
Madoff whistleblower Harry Markopolos calls GE a ‘bigger fraud than Enron’ - one2zero
https://www.cnbc.com/2019/08/15/ge-shares-drop-after-madoff-whistleblower-harry-markopolos-raises-red-flags-on-its-accounting.html
======
arbuge
An alternative viewpoint:

[https://brontecapital.blogspot.com/2019/08/the-flat-out-
sill...](https://brontecapital.blogspot.com/2019/08/the-flat-out-silly-
markopolos-ge-report.html?spref=tw)

As Charlie Munger says, always look at the incentives to understand people's
behavior. Markopolos' sponsoring hedge funds are shorting GE:

[https://www.bloomberg.com/news/articles/2019-08-15/ge-
drops-...](https://www.bloomberg.com/news/articles/2019-08-15/ge-drops-as-
madoff-whistle-blower-levels-accounting-accusations?srnd=premium)

"Markopolos is working with a hedge fund he didn’t identify and stands to
benefit from bets that GE’s stock will decline, according to the Wall Street
Journal, which reported earlier on the accounting report. Markopolos and his
colleagues also hope to collect a whistle-blower reward by reporting their
findings to regulators, the Journal said."

~~~
darawk
The fact that he's shorting GE should probably give you more confidence that
he's right. That demonstrates skin in the game. He's not just speculating idly
- he's putting his own assets at risk in the bet.

~~~
arbuge
It seems to me he is being paid by hedge funds to come up with research that
supports their short positions. I see no evidence anywhere that he's shorting
them using his own personal funds and even that would not necessarily give me
any additional confidence he's right.

With your logic one might also claim that promoters of pump-and-dump schemes
should be commended for having skin in the game.

~~~
eganist
> It seems to me he is being paid by hedge funds to come up with research that
> supports their short positions.

Regardless of whether this is true, should they successfully collect a reward,
it would validate the research on merits.

~~~
slg
Not if this research is what causes the stock to drop and is what allows them
to collect a reward. Then the merits of the accusations doesn't actually
matter and they don't have to true for the people shorting the stock to profit
from releasing them.

I have no idea if these accusations are true, but the accuser's short position
on the stock has zero positive bearing on the validity of the accusations.

~~~
eganist
> Not if this research is what causes the stock to drop and is what allows
> them to collect a reward.

I don't understand the causative relationship you're asserting between a drop
in value and a whistleblower award that's only granted after an enforcement
action. How would a drop in stock value result in a whistleblower award?

~~~
shkkmo
What are you talking about? There is zero whistleblowing going on here. This
is an outside investigative report funded by a hedge fund. The only link to
whistleblowing is the investigators biography.

~~~
elliekelly
From the disclosures section of the report:

> Prior to the initial distribution of this Report on August 15, 2019, the
> Company also submitted this Report to the U.S. Securities and Exchange
> Commission’s Whistleblower Program and the U.S. Department of Justice’s
> FIRREA Whistleblower Program. Both or either of those submissions may
> generate profits for the Company independent of the financial performance of
> GE and/or the securities, derivatives, and other financial instruments of,
> and/or relating to, GE.

I don't know how the DOJ program works but SEC Whistleblowers can be awarded
10-30% of the money recovered as a result of their information.

SEC FAQ here: [https://www.sec.gov/whistleblower/frequently-asked-
questions](https://www.sec.gov/whistleblower/frequently-asked-questions)

~~~
xbmcuser
I think he came out with the report as SEC had already started investigating
GE. If he had not come out with his report he might not have been able to
trade in GE stock as he would have had insider information and could be dinged
for insider trading. After putting the information out in the public he can
short all he wants.

------
mistrial9
I distinctly recall a USA top-ten business school with an ad for "Financial
Engineering MBA" (yes, real math) showing a small, smiling brown-skinned woman
in Fortune 500 business attire. At the same time, top management at GE
mentioned "financial engineering" as a strength in the business press.

Perhaps it is an obvious evolution of their complex asset leasing models from
forty years ago to "financial engineering", but the implications of a USA
engineering firm, outsourcing all the work and focusing on money tricks
instead.. it just shouts everything that went wrong with American Business, to
me.

~~~
ryanjshaw
> it just shouts everything that went wrong with American Business, to me.

Quite the opposite. Sound financial management implies financial engineering.
I recommend you study and understand the field before criticising it; it's not
"tricks" at all.

