By CCN Markets: Embattled industrial giant General Electric took another blow Thursday. GE stock is trading down more than 10% following news that famed fraud investigator Harry Markopolos has accused General Electric of committing fraud.
Markopolos stated that GE is a “bigger fraud than Enron” and added:
“My team has spent the past seven months analyzing GE’s accounting and we believe the $38 billion in fraud we’ve come across is merely the tip of the iceberg,”
Markopolos released a 170-page report targeting GE stock. In his report, he accused the company of having nearly a $20 billion shortfall in its insurance business. He also alleges that GE is dramatically overstating the value of its oil and gas business.
Combined, Markopolos says General Electric is worth nearly $40 billion less than investors believe. As GE stock has a market cap of around $80 billion, this implies that GE stock is 50 percent overvalued.
Markopolos became famous for exposing Bernie Madoff’s gigantic Ponzi scheme. However, some analysts believe he may not have similar success this time.
He’s working with an undisclosed hedge fund to profit from GE’s decline and will receive a portion of any gains they make. This would potentially motivate Markopolos to make sweeping claims and allegations in an effort to scare GE’s investors.
Also, remember that Madoff was a total fraud. The crimes Markopolos is accusing General Electric of rest on complicated accounting and legal definitions. It’s far harder to prove definitive fraud in complex areas where multiple accounting standards are accepted.
GE, for its part, said that Markopolos didn’t contact them to verify anything in his report and stated that:
“While we can’t comment on the detailed content of a report that we haven’t seen, the allegations we have heard are entirely false and misleading.”
John Hempton, an Australian hedge fund manager, called Markopolos’ GE stock report “flat-out silliness.” Hempton pointed out seeming errors in Markopolos’ analysis of GE’s insurance business. And Hempton found the following slide from Markopolos’ report particularly absurd:
There are several obvious problems with Markopolos’ comparison.
For one thing, Madoff didn’t have an actual profit margin because he made the whole investment scheme up. It’s hard to compare that to a real business.
For another, every major U.S. industrial firm is “too good to be true” by Markopolos’ “Madoff Test.” Honeywell earns a 20% margin, Emerson Electric earns 16%, and Illinois Tool Works pulls 24%. If Markopolos is to be believed, they’re all frauds. As Hempton concluded:
“I guess all of these are ‘too good to be true’ too. Indeed the entire high-end of US manufacturing is worse than Madoff if you believe Mr Markopolos.”“I think the alternative is more likely. Say what you will, GE remains the unequivocal leader in medical imaging technology and the unequivocal leader in jet engines. In both these there are very few competitors and it would be near impossible to eat into GE’s lead.”