GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

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RobLyons
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by RobLyons » Thu Aug 15, 2019 4:24 pm

Silence Dogood wrote:
Thu Aug 15, 2019 4:16 pm
Yet another example of the risks associated with investing in individual stocks.

Sad to see what has happened to what was once an iconic company.

x2

More proof of the benefits of the lazy 3 fund portfolio !
"Great parenting sets the foundation for a better world"

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dodecahedron
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by dodecahedron » Thu Aug 15, 2019 4:26 pm

IowaFarmBoy wrote:
Thu Aug 15, 2019 2:22 pm
I thought GE had spun off Genworth and that most (all?) of the LTC business was with placed with Genworth? Is Genworth truly a separate entity at this point or is GE still on the hook in some way- like providing reinsurance?

Edit: I just read the link and it does sound like GE is on the hook for a lot of LTC losses but I'm still curious about the relationship with Genworth since our policy is with Genworth.
I gather GE ¨sold off¨ Gemworth some time ago, but it sounds to me as though GE might have effectively retained some of the ¨tail risk¨ by retaining a reinsurance position in order to make the deal go through.

The parallels to slicing and dicing mortgage-backed securities and some parties retaining the ¨toxic waste¨ portions of the deal are suggestive.

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dodecahedron
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by dodecahedron » Thu Aug 15, 2019 4:33 pm

RobLyons wrote:
Thu Aug 15, 2019 4:24 pm
Silence Dogood wrote:
Thu Aug 15, 2019 4:16 pm
Yet another example of the risks associated with investing in individual stocks.

Sad to see what has happened to what was once an iconic company.

x2

More proof of the benefits of the lazy 3 fund portfolio !
I just skimmed the new book by Bernanke, Geithner, and Paulson with a retrospective on the 2008 financial crisis and it sounds like we came awfully close to a total meltdown from which even a classic 3 fund portfolio might not have protected us. They talk about an ¨e coli effect¨ in financial markets, where good as well as bad companies can be dragged down as nobody is sure exactly what assets are affected (just like when an e coli outbreak can induce consumers to avoid all meat because they can´t be sure exactly which sources are tainted.)

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by aristotelian » Thu Aug 15, 2019 4:36 pm

anoop wrote:
Thu Aug 15, 2019 1:14 pm
What happens to the people with policies from GE if they declare bankruptcy, especially those that are actively making claims?

Any chance they would end up getting bailed out a la GM?
Maybe Buffet would be interested.

AZAttorney11
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by AZAttorney11 » Thu Aug 15, 2019 4:37 pm

This is awesome. Good for Culp.

https://www.cnbc.com/2019/08/15/ge-ceo- ... ation.html

General Electric CEO Larry Culp bought nearly $2 million worth of the company’s stock after Madoff whistleblower Harry Markopolos called the conglomerate “a bigger fraud than Enron.”

A Thursday evening filing with the SEC revealed that Culp bought 252,200 shares for about $7.93 each. Culp has roughly doubled his holding of GE shares this week, according to the filing.

RobLyons
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by RobLyons » Thu Aug 15, 2019 4:37 pm

dodecahedron wrote:
Thu Aug 15, 2019 4:33 pm
RobLyons wrote:
Thu Aug 15, 2019 4:24 pm
Silence Dogood wrote:
Thu Aug 15, 2019 4:16 pm
Yet another example of the risks associated with investing in individual stocks.

Sad to see what has happened to what was once an iconic company.

x2

More proof of the benefits of the lazy 3 fund portfolio !
I just skimmed the new book by Bernanke, Geithner, and Paulson with a retrospective on the 2008 financial crisis and it sounds like we came awfully close to a total meltdown from which even a classic 3 fund portfolio might not have protected us. They talk about an ¨e coli effect¨ in financial markets, where good as well as bad companies can be dragged down as nobody is sure exactly what assets are affected (just like when an e coli outbreak can induce consumers to avoid all meat because they can´t be sure exactly which sources are tainted.)


:shock: Ok now THIS is concerning... Will have to skim when I get a chance.. Thanks for your input
Luckily Im only 38 but never want to see "meltdowns"
"Great parenting sets the foundation for a better world"

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Stinky
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Stinky » Thu Aug 15, 2019 4:40 pm

aristotelian wrote:
Thu Aug 15, 2019 4:36 pm
anoop wrote:
Thu Aug 15, 2019 1:14 pm
What happens to the people with policies from GE if they declare bankruptcy, especially those that are actively making claims?

Any chance they would end up getting bailed out a la GM?
Maybe Buffet would be interested.
Buffett is a smart buyer.

He is smart enough to stay away from LTC. :D
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JamesSFO
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by JamesSFO » Thu Aug 15, 2019 4:45 pm

The 175-page report is worth a read. Some of the slides/graphs could be more helpful but overall quite clear.

aristotelian
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by aristotelian » Thu Aug 15, 2019 4:47 pm

By the way, one of my favorite Meb Faber episodes had a short trader who specialized in exposing frauds. Very entertaining guy and absolutely legal. I was convinced he was doing a public service. https://mebfaber.com/2018/10/10/episode ... nt-change/

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Caduceus » Thu Aug 15, 2019 4:50 pm

I recommend downloading and reading the actual report. I'm about halfway through it and some things jump out at me. There are some very good questions about GE's accounting practices, but so far the impression that I'm getting from Markopolos' report is that it is primarily a marketing document. It is full of assertions and appeals to authority; there are lots of places where he could have inserted the specific numbers, premium tables, etc., and it was almost always left absent. The entire document is highly repetitive - it makes some of the same points over and over and over again, and they are thinly developed.

It is also written in a highly sensationalistic style, which makes me suspicious. The research isn't presented in a methodical, evidence-based manner. It's more like having a high-strung person insist you believe there's a fire in the house. If you read it, you will see what I mean about the language and style. There are a few sets of numbers that he keeps repeating as if to insist on its significance (like the treatment of Baker Hughes).

I may change my mind when I finish the entire report, which is quite long. But for someone with his stature, it is disappointing the report was not written in a more rational and substantive manner.