~~~
jacobolus
As an uninformed outside observer, I have seen a large number of companies
that used to pride themselves on product quality, customer support, and
treating workers well get bought by private equity or other finance guys (or
maybe sometimes just taken over from inside), shed everyone competent, focus
on cost cutting and nickel-and-diming customers, and start producing garbage
products with no support, transforming the relationship with customers into a
largely adversarial one.

In many cases the finance guys have (legally?) embezzled large amounts of
money while loading the companies with debt and then dumped them, leaving
customers, employees, suppliers, and other investors holding the bag.

I’m sure this process is considered to be “sound financial management” by
some.

~~~
wskinner
What are your two favorite examples that illustrate this pattern?

~~~
notyourday
GE would be one.

The other... EAK Ramen in NYC (small chain that landed here a couple of years
ago out of LA so I'm sure it is financial engineering at work, not just an
owner experimenting). They removed what used to be a standard part of the
ramen that came with it ( egg, some toppings ) and started offering removed
parts as "customize your own ramen! Add an egg for a $1! Add corn for a $1!
Add X for a $1 ) as a way to raise prices by wrapping that into
"customization". As if their customers are stupid and don't notice that the
same ramen now costs not $14 but $18.

------
camjohnson26
Here’s a quick blog post that points out a few problems with the report.

[https://brontecapital.blogspot.com/2019/08/the-flat-out-
sill...](https://brontecapital.blogspot.com/2019/08/the-flat-out-silly-
markopolos-ge-report.html?m=1)

It looks like Markopolis claimed GE’s margins were too good to be true, even
though they’re below the industry average.

Also he compares this section of the business with another company that GE
spun off, seemingly not knowing that they were originally linked.

Doesn’t seem like a very credible report if these 2 things are true.

~~~
elliekelly
I'm torn because I've definitely heard plenty of rumblings about GE Capital
over the past decade so the accusations certainly seem plausible. I feel like
I even opened the report expecting to confirm the rumors I had heard. But I've
only made it to page 5 and so far it's a lot of hot air without any substance.
And the tone of the writing is needlessly flippant. It's difficult for me to
take the report seriously.

For example, this sentence raises red flags to me:

> I won’t reveal every technique we used because every wannabe accounting
> fraudster out there is going to be reading this section closely looking at
> it as a “how not to get caught” primer. There’s no point in making them
> harder to catch than they already are.

We're just supposed to take him at his word in order to protect ourselves from
"wannabe accounting fraudsters" who might try to repeat what GE has done? That
doesn't make sense to me. Revealing GE's supposed tricks would allow everyone
else in the industry to better monitor for them.

~~~
busyant
> I'm torn because I've definitely heard plenty of rumblings about GE Capital
> over the past decade so the accusations certainly seem plausible.

Back in the 1990s and maybe early 2000s, GE would 'beat' analyst profit
estimates _every quarter_ by 'a penny' per share (occasionally by a few
pennies). This went on for _many_ years.

I don't have any special insight, but this always struck me as _fishy_. You
have a stable of presumably competent analysts prognosticating on your next
quarter's revenue and profit and you consistently beat their average estimate
_by a tiny bit._ You would think that you would come in _under_ the estimate
every-so-often, but that was incredibly rare and the consistency always had a
whiff of impropriety.

It wasn't just GE that did this. Many Fortune-500 companies had similar
behavior, so perhaps it has an innocuous explanation, but I always wondered
how it was possible to consistently beat estimates like this.

~~~
jerf
There's more degrees of freedom in accounting and accounting-related matters
that non-accountants tend to realize. An easy trick to explain is a big deal
of some kind that is closing near the end of the quarter. If your customer
doesn't care, you may be able to choose whether you close that deal this
quarter, because you need the revenue this quarter, or if you want to close it
next quarter because you've got this quarter's "beat" covered, and there's no
great advantage to beating by just that bit more.

Obviously in this specific case, it's only a quarter's worth of flexibility; I
mean this as an example, not a manual on the practice.

There's a lot of ways of borrowing against the future to show revenue now. It
is suspicious, but it may not necessarily be suspicious in the "fraud" sense
of they aren't making the money they claim to be making, but rather, are they
eating their seed corn to get this quarter's beat? Did they pull revenue
forward they "shouldn't" have? (Sometimes it seems like it's better to beat
expectations by a little for several quarters, then have one big disaster
quarter, than to miss by a little for several quarters.) Did they profit this
quarter by failing to invest in growth that they're going to need later?

So, I wouldn't say it's an innocuous explanation exactly, but perhaps rather,
there's a range of explanation that range from mostly innocuous gimmicks to
the outright fraud, and it's hard to tell from the summary sheets which one
you're looking at.

------
tabtab
GE decided that playing financial tango is more profitable than manufacturing.
Too many US companies become shell-game manipulators rather than shell makers.
Maybe that's somehow fine and normal, but it's hard to sleep sound at night
knowing the US economy's main product is financial tiddlywinks.

