GE’s Alleged Fraud: Another Factor to Invest in Startups

General Electric shares dropped 11% yesterday to $7.80 after renowned scams investigator Harry Markopolos released a report calling GE a “larger fraud than Enron.” You might remember Mr. Markopolos as the guy who attempted to alert the Securities and Exchange Commission (SEC) to Bernie Madoff’s billion-dollar ponzi plan a years prior to it collapsed.

To be reasonable, it deserves keeping in mind that Markopolos is working with an unnamed hedge fund that has shorted GE stock and stands to make cash if GE shares drop. So Markopolos is not exactly an impartial witness. Regardless of this, I’m inclined to listen to what the male has to say.

In a 175- page report, Markopolos claims GE concealed losses of at least $38 billion from its insurance coverage business. Here are a couple of highlights I selected.

To prove GE’s scams, we headed out and situated the 8 largest Long-Term Care (LTC) insurance coverage deals that GE is a counterparty to, representing approximately 95% or more of GE’s direct exposure. Either these 8 insurance provider submitted false statutory financial statements with their regulators or GE’s financial declarations are incorrect …

My group has actually spent the past 7 months examining GE’s accounting, and our company believe the $38 billion in fraud we’ve encountered is merely the idea of the iceberg. To put it into perspective, $38 billion in accounting scams is over 40% of GE’s market capitalization, and we understand we just discovered a part of it. If you like analyzing accounting scams as much as we do, we’re sure you’ll find our slide deck a gripping read …

GE has been running a decadeslong accounting fraud by just providing top-line revenue and bottom-line profits for its organisation systems and getting away with leaving out expense of products offered …

To make it difficult to compare GE’s numbers across multiyear time periods, GE alters its Financial Statement reporting formats every few years …

Our Whistleblower Report only information $38 billion in accounting fraud, but we know we didn’t catch everything. Only GE’s accounting department understands where the rest of the skeletons are buried …

The report is blunt, in-depth and could be definitely devastating to GE.

I have to think Markopolos and his partner would not have actually made these claims unless they were certain. Mostly since if the allegations aren’t real, they will be taken legal action against into oblivion by an army of GE legal representatives.

GE has provided a declaration in action to the report, which begins by saying that “The claims made by Mr. Markopolos are meritless.” Meritless is an interesting option of words.

Why not simply state the claims are false? I believe that every word because statement was selected thoroughly.

Disturbing Ramifications If True

One concern has actually been bouncing around in my head considering that these accusations broke. If the claims are true, how the heck did every analyst on Wall Street miss this?

For a minimum of a years, GE has been known to use dirty accounting Back in 2009, the SEC sued it for scams, accusing the company of utilizing “overly aggressive accounting.” The company paid a $50 million fine and confessed no regret.

And in 2017, The Wall Street Journal wrote a series about GE’s accounting practices, specifying that “No matter what occurs with General Electric Co.’s dividend, investors will still need to face the reality it is almost impossible to tell just how much of its earnings are backed by money.”

With its history, you ‘d think GE would have been under more scrutiny from regulators and experts. It’s troubling to believe it could have gotten away with such a huge scheme for so long (if the allegations show true).

And if this is taking place at one of the most renowned firms in America, and no one found it, just how much comparable habits is taking place at other business? At banks? Insurance provider? All are known to have “tough to figure out” monetary statements.

Part of a Pattern?

A lot of U.S. companies today are believing short term. Some “massage” their monetary reports. Some dedicate scams. And many others handle dangerous debt loads.

At GE, this supposed fraud might have begun with a little deception to strike quarterly numbers and after that grew out of control from there.

Another big problem is that many companies today pay their CEOs far too much money. GE’s former CEO Jeffrey Immelt, for instance, earned almost $33 million in 2015, in spite of lackluster performance.

GE is not alone. Take a look at this chart, which shows how a lot more cash American CEOs make than the average employee. In 1965, the CEO made 20 times the average employee. Today, it’s 312 times!

Keep In Mind how the CEO pay ratio appears to have actually peaked in 2000 and 2008 throughout the height of the last bubbles. And it looks set to peak again quickly. It’s yet another indication that we are in the late phases of this cycle.

The business culture in lots of “establishment” companies is failing. Eventually a great deal of these dinosaurs will go extinct, leaving substantial gaps throughout industries.

This is a huge reason I prefer to purchase young U.S. companies (startups) instead of the S&P 500 or the Dow.

Disruptive start-ups are currently changing the landscape across all industries. The reality that many older, developed companies are packed with debt, usage doubtful accounting and are being robbed from within by their own executives just makes the decision much easier.

Excellent investing,

Adam Sharp

Co-Founder, Early Investing

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