately buying up shares to defy Markopolos’s report and quell public concerns? Or is he simply confident in his turnaround plan and that Markopolos’s allegations of fraud are already being addressed by regulators?
From the onset, Culp and other GE insiders have vehemently denied the conclusions of a 175-page report authored by Harry Markopolos. Markopolos, known for correctly outing the Bernie Madoff Ponzi scheme, claims that GE’s long-term care insurance unit needs to raise its cash reserves by more than $18.5 billion and that Baker Hughes (BHGE), its oil and gas subsidiary, is being used to hide GE losses, among other claims.
Accounting fraud allegations aside, it’s been a rough few years for GE. The company was kicked out of the Dow Jones last summer after 111 years of constituency in the index. Looking back even further, GE shares fell by 42.9% in 2017 and 55.4% in 2018; shares are up 10.9% in 2019 year-to-date.
Markopolos stated that the findings his team has made public are “merely the tip of the iceberg,” that “[his report] is going to make this company probably file for bankruptcy,” and finally, that “WorldCom and Enron lasted about four months. … We’ll see how GE does.”
And see how GE does, we shall. Or you can dig deeper on GE for yourself — start a Free Trial of YCharts today.