~~~
astrodust
This has been the end-goal since the 1980s when everyone realized there was
way more money to be made in running companies into the ground to sell them
off for scrap, raiding pension funds, and securitizing everything.

Why make things when you can just make money?

------
ortusdux
GE has been a mess for a while now. I know many vendors that won't ink a deal
with them because they always try and pay at the end of next quarter.
Ironically, because everyone knows their tactics, they either end up paying
more for reputable vendors that need an insurance buffer, or they end up with
a worse product from fringe companies that are willing to roll the dice on
getting paid.

~~~
stcredzero
_I know many vendors that won 't ink a deal with them because they always try
and pay at the end of next quarter._

That soon? I've known companies with cash flow issues try to turn contractors'
Net 30 or Net 90 into Net 180 and beyond.

~~~
patwolf
We recently did work for a very large corporation that switched from net 60 to
net 180. I'm not sure if they did it for cash flow reasons, but I doubt it.
We're a small company, so it was tough for us considering we'd be paying
developers 6-months of salary before we'd see a dime. They did conveniently
offer financing so that we could get paid sooner, albeit with interest.

It seemed to me like large corporations feel that they can strong-arm their
vendors into unsavory terms because of their clout.

~~~
cjrp
> They did conveniently offer financing so that we could get paid sooner,
> albeit with interest.

That's blown my mind a little, charging interest on a loan of money which you
owe to someone. Genius.

~~~
52-6F-62
Sounds more like a low effort scam to me...

------
one2zero
Direct Link:

[http://fm.cnbc.com/applications/cnbc.com/resources/editorial...](http://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2019/8/15/2019_08_15_GE_Whistleblower_Report.pdf)

------
NikolaeVarius
I like they put their money where their mouth is and shorted GE. Actually puts
their skin in the game before making accusations.

~~~
kingnothing
I wonder if that could be considered securities fraud. They had insider
knowledge that their report would damage the stock price of GE.

~~~
sokoloff
Is it insider knowledge? Or merely non-public knowledge that they legally
generated from their own research efforts?

~~~
jdmichal
If the information was synthesized from public knowledge, then it is fair
game. Non-public is not determined by "how many people know this information".

------
piker
Before becoming too concerned with the fact that the author of this report is
compensated based on the performance of the sponsoring fund's short position,
one should note that it has been argued that allowing Enron insiders who knew
of the irregularities to short Enron stock would have supplied a downward
pressure that may have saved Enron employees millions of dollars. Many of
those employees were investing 100% of their 401k into the stock at its peak.

~~~
wil421
The FinTech company I work at offers ESPP and an option to invest in company
stock for your 401k. I take full advantage of ESPP but sell it quickly. My
coworkers have saved it and been through 3 splits and made a ton of money. The
same coworker lost 10s of thousands when he worked for WorldCom/MCI in the
late 90s. He’s probably even right now.

I would never invest 100% of my 401k into my employers stock. Even 10% seems
risky.

------
Ididntdothis
GE should be a warning for all management gurus. I still remember when Jack
Welch was the idol of all managers and I read a lot about how GE was grooming
the next generation of super managers. Turns out that Welch didn’t really
create a company that could perform with excellence in the long run. Seems he
was more of a one hit wonder.

~~~
projektfu
Actually, I'd say he was more of a fraud. It's been well known that under his
administration GE earnings growth was basically linear and returned to typical
volatility after he left, suggesting he was manipulating the figures to make
it work. Meanwhile the company had sold off most of the businesses it was
known for with the exception of light bulbs and aircraft engines.

------
Grzegrzolka
I have friends working as senior developers for GE in Poland. Basically US
branch outsource project to Polish brand because they are paid peanuts in
comparison, then part of the work is outsourced to India branch which is paid
even less. I have ZERO respect for American mega-corps.

~~~
wil421
At my last job I worked exclusively with our Europe branch and European
customers. 75% of the developers I worked with were contractors or consultant
companies they outsourced to. More than half also had offshore India teams.

You’d recognize all the customers names and likely own their products.

