http://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2019/8/15/20190815GEWhistleblower_Report.pdf
GENERAL ELECTRIC, A BIGGER FRAUD THAN ENRON
Summary: GE’s $38 Billion in Accounting Fraud
www.gefraud.com
by Harry Markopolos, CFA®, CFE
Synopsis:
This is my accounting fraud team’s ninth insurance fraud case in the past nine years and it’s the biggest, bigger
than Enron and WorldCom combined. In fact, GE’s $38 Billion in accounting fraud amounts to over 40% of GE’s market
capitalization, making it far more serious than either the Enron or WorldCom accounting frauds. Enron’s CEO, Jeff
Skilling resigned on August 14, 2001, Enron was downgraded to junk status on November 28th and filed for bankruptcy
protection on December 2nd. On March 11, 2002 WorldCom received document requests from the SEC related to its
accounting and loans to officers; on April 30th CEO Bernie Ebbers resigns regarding his $400 million in personal loans
from the company, then on June 25th CFO Scott Sullivan is fired before WorldCom files Chapter 11 on July 21st. It’s been
17 years since WorldCom so we’re long overdue for something like GE. As you read our slide deck you’ll see that GE
utilizes many of the same accounting tricks as Enron did, so much so that we’ve taken to calling this the “GEnron” case.
To prove GE’s fraud we went out and located the 8 largest Long-Term Care (LTC) insurance deals that GE is a counterparty to, accounting for approximately 95% or more of GE’s exposure. Either these 8 insurance companies filed false
statutory financial statements with their regulators or GE’s financial statements are false. We’ll show you the losses from
each reinsurance arrangement in both dollar losses and percentage losses and let you determine who is telling the truth.
We paid to use the National Association of Insurance Commissioners (NAIC) and AM Best Databases to access these
8 insurers’ statutory financial statements filed with the relevant state insurance commissions. What they revealed
was GE was hiding massive loss ratios, the highest ever seen in the LTC insurance industry, along with exponentially
increasing dollar losses being absorbed by GE. The GE Capital insurance unit with the largest losses is ERAC and that
unit’s average policy-holders’ age is now 75. The losses in this unit led to GE’s unexpected late 2017/early 2018 $15
Billion reserve hit. Unfortunately, the fast approaching 5-year age group between 76-80 will see a 77% increase in LTC
claims filed which will see GE’s losses increase several-fold. We expect to soon see loss ratios of 750% to 1,000% or more
on some of GE’s reinsurance agreements. According to industry data, approximately 86% of GE’s LTC claims are ahead of
them and the accompanying losses are growing at an exponential and un-survivable rate.
Of the $29 Billion in new LTC reserves that GE needs, $18.5 Billion requires cash immediately while the remaining
$10.5 Billion is a non-cash GAAP charge which accounting rules require to be taken no later than 1QTR 2021. These
impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants. Unfortunately, GE
has almost no cash, so they had to request special forbearance from the Kansas Insurance Department (KID) to be able
to fund their January 2018 $15 Billion reserve increase over a 7-year time horizon, so the odds of them being able to
fund $18.5 Billion in new cash reserves is doubtful. What’s even more doubtful is GE becoming cash flow positive in 2021
as management would have you believe.
GE’s cash situation is far worse than disclosed in their 2018 10-K, in fact once GE’s $9.1 Billion accounting fraud
tied to its Baker-Hughes GE (BHGE) acquisition is accounted for, GE only had $495 Million in cash flow from operating
activities in 2018 and it ended the year with MINUS $20 Billion in working capital. After we accounted for the $38 Billion
in accounting fraud GE’s debt to equity ratio goes from the 3:1 ratio it reported at the end of the 2nd quarter 2019 to a
woefully deficient 17:1.
My team has spent the past 7 months analyzing GE’s accounting and we believe the $38 Billion in fraud we’ve come
across is merely the tip of the iceberg. To put it into perspective, $38 Billion in accounting fraud is over 40% of GE’s
market capitalization and we know we only found a portion of it. If you love analyzing accounting fraud as much as we
do, we’re sure you’ll find our slide deck a gripping read.