GE Denies Critic's Claims on Finances -- WSJ
August 20 2019 - 3:02AM
Dow Jones News
By Micah Maidenberg and Mark Maremont
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 20, 2019).
General Electric Co. pushed back further on Monday against
claims by an accounting expert that the company hasn't been
forthright about its finances.
In a new investor update, the company said it believes the
current reserves for its long-term-care insurance business are well
supported by its portfolio of investments. GE also defended the
accounting for its oil-and-gas business.
Last Thursday, Harry Markopolos, the accounting expert who
raised red flags about Bernard Madoff's Ponzi scheme, accused GE of
masking its financial problems and filing inaccurate or fraudulent
information with regulators.
GE Chief Executive Larry Culp said then the allegations from Mr.
Markopolos amounted to market manipulation, adding his report
contained false statements and was motivated by personal profit.
Mr. Markopolos on Thursday dismissed GE's criticism of his
motivation and methods.
Shares of GE dropped 11% after Mr. Markopolos, who was working
with an undisclosed hedge fund, went public with his report. The
stock rebounded 9.7% on Friday, but closed off 1.4% at $8.67 a
share on Monday.
On Monday, GE focused its rebuttal on its long-term-care
business and Baker Hughes, its oil-and-gas unit. The message was
sent by Steve Winoker, GE's vice president for investor
communications.
The company said it has "been up front and transparent about the
long-term liabilities," and there are "a lot of viewpoints in the
market regarding the risks and financial obligations across the
entire [long-term-care] industry."
It said that as a reinsurer, it isn't responsible for 100% of
every risk in that business. GE also said the "adverse differences"
between its policies and those from other companies are
significantly overstated.
Mr. Markopolos said GE's response didn't touch on one of his
group's main points, which is GE's allegedly weak cash and
working-capital position. He said his group intends to respond in
detail later this week.
Mr. Markopolos's group estimated, in its report, that GE will
need to increase its insurance reserves by $18.5 billion in cash
and take a $10.5 billion charge because of an accounting change in
2021.
GE said Monday it wouldn't need to make a cash contribution of
$29 billion to the long-term-care insurance business.
"Our future liabilities depend on variables that will play out
over decades, not years, and are dictated by rigorous testing
processes, sound actuarial analysis, and the application of
regulatory and accounting rules," the company said.
GE also said Monday it is required to report financial
information about its Baker Hughes business as part of its own
results. The company said when it reduces its investment in Baker
Hughes and is no longer the controlling owner, it expects to record
a noncash charge.
"This will not impact GE's cash needs and liquidity, and the
sale of our remaining stake will also generate additional cash that
can be used for deleveraging," the note on Monday said.
GE also said that consolidating Baker Hughes into its business
doesn't skew investor perceptions of its cash flows.
Based on GE's explanation, the company is properly accounting
for its 50.2% investment in Baker Hughes, according to two
accounting professors contacted by The Wall Street Journal.
The Markopolos group's critique was based on GE's prior
statements on the matter in securities filings, which were
"confusing," said Joshua Ronen, an accounting professor at New York
University's Stern School of Business who reviewed the filings.
Write to Micah Maidenberg at micah.maidenberg@wsj.com and Mark
Maremont at mark.maremont@wsj.com
(END) Dow Jones Newswires
August 20, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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