------
ummonk
Will the long term care insurance policyholders don't get screwed out of their
policies if GE goes bankrupt?

~~~
drewnick
Each state has a Guaranty Association that provides up to several hundred
thousand dollars per policy for failed insurance companies. We've seen this
story before with Penn Treaty which was liquidated in 2017. In California it's
$560k. [https://www.califega.org/](https://www.califega.org/)

------
sschueller
I can't download the report, I get a server error when submitting the form.
Does anyone have a direct link?

~~~
one2zero
Direct Link from CNBC:

[http://fm.cnbc.com/applications/cnbc.com/resources/editorial...](http://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2019/8/15/2019_08_15_GE_Whistleblower_Report.pdf)

------
VladimirIvanov
Marlopolos point where he says the Baker Hughes investment should take a
goodwill impairment charge is incorrect. GE is right when they point out that
they own more 50% of the company so it needs to be consolidated.

------
crb002
Wow. Given CNBC is owned by GE.

~~~
seren
It was, it has been sold by GE a long time ago (at least 5 years). Maybe some
of the staff still feels some sort of loyalty (or relief) I don't know but
there is no reason now that CNBC should be more harsh or gentle on GE news.

------
sleepysysadmin
I recently did an analysis of GE as well. Largely speaking found their numbers
to be too good to be true.

~~~
_-___________-_
The Affinity is built around the CFM56 core. Not a brand new turbofan, just a
further development of a massively successful product.

Edited to add: there was originally a lot of vague insinuations about the GE
Affinity turbofan in the parent comment, but it was edited down from five
paragraphs to one after I replied.

------
ptah
if this is based on public record, how come it is only exposed now

~~~
SpicyLemonZest
Libor manipulation was on the public record years before the scandal blew up.
Exposing anything but dirt-simple financial fraud is hard, even to people who
know all the facts.

~~~
derivagral
Amusingly(?..) LIBOR-style manipulation still exists in other markets!
[https://www.bloomberg.com/opinion/articles/2018-02-01/was-
ch...](https://www.bloomberg.com/opinion/articles/2018-02-01/was-chicken-
libor-manipulated-too)

Strange to think that incentives like this are/were considered the best
solution and can last so long.

------
sschueller
Is this the tipping point that will start the recession?

~~~
nappy-doo
Doubt it. GE is small potatoes nowadays.

~~~
whatok
I'm not agreeing with the previous poster but GE is anything but small
potatoes nowadays. They have over 100bn in debt and there's a very real case
where they get downgraded to high yield which is a near death sentence for an
industrial company of their size.

------
tradeWar
Also GE has been putting executives in jail with the help of the American
government in order to put pressure and takeover foreign companies.

[https://www.bloomberg.com/news/articles/2019-01-15/-the-
amer...](https://www.bloomberg.com/news/articles/2019-01-15/-the-american-
trap-an-executive-s-view-from-a-u-s-prison-cell)

[https://www.counterpunch.org/2016/12/02/behind-ges-
takeover-...](https://www.counterpunch.org/2016/12/02/behind-ges-takeover-of-
alstom-energy/)

[https://www.economist.com/business/2019/01/17/how-the-
americ...](https://www.economist.com/business/2019/01/17/how-the-american-
takeover-of-a-french-national-champion-became-intertwined-in-a-corruption-
investigation)

------
one2zero
What's hilarious is that if you look at the website gefraud.com and attempt to
download the report take a look at the fine print. These guys SHORTED GE
before they made this report public....

Edit: Guys, I understand the logic behind shorting GE, what I found funny was
that they made it public that they had short positions in their disclaimer. IF
I were in their position I would've shorted GE just like any other individual
with this information.

~~~
Analemma_
If they have information that GE is overvalued, what _should_ they do? If they
don’t short, people like you go Taleb and accuse them of throwing out
accusations with no skin in the game; if they do short, they get accused of
making things up for profit. They can’t win.

~~~
one2zero
But you see, I didn't say that they were wrong or right. I merely was pointing
out the fact that they put in their disclaimer that they did in fact have
short positions on GE prior to publication.

~~~
jkqwzsoo
You didn’t “merely point it out”, you described it as “hilarious”. This
implies that you view the disclosure as some sort of evidence of impropriety,
as if you discovered what game they were truly playing or something.

As others have told you, this is standard practice for short sellers, and the
financial industry as a whole.

What would you rather them do? Simply claim that GE is a fraud without having
any stake in GE, long or short? Don’t you lend their claim more weight given
that they’ve taken a financial position based on their belief? I would think
that would be a more rational view.