This entire episode is fascinating. I've never done a deep dive into GE's financial reports because of how complicated it was - this is making me think it might be good fun!

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by HawkeyePierce » Thu Aug 15, 2019 5:08 pm

I'm still waiting for the site to email me the report. Maybe they're overloaded with traffic.

rj342
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by rj342 » Thu Aug 15, 2019 5:20 pm

I did a little checking because I know GE just licenses their brand name to a lot of other companies to slap on cheaper items. I was surprised to see that "GE Appliances" is no longer owned by General Electric, but was sold to Haier (Chinese) in 2016. The deal included the rights to use the GE name and logo until 2056.

That's the kind of thing that makes people distrust corporations.

At least they still make jet engines and heavy duty power equipment.

columbia
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by columbia » Thu Aug 15, 2019 5:24 pm

rj342 wrote:
Thu Aug 15, 2019 5:20 pm
I did a little checking because I know GE just licenses their brand name to a lot of other companies to slap on cheaper items. I was surprised to see that "GE Appliances" is no longer owned by General Electric, but was sold to Haier (Chinese) in 2016. The deal included the rights to use the GE name and logo until 2056.

That's the kind of thing that makes people distrust corporations.

At least they still make jet engines and heavy duty power equipment.
That brings to mind that one can still buy Westinghouse products:
https://westinghouse.com/homepage/for-the-home/

That’s my father’s (who worked for them for 25+ years) Westinghouse.

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Phineas J. Whoopee
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Phineas J. Whoopee » Thu Aug 15, 2019 5:42 pm

There exists illegal trading based on non-public inside information.

There exist corporate insiders who, with limitations, are legally allowed to trade in the securities of the corporation. In the US often they are restricted to a one-month window after the release of their quarterly results. Extraordinarily wealthy founders often enter into trading programs in which they sell, for example, one million shares on the first day of the window, regardless of what may be happening, and delegate the implementation to a financial services firm. That way they can reduce their risks without any suggestion of illegal trading.

Inside information and insider trading are separate concepts.

Naturally the laws and regulations do not do a perfect job of preventing corporate insiders from illegally trading based on non-public inside information.

To stir a perennial hornet's nest, insiders illegally trading based on non-public inside information is the foundation of the strong form of the Efficient Market Hypothesis.

PJW

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burt
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by burt » Thu Aug 15, 2019 5:50 pm

I have no problems with Hedge Funds doing the job that the SEC should be doing.

illumination
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by illumination » Thu Aug 15, 2019 5:56 pm

SuperSaver1975 wrote:
Thu Aug 15, 2019 1:46 pm
Vanguard Fan 1367 wrote:
Thu Aug 15, 2019 11:15 am
There are so many laws about insider trading and other things involved with knowledge about how a stock could go. How could it be legal for a company to take a short position and then publish information that might make the stock tank?
I read this guy's book on the Madoff scandal. He's a very good forensic accountant. I'm not a lawyer, but it seems to me that as long as the information he is using is legit, and the conclusions are legit, why shouldn't he be able to make some money after he's done the work to determine a proper valuation of the company? There are lots of people out there, either asleep at the wheel or committing deliberate fraud if this guy is correct. If he's wrong, then I'd expect GE to sue him for everything he's got. But I don't see any problem with making money off this. He did the work that others should have already done.

I think people should be able to make money this way on public information, the only problem is, not everyone is honest and it's amazing the mental gymnastics we can do when making a lot of money is on the line. Or even worse, knowing the truth but trying to create a panic.


I have absolutely seen cases where some hedge fund manager makes a case a company they are shorting is some big fraud scheme and absolutely nothing comes of it. It's just baseless accusations hoping to create a stampede of selling.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Dude2 » Thu Aug 15, 2019 11:37 pm

From the article,
“GE would change its reporting formats every 2-4 years to prevent analysts from being able to make comparisons across time horizons! In other words, GE went out of its way to make it impossible to analyze the performance of their business units.

“Why would a company do that? We could only think of two reasons: 1) to conceal accounting fraud or 2) because they’re so incompetent they’re not capable of keeping proper books and records. I’m not sure which reason is worse because both are bad and each is a path to bankruptcy.”
Perhaps this is the sort of thing regulators should be looking out for and legislators should be making illegal -- if it isn't already.

In any case, a reason the report might read more like a marketing presentation than a hard-data forensic accounting analysis could be due to the complexity. It will require opening the books to get to the meat of the fraud. He is saying he smells the smoke.

HawkeyePierce
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by HawkeyePierce » Thu Aug 15, 2019 11:48 pm

I just finished reading the report. I agree parts of it don’t make sense (why compare GE’s profit margin with Madoff’s).

But, any company that claims consistent earnings growth despite the business cycle while also failing to be transparent about their finances is worth a deeper investigation. It’s hard to dismiss the point that GE’s consolidated profit margin doesn’t match the sum of its business units. Where’d the money go?

Certainly his report provides credible reasons to believe GE may have mismanaged its reinsurance business. Few executives from an insurance background and numbers that don’t add up when compared with industry peers.

Their treatment of Baker Hughes is also interesting. I’d like to see a rebuttal or confirmation of Markopolos’ thesis there from another accountant.

The response from GE hasn’t been reassuring. Buying a tiny amount of shares in your personal account, that’s the exec response? I recall a Bear Sterns exec did the same right before the company collapsed. It’s proof of nothing.

GE should be able to conclusively rebut this report if it’s untrue. Where is the rebuttal?

Enron was also unable to produce a clear balance sheet right before the lid blew off their fraud. Not a good sign that GE hasn’t provided any defense that isn’t hand-waving and ad hominems.

(I’ve been reading “Financial Shenanigans” by Schilit, a textbook on detecting accounting fraud. I’m far from an expert but seems to me that this report raises reasonable questions)

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Valuethinker » Fri Aug 16, 2019 3:40 am

dodecahedron wrote:
Thu Aug 15, 2019 4:33 pm
RobLyons wrote:
Thu Aug 15, 2019 4:24 pm
Silence Dogood wrote:
Thu Aug 15, 2019 4:16 pm
Yet another example of the risks associated with investing in individual stocks.

Sad to see what has happened to what was once an iconic company.

x2

More proof of the benefits of the lazy 3 fund portfolio !
I just skimmed the new book by Bernanke, Geithner, and Paulson with a retrospective on the 2008 financial crisis and it sounds like we came awfully close to a total meltdown from which even a classic 3 fund portfolio might not have protected us. They talk about an ¨e coli effect¨ in financial markets, where good as well as bad companies can be dragged down as nobody is sure exactly what assets are affected (just like when an e coli outbreak can induce consumers to avoid all meat because they can´t be sure exactly which sources are tainted.)
Oh we were on the ledge. In fact we had one foot off the ledge and into mid air.

Policymakers continued to see it as a liquidity crisis. Which it was. The money markets froze & imploded. There was literally no liquidity out there. That left the European banks horribly exposed & rescued by the NY Fed's willingness to provide dollar liquidity via REPO transactions. (European banks are intrinsically short USD deposits, but a lot of their lending and trading is done in USD, thus they borrow from money markets - when that freezes they are in deep trouble).

But the solution had to address the solvency crisis. There were a number of financial institutions which were trading insolvent. At the value of Mortgage Backed Securities at that moment (which was unknowable) I suspect even the likes of Merrill Lynch and Goldman Sachs were insolvent.
But for sure RBS (I think the world's 4th largest bank by assets at the time?). HBOS (largest UK home lender). Various European and American financial institutions (Citi for one).

There had to be a massive public injection of equity to stabilize the balance sheets. Finance being a game of confidence, this in turn would reassure markets and cause the value of the assets to rise. Which is what happened - the US bank & AIG bailout was actually done at a profit (the UK one at a £33bn loss, so far).

But legislators kicked out the first version of the TARP. And the TARP was intended to provide liquidity, not direct investment into bank equity.

After the British announced their bank bailout, other countries followed suit. It was Prime Minister Gordon Brown & Chancellor Alistair Darling's greatest moment. The tone of the announcement was, Churchillian, "Things are bad. They may get worse. We shall do what is necessary. If that is insufficient then we shall do more." 2 Scotsmen decide to save world finance. You could almost hear the Spitfire and Hurricane engines coughing into life in the cold Kent morning. A New York Times columnist wrote "Did Gordon Brown just save the world?"

And so the Congress passed the TARP . Apparently what is said on the floor of the Congress in the passing of a bill has legal force in its subsequent interpretation. A question was asked of Rep Frank about the intent of the bill, and he allowed that it included the possibility of buying bank equity.

The arsenal was loaded. The US Treasury & the Fed now had the financial means to organise a bailout. Which they did. Other world governments followed suit.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by HawkeyePierce » Fri Aug 16, 2019 4:19 am

+1 to Valuethinker.

We're straying pretty far from the topic here, but Adam Tooze's recent book "Crashed" provides an in-depth account of the role of trans-atlantic finance in the crisis and the Fed's willingness to provide dollar liquidity to other central banks (who in turn used it to lend dollars to their home institutions).

There's more info here: https://www.federalreserve.gov/monetary ... yswaps.htm

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Harry Livermore
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Harry Livermore » Fri Aug 16, 2019 8:33 am

There was a recent hedge-fund-produced report on a company that I like and have been buying, A.O. Smith. Boring old water heater company with a large and growing presence in Asia and East Asia. I like it because it's something I can understand, and management is adding water purification into the mix for the overseas segments, and it's growing nicely.
Anyway, this report claimed all kinds of financial shenanigans, and how Asian sales partner companies are keeping profits from AOS, and the money will never get back to the AOS balance sheet. I read it and was not entirely impressed, and have hung on to my shares because I still think AOS is solid and growing. But guess what happened to the AOS share price? Still down +/- 10%.
It's a bit unnerving to say the least.
Over on seeking alpha, there have been countless threads damning GE, and almost as many saying GE is the buy of the century. I have stayed far, far away from GE stock. It's sad to see a storied, steady company that had a hand in low tech lightbulbs and state of the art power gen and jet engines, become so smug and overconfident that they thought getting into insurance and high finance would be a smart move.
How much more valuable might the company be if they had only stuck with boring old light bulbs, appliances, and locomotives? But then I guess "Two Jet Jeff" and Welch might not have quite as high net worths. Thousands of GE shareholders might be happier though.
Cheers


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vitaflo
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by vitaflo » Fri Aug 16, 2019 11:13 am

AZAttorney11 wrote:
Thu Aug 15, 2019 4:37 pm

A Thursday evening filing with the SEC revealed that Culp bought 252,200 shares for about $7.93 each. Culp has roughly doubled his holding of GE shares this week, according to the filing.
I'm more alarmed the CEO of GE only had $2m worth of stock before yesterday.

psteinx
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by psteinx » Fri Aug 16, 2019 11:18 am

vitaflo wrote:
Fri Aug 16, 2019 11:13 am
AZAttorney11 wrote:
Thu Aug 15, 2019 4:37 pm

A Thursday evening filing with the SEC revealed that Culp bought 252,200 shares for about $7.93 each. Culp has roughly doubled his holding of GE shares this week, according to the filing.
I'm more alarmed the CEO of GE only had $2m worth of stock before yesterday.
Per, I think, this morning's WSJ, he'd bought $3M worth the day before. So if the statement is true that he's doubled his holdings, it's more like he went from $5M to $10M. And given that GE has been falling hard for a long time, his $5M may have been $8M or $10M or whatever, a year or so ago.

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PrettyCoolWorkshop
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by PrettyCoolWorkshop » Fri Aug 16, 2019 11:46 am

psteinx wrote:
Fri Aug 16, 2019 11:18 am
vitaflo wrote:
Fri Aug 16, 2019 11:13 am
AZAttorney11 wrote:
Thu Aug 15, 2019 4:37 pm

A Thursday evening filing with the SEC revealed that Culp bought 252,200 shares for about $7.93 each. Culp has roughly doubled his holding of GE shares this week, according to the filing.
I'm more alarmed the CEO of GE only had $2m worth of stock before yesterday.
Per, I think, this morning's WSJ, he'd bought $3M worth the day before. So if the statement is true that he's doubled his holdings, it's more like he went from $5M to $10M. And given that GE has been falling hard for a long time, his $5M may have been $8M or $10M or whatever, a year or so ago.
GE stock is up 9.50% today as I write this, so it may end up recovering all of its losses from yesterday. Culp may make good on his bet. Price discovery is a heck of a thing...
Be greedy and fearful. All the time.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by lazydavid » Fri Aug 16, 2019 12:08 pm

Dude2 wrote:
Thu Aug 15, 2019 11:37 pm
From the article,
“GE would change its reporting formats every 2-4 years to prevent analysts from being able to make comparisons across time horizons! In other words, GE went out of its way to make it impossible to analyze the performance of their business units.

“Why would a company do that? We could only think of two reasons: 1) to conceal accounting fraud or 2) because they’re so incompetent they’re not capable of keeping proper books and records. I’m not sure which reason is worse because both are bad and each is a path to bankruptcy.”
Perhaps this is the sort of thing regulators should be looking out for and legislators should be making illegal -- if it isn't already.

In any case, a reason the report might read more like a marketing presentation than a hard-data forensic accounting analysis could be due to the complexity. It will require opening the books to get to the meat of the fraud. He is saying he smells the smoke.
My understanding is if you change your accounting/reporting practices, you have to report in both formats in the year you make the change. Of course, they could certainly cherry-pick the year that the change was made to avoid before/after comparisons in particular areas.

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nedsaid
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by nedsaid » Fri Aug 16, 2019 2:10 pm

HawkeyePierce wrote:
Thu Aug 15, 2019 11:48 pm
I just finished reading the report. I agree parts of it don’t make sense (why compare GE’s profit margin with Madoff’s).

But, any company that claims consistent earnings growth despite the business cycle while also failing to be transparent about their finances is worth a deeper investigation. It’s hard to dismiss the point that GE’s consolidated profit margin doesn’t match the sum of its business units. Where’d the money go?

Certainly his report provides credible reasons to believe GE may have mismanaged its reinsurance business. Few executives from an insurance background and numbers that don’t add up when compared with industry peers.

Their treatment of Baker Hughes is also interesting. I’d like to see a rebuttal or confirmation of Markopolos’ thesis there from another accountant.

The response from GE hasn’t been reassuring. Buying a tiny amount of shares in your personal account, that’s the exec response? I recall a Bear Sterns exec did the same right before the company collapsed. It’s proof of nothing.

GE should be able to conclusively rebut this report if it’s untrue. Where is the rebuttal?

Enron was also unable to produce a clear balance sheet right before the lid blew off their fraud. Not a good sign that GE hasn’t provided any defense that isn’t hand-waving and ad hominems.

(I’ve been reading “Financial Shenanigans” by Schilit, a textbook on detecting accounting fraud. I’m far from an expert but seems to me that this report raises reasonable questions)
Thank you for the "I read the report so that you don't have to" post, I really enjoyed your comments. I don't think there is outright fraud here, certainly GE was performing financial engineering. Having been a long-time holder of GE stock, I have dubbed it "Our Lady of Perpetual Disappointment." Still own the stock, in part so I have something to write about on the forum. I will say, this stock has never missed an opportunity to miss an opportunity. My suspicion is that GE's troubles date back to Jack Welch and Jeff Immelt who in my view did a lousy job as his successor. Just seems that the CEO's job was more about managing the stock price and manipulating the earnings number than just running the darned business. It is a textbook case of what happens when bright people get bored.
A fool and his money are good for business.

Caduceus
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Caduceus » Fri Aug 16, 2019 2:50 pm

The market seems to have decided that the report did not reveal anything they did not already know previously. It is so hard to make money as a short-seller. The stock price is back to nearly where it was before the report.

Interestingly enough, Warren Buffett, the world's best analyst of reinsurance earnings, has not spoken about fraudulent red flags. He's owned GE before, and he's mentioned that the size of their reserving mistakes was somewhat unexpected, but that GE was still fundamentally a strong company and that he might be interested at the right price. Since the stock is, even at yesterday's price, basically where it was several months ago and Buffett did not buy, this does not seem anywhere near the right price he had in mind!

germark
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by germark » Fri Aug 16, 2019 3:26 pm

On a somewhat related note, I recall that in a few threads on Dividend Investing people said things like "look at GE", sort of implying that they had done a significant dividend cut at some point in the future. This thread caused me to look into that and OMG - is this correct?

Ex/Eff Date Cash Amount
6/28/2019 0.01
3/8/2019 0.01
12/19/2018 0.01
9/14/2018 0.12

6/15/2018 0.12
2/23/2018 0.12
12/26/2017 0.12
9/15/2017 0.24

6/15/2017 0.24
2/23/2017 0.24
12/22/2016 0.24
9/15/2016 0.23
6/16/2016 0.23
2/25/2016 0.23
12/17/2015 0.23
9/17/2015 0.23
6/18/2015 0.23
2/19/2015 0.23
12/18/2014 0.23
9/18/2014 0.22
6/19/2014 0.22
2/20/2014 0.22
12/19/2013 0.22
9/19/2013 0.19
6/20/2013 0.19

(From https://www.nasdaq.com/symbol/ge/dividend-history)

In short, it appears that GE was steadily increasing their dividend for ages, and then suddenly halved it, and then cut it from $0.12 to $0.01. Is this correct? What happened?

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nedsaid
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by nedsaid » Fri Aug 16, 2019 3:34 pm

We might have seen the opposite of the pump and dump scam here. It is suspicious that the author of the report is affiliated with a hedge fund that could have benefited from being short GE. Jim Cramer admitted that as a Hedge Fund manager that he would spread false rumors about a company to drive down its stock price. There is a YouTube video out there showing this and am surprised this didn't earn him a lifetime ban from the SEC. It was right on the line behavior if not outright illegal. Is something similar happening here?
A fool and his money are good for business.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by rj342 » Fri Aug 16, 2019 3:46 pm

HawkeyePierce wrote:
Fri Aug 16, 2019 4:19 am
+1 to Valuethinker.

We're straying pretty far from the topic here, but Adam Tooze's recent book "Crashed" provides an in-depth account of the role of trans-atlantic finance in the crisis and the Fed's willingness to provide dollar liquidity to other central banks (who in turn used it to lend dollars to their home institutions).

There's more info here: https://www.federalreserve.gov/monetary ... yswaps.htm
re transatlantic finance...
I long since forgot where I read it -- maybe Murray Rothbard? -- but supposedly a contributor the Great Depression being worldwide was that the US banks were loaning a lot of money to Germany for it to pay WW1 war reparations required under the pretty punitive Versailles Treaty. IIRC bankers were supported/pushed by Wilson's administration.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by HawkeyePierce » Fri Aug 16, 2019 7:47 pm

nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Thank you for the "I read the report so that you don't have to" post, I really enjoyed your comments. I don't think there is outright fraud here, certainly GE was performing financial engineering. Having been a long-time holder of GE stock, I have dubbed it "Our Lady of Perpetual Disappointment." Still own the stock, in part so I have something to write about on the forum. I will say, this stock has never missed an opportunity to miss an opportunity. My suspicion is that GE's troubles date back to Jack Welch and Jeff Immelt who in my view did a lousy job as his successor. Just seems that the CEO's job was more about managing the stock price and manipulating the earnings number than just running the darned business. It is a textbook case of what happens when bright people get bored.
To be clear, my layman's opinion is that we're likely looking at "financial engineering bordering on fraud". I can certainly imagine how a culture of parachuting execs into positions for which they don't have the necessary experience could lead to fatal short-term-ism.

I think the report makes a good case that GE stepped over some bright lines to make their finances appear better than reality. The three the stuck out to me:

1) Booking all premiums from their LTC business as earnings without deducting anything for reserves. This boosted earnings in the short-term but (if this report is right) means their LTC re-insurance unit is now dangerously undercapitalized. This is similar to the situation AIG found itself with with their CDS business.

Now, this could be fraud or it could be incompetence. It's possible that (like AIG) GE has severely underestimated the necessary reserves for that business but that this was driven not by malice but foolishness. The report claims that GE tried to buy reinsurance on their LTC policies but their counterparty failed, leaving GE further exposed. One could read that as GE realizing their problem and trying to fix it but shooting themselves in the foot instead.

The report points out that the majority of senior leadership in their insurance division does not come from an insurance background, so this could be explained by inexperience and incompetence.

The report claims that incorrect accounting treatments in their LTC division leave them with a $29 billion reserve shortfall.

2) Their accounting treatment double-counts Baker Hughes earnings under both BH and GE's consolidated financials. I think the report lays out a pretty clear-cut case why this is a violation of GAAP standards and should lead to a restatement of their 2018 10K.

GE does not operate BH, they merely own shares in that company but it is self-directed and reports its own financials. GE has also been reporting those financials on its own balance sheet rather than booking the value of their shares at fair-market value, as that would require GE to book the loss on the decline in value of those shares.

3) Finally, their consolidated profit margin is 1.6% but their weighted cost of capital is 5.5%. I don't think that points to any fraud on its own but does seem like a major business problem to me. Also, their consolidated profit margin does not match the weighted average profit margin across all their business units of 14.7%, so where is that difference coming from?

The report frankly would've been stronger if he'd focused on just those three. The rest contains a lot of noise (like an exec stating 8% growth on an earnings call when it was actually 7.4%. Big whoop). It also contains some problems that the market already knows about like existing SEC investigations into specific business units and prior fines for accounting fraud.

I think he makes a solid case that GE has been mismanaged but one look at the stock price over the last decade makes it clear the market already knows that.

Here's what I would like to see from Markopolos:

1) What are the incentive arrangements for execs? Eg, show us how this fraud could have helped them in the short term. The specifics of a lot of Enron's fraud could be tied directly to bonus and incentive arrangements.

2) Play your own devil's advocate. Are there charitable explanations for any of these discrepancies? Markopolos just seems to assume he's got them dead to rights.

3) This report imagines some severe consequences for GE. First is a downgrade of their credit rating leaving them at the junk level, second is seeing them locked out of the commercial paper market and third is breaking existing debt covenants. While those are possible, show us reasons to believe they're likely. Show us where that has happened in the past rather than just drawing murky comparisons with Madoff and Enron and AIG.

4) Second opinions. This is the work of his team and they certainly appear qualified to make this assessment, but did they double-check their work with anyone?

5) Outside comments. A lot of the accusations around their LTC business revolve around recent regulatory decisions by the Kansas Department of Insurance. Did he ask for their comment on this?

6) There are some vague accusations that they are hiding toxic assets off their balance sheet. Enron did this quite a bit: in one example, they had a fleet of worthless tankers off Nigeria and each quarter they would arrange to temporarily sell those tankers to a special-purpose entity for a couple weeks to avoid reporting them on their balance sheet (financing came from outside banks). The fraud was failing to report the liability to those banks for the loan that financed that entity.

If GE is up to similar tricks, be more specific. What are they hiding? What assets could they be warehousing off the books?

The slide deck format makes it very difficult to tie together all the accusations. If they've misstated their balance sheet, show us what you believe a correct consolidated balance sheet would look like and show it to us in one place so we can clearly see the impact on their cash flow, earnings and working capital.

My tentative conclusion is that Markopolos may indeed be correct but both parties need to bring their evidence to the table at this point so the market can judge them for itself.

(Again, I am not an accountant, I'm just a software engineer, but my day job involves building internal financial reporting systems for a major tech company and my hobby is studying financial fraud. I spent a lot of time implementing GAAP and SOX controls)

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by nedsaid » Fri Aug 16, 2019 8:10 pm

HawkeyePierce wrote:
Fri Aug 16, 2019 7:47 pm
nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Thank you for the "I read the report so that you don't have to" post, I really enjoyed your comments. I don't think there is outright fraud here, certainly GE was performing financial engineering. Having been a long-time holder of GE stock, I have dubbed it "Our Lady of Perpetual Disappointment." Still own the stock, in part so I have something to write about on the forum. I will say, this stock has never missed an opportunity to miss an opportunity. My suspicion is that GE's troubles date back to Jack Welch and Jeff Immelt who in my view did a lousy job as his successor. Just seems that the CEO's job was more about managing the stock price and manipulating the earnings number than just running the darned business. It is a textbook case of what happens when bright people get bored.
To be clear, my layman's opinion is that we're likely looking at "financial engineering bordering on fraud". I can certainly imagine how a culture of parachuting execs into positions for which they don't have the necessary experience could lead to fatal short-term-ism.

I think the report makes a good case that GE stepped over some bright lines to make their finances appear better than reality. The three the stuck out to me:

1) Booking all premiums from their LTC business as earnings without deducting anything for reserves. This boosted earnings in the short-term but (if this report is right) means their LTC re-insurance unit is now dangerously undercapitalized. This is similar to the situation AIG found itself with with their CDS business.

Now, this could be fraud or it could be incompetence. It's possible that (like AIG) GE has severely underestimated the necessary reserves for that business but that this was driven not by malice but foolishness. The report claims that GE tried to buy reinsurance on their LTC policies but their counterparty failed, leaving GE further exposed. One could read that as GE realizing their problem and trying to fix it but shooting themselves in the foot instead.

The report points out that the majority of senior leadership in their insurance division does not come from an insurance background, so this could be explained by inexperience and incompetence.

The report claims that incorrect accounting treatments in their LTC division leave them with a $29 billion reserve shortfall.

2) Their accounting treatment double-counts Baker Hughes earnings under both BH and GE's consolidated financials. I think the report lays out a pretty clear-cut case why this is a violation of GAAP standards and should lead to a restatement of their 2018 10K.

GE does not operate BH, they merely own shares in that company but it is self-directed and reports its own financials. GE has also been reporting those financials on its own balance sheet rather than booking the value of their shares at fair-market value, as that would require GE to book the loss on the decline in value of those shares.

3) Finally, their consolidated profit margin is 1.6% but their weighted cost of capital is 5.5%. I don't think that points to any fraud on its own but does seem like a major business problem to me. Also, their consolidated profit margin does not match the weighted average profit margin across all their business units of 14.7%, so where is that difference coming from?

The report frankly would've been stronger if he'd focused on just those three. The rest contains a lot of noise (like an exec stating 8% growth on an earnings call when it was actually 7.4%. Big whoop). It also contains some problems that the market already knows about like existing SEC investigations into specific business units and prior fines for accounting fraud.

I think he makes a solid case that GE has been mismanaged but one look at the stock price over the last decade makes it clear the market already knows that.

Here's what I would like to see from Markopolos:

1) What are the incentive arrangements for execs? Eg, show us how this fraud could have helped them in the short term. The specifics of a lot of Enron's fraud could be tied directly to bonus and incentive arrangements.

2) Play your own devil's advocate. Are there charitable explanations for any of these discrepancies? Markopolos just seems to assume he's got them dead to rights.

3) This report imagines some severe consequences for GE. First is a downgrade of their credit rating leaving them at the junk level, second is seeing them locked out of the commercial paper market and third is breaking existing debt covenants. While those are possible, show us reasons to believe they're likely. Show us where that has happened in the past rather than just drawing murky comparisons with Madoff and Enron and AIG.

4) Second opinions. This is the work of his team and they certainly appear qualified to make this assessment, but did they double-check their work with anyone?

5) Outside comments. A lot of the accusations around their LTC business revolve around recent regulatory decisions by the Kansas Department of Insurance. Did he ask for their comment on this?

6) There are some vague accusations that they are hiding toxic assets off their balance sheet. Enron did this quite a bit: in one example, they had a fleet of worthless tankers off Nigeria and each quarter they would arrange to temporarily sell those tankers to a special-purpose entity for a couple weeks to avoid reporting them on their balance sheet (financing came from outside banks). The fraud was failing to report the liability to those banks for the loan that financed that entity.

If GE is up to similar tricks, be more specific. What are they hiding? What assets could they be warehousing off the books?

The slide deck format makes it very difficult to tie together all the accusations. If they've misstated their balance sheet, show us what you believe a correct consolidated balance sheet would look like and show it to us in one place so we can clearly see the impact on their cash flow, earnings and working capital.

My tentative conclusion is that Markopolos may indeed be correct but both parties need to bring their evidence to the table at this point so the market can judge them for itself.

(Again, I am not an accountant, I'm just a software engineer, but my day job involves building internal financial reporting systems for a major tech company and my hobby is studying financial fraud)
There are Generally Accepted Accounting Standards and public companies are required to be audited. There are rules that determine how you book the results of partially owned subsidiaries. Whatever GE did has to get past the auditors. They can't just willy-nilly decide how they are going to present their financial statements or willy-nilly decide how they are going to book transactions. Being a public company, GE is subject to scrutiny by the Securities Exchange Commission.

Pretty much, auditors test the internal accounting controls of a company. The better the controls, the less field work the auditors have to do. The looser the controls, the more field work the auditors must perform. Auditors must select a large enough of a sample size to make detection of fraud, if it exists, likely. So you would also have to believe that internal controls weren't too good. That is possible. The external auditors could have failed to select a large enough sample size to detect fraud and that is possible as well.

Fraud is certainly possible, as we saw with Enron, and it is possible to get massive fraud past the auditors. Arthur Anderson signed off on Enron's financial statements and now no longer exists as an auditing firm though the consulting arm of their business lives on. Hard to believe that under threat of a death penalty over a sloppy audit that KPMG would be so reckless. You would think that KPMG would be extra careful here.

Fraud or outright fraud is possible given the complexities of GE's Corporate structure. It is also possible that liabilities from its former long term care business are understated. But you would also have to wonder why auditors wouldn't ask these questions and you would have to believe that the auditing firm has zero expertise in insurance.

Being such a large company, GE would have its own internal auditors, whose job is to assure compliance with internal company policies and internal controls. It is possible for management to overrule internal controls and commit fraud but the point is there are supposed to be internal safeguards. But safeguards have failed before, both internal and external.

GE spun off Genworth, a company that primarily does long term care insurance. In a similar fashion that Structured Investment Vehicles took the risk of subprime debt off the balance sheets of banks only to have the liability return to bank balance sheets when the SIVs ran into trouble; it is possible that the risk from long term care contracts could return to GE if Genworth runs into trouble. I own Genworth stock too, it could be this issue is delaying the acquisition of Genworth by a Chinese company. The question of liabilities from LTC is a murky one, how much should be recognized on GE's books and how much should be on the books of Genworth? I think this is the central issue here and not Baker Hughes.

Failure of the Securities Exchange Commission is certainly possible. Under the Bush II administration, the SEC failed its mandate big time. This has happened before. Could it be that we are seeing similar sloppiness here particularly in an environment of deregulation? Possible.

I am an Accountant. It has many years since I studied GAAP in college and things have changed. When I was a hospital accountant, our organization issued Technical Accounting Bulletins and we also had a website where we could research GAAP. Have to admit that I don't know this stuff cold. Foggy memory recalls that if you own over 50% of a subsidiary, you can issue consolidated financial statements. My understanding is that GE reduced its ownership of Baker Hughes but was still over the 50% ownership.

The thing is, there are at least three layers of protection here. Internal policies and controls, the external auditors, and the Securities Exchange Commission. You would have to believe that all three layers of protection failed and that management was complicit in fraud. This has all happened before, so it is possible. Also recall that as a result of the failures of Enron, WorldComm, and Washington Mutual; Congress passed Sarbanes/Oxley, affectionately known as SarBox or Sox. Company Executives have to personally vouch for the Financial Statements. Jeff Immelt would have had to override layers of oversight and protection thus exposing himself to both civil penalties and jail. It just seems a bit of a stretch here, particularly when the author of this report and his hedge fund partners stood to gain from a falling GE stock price. Color me a bit skeptical here.
A fool and his money are good for business.

Ki_poorrichard
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Ki_poorrichard » Fri Aug 16, 2019 8:53 pm

I invested in GE awhile back. Honestly, I did it because Jack Brennan was on their board of directors. I even watched him talk about GE and bring in the new CEO before Larry Culp. Plain and simple, I bought into the turn around story. There are stratified layers of risk in everything.

Buyer beware. Well, investor beware. That’s an understatement.

I doubt the claims to the hedge fund incentive. Why would someone ruin their reputation like that so easily? .. and kill their livelihood. Not buying into that.

As for Larry Culp, he was appointed the position with an incentive too if that’s the case. A good captain will do anything to steer the ship into safe harbor or keep it from sinking. I’m sure he was or is not truly aware of the possible deep financial underpinnings or should I say possible “hidden numbers” that can lead to GE’s demise.

What the heck do I know? Larry Culp has a remarkable track record as a CEO. But, who knows what’s really going on deep within any company now a days. Financial engineering and insider buying to lure investors, the list goes on and on. I guess anything is possible. Just count the number of ponzi schemes we went through despite the regulation to deter it. Only time will tell.

I will keep learning lessons ...
Last edited by Ki_poorrichard on Fri Aug 16, 2019 9:08 pm, edited 1 time in total.
"We are never certain. We are always ignorant to some degree." - Peter L. Bernstein

AZAttorney11
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by AZAttorney11 » Fri Aug 16, 2019 9:01 pm

nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Fraud is certainly possible, as we saw with Enron, and it is possible to get massive fraud past the auditors. Arthur Anderson signed off on Enron's financial statements and now no longer exists as an auditing firm though the consulting arm of their business lives on. Hard to believe that under threat of a death penalty over a sloppy audit that KPMG would be so reckless. You would think that KPMG would be extra careful here.
I'll tell you who is having a bad week, and that's the lead audit partner from KPMG on the GE engagement. And all of the equity partners at KPMG. And their malpractice carrier(s).

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by cbeck » Sat Aug 17, 2019 1:14 am

It's a little shocking to me how many people on here question Markopoulos's bona fides when he has come out with a negative report using only public information as far as we know. I wonder why it is that the motives and methods of authors of positive reports also based on public information are so seldom questioned.

I am not going to take a position on GE either way, but I am inclined to believe Markopoulos is right. Years ago I ran into a guy who worked on the factory floor of a GE manufacturing plant. At that time the insider view of the company was, "Everything GE makes sucks, except the vacuum cleaners."

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by boogiehead » Sat Aug 17, 2019 2:44 am

AZAttorney11 wrote:
Fri Aug 16, 2019 9:01 pm
nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Fraud is certainly possible, as we saw with Enron, and it is possible to get massive fraud past the auditors. Arthur Anderson signed off on Enron's financial statements and now no longer exists as an auditing firm though the consulting arm of their business lives on. Hard to believe that under threat of a death penalty over a sloppy audit that KPMG would be so reckless. You would think that KPMG would be extra careful here.
I'll tell you who is having a bad week, and that's the lead audit partner from KPMG on the GE engagement. And all of the equity partners at KPMG. And their malpractice carrier(s).
The problem is there is too much to lose for KPMG that they would never truly challenge GE's Accounting Practices. GE is one of KPMG's largest clients (KPMG has been losing clients left and right with numerous scandals in the past 5 years), its been a client for over 100 years (which to me in itself is a red flag, in Europe public companies are forced to rotate auditors I believe every 10 years) so I would almost hold no value in the external audit report.

As for penalties and Enron .... white collar crimes is still just a slap on the wrist. I was looking into conferences to attend earlier this year and one of the ones that I came across the key note speaker was the ex-CFO of Enron which made me do a double take... apparently he is doing well in the speaking circuit nowadays.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by HawkeyePierce » Sat Aug 17, 2019 4:06 am

boogiehead wrote:
Sat Aug 17, 2019 2:44 am
AZAttorney11 wrote:
Fri Aug 16, 2019 9:01 pm
nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Fraud is certainly possible, as we saw with Enron, and it is possible to get massive fraud past the auditors. Arthur Anderson signed off on Enron's financial statements and now no longer exists as an auditing firm though the consulting arm of their business lives on. Hard to believe that under threat of a death penalty over a sloppy audit that KPMG would be so reckless. You would think that KPMG would be extra careful here.
I'll tell you who is having a bad week, and that's the lead audit partner from KPMG on the GE engagement. And all of the equity partners at KPMG. And their malpractice carrier(s).
The problem is there is too much to lose for KPMG that they would never truly challenge GE's Accounting Practices. GE is one of KPMG's largest clients (KPMG has been losing clients left and right with numerous scandals in the past 5 years), its been a client for over 100 years (which to me in itself is a red flag, in Europe public companies are forced to rotate auditors I believe every 10 years) so I would almost hold no value in the external audit report.

As for penalties and Enron .... white collar crimes is still just a slap on the wrist. I was looking into conferences to attend earlier this year and one of the ones that I came across the key note speaker was the ex-CFO of Enron which made me do a double take... apparently he is doing well in the speaking circuit nowadays.
Well, he did spend quite some time in prison.

Nedsaid: I’ll defer to you on the accounting questions as I don’t have experience there. I’d love to hear your opinion on the Baker Hughes section of the report. To my layman reading the GAAP rules cited seem straightforward but I’m keen to hear if Markopolous is reaching here.

TomCat96
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by TomCat96 » Sat Aug 17, 2019 5:03 am

boogiehead wrote:
Sat Aug 17, 2019 2:44 am
AZAttorney11 wrote:
Fri Aug 16, 2019 9:01 pm
nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Fraud is certainly possible, as we saw with Enron, and it is possible to get massive fraud past the auditors. Arthur Anderson signed off on Enron's financial statements and now no longer exists as an auditing firm though the consulting arm of their business lives on. Hard to believe that under threat of a death penalty over a sloppy audit that KPMG would be so reckless. You would think that KPMG would be extra careful here.
I'll tell you who is having a bad week, and that's the lead audit partner from KPMG on the GE engagement. And all of the equity partners at KPMG. And their malpractice carrier(s).
The problem is there is too much to lose for KPMG that they would never truly challenge GE's Accounting Practices. GE is one of KPMG's largest clients (KPMG has been losing clients left and right with numerous scandals in the past 5 years), its been a client for over 100 years (which to me in itself is a red flag, in Europe public companies are forced to rotate auditors I believe every 10 years) so I would almost hold no value in the external audit report.

As for penalties and Enron .... white collar crimes is still just a slap on the wrist. I was looking into conferences to attend earlier this year and one of the ones that I came across the key note speaker was the ex-CFO of Enron which made me do a double take... apparently he is doing well in the speaking circuit nowadays.
Anytime a company changes its auditor it's a major red flag, whether the company initiates it, or whether it's the auditor that withdraws.
I think in this case it's impossible to tell. I agree there's too many years, and too close a tie between KPMG and GE to be able to effectively discern who is the one truly initiating it.

https://www.complianceweek.com/ge-audit ... 59.article
https://www.bloomberg.com/news/articles ... g-missteps
https://money.cnn.com/2018/04/24/invest ... index.html

Take a look at this, and match up the evidence.
"The three former KPMG US partners who have been accused of using leaked information about audit inspections to cheat the system could face up to 85 years in prison if they are found guilty"

Philip Bartlett, the inspector in charge, added, “As alleged, the defendants took advantage of confidential information stolen from the PCAOB and used it to tip off KPMG partners about impending audit inspections.

https://economia.icaew.com/news/january ... rs-in-jail

"A former audit inspector and executive director at KPMG was sentenced to eight months in prison after entering a guilty plea related to a scheme to steal inspection plans."

https://www.complianceweek.com/accounti ... 54.article


It's looking pretty bad. No theres no overt link between that and GE. But I think it at least it shows partners at KPMG were willing to break the law to help someone.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by TomCat96 » Sat Aug 17, 2019 5:12 am

nedsaid wrote:
Fri Aug 16, 2019 8:10 pm
HawkeyePierce wrote:
Fri Aug 16, 2019 7:47 pm
nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Thank you for the "I read the report so that you don't have to" post, I really enjoyed your comments. I don't think there is outright fraud here, certainly GE was performing financial engineering. Having been a long-time holder of GE stock, I have dubbed it "Our Lady of Perpetual Disappointment." Still own the stock, in part so I have something to write about on the forum. I will say, this stock has never missed an opportunity to miss an opportunity. My suspicion is that GE's troubles date back to Jack Welch and Jeff Immelt who in my view did a lousy job as his successor. Just seems that the CEO's job was more about managing the stock price and manipulating the earnings number than just running the darned business. It is a textbook case of what happens when bright people get bored.
To be clear, my layman's opinion is that we're likely looking at "financial engineering bordering on fraud". I can certainly imagine how a culture of parachuting execs into positions for which they don't have the necessary experience could lead to fatal short-term-ism.

I think the report makes a good case that GE stepped over some bright lines to make their finances appear better than reality. The three the stuck out to me:

1) Booking all premiums from their LTC business as earnings without deducting anything for reserves. This boosted earnings in the short-term but (if this report is right) means their LTC re-insurance unit is now dangerously undercapitalized. This is similar to the situation AIG found itself with with their CDS business.

Now, this could be fraud or it could be incompetence. It's possible that (like AIG) GE has severely underestimated the necessary reserves for that business but that this was driven not by malice but foolishness. The report claims that GE tried to buy reinsurance on their LTC policies but their counterparty failed, leaving GE further exposed. One could read that as GE realizing their problem and trying to fix it but shooting themselves in the foot instead.

The report points out that the majority of senior leadership in their insurance division does not come from an insurance background, so this could be explained by inexperience and incompetence.

The report claims that incorrect accounting treatments in their LTC division leave them with a $29 billion reserve shortfall.

2) Their accounting treatment double-counts Baker Hughes earnings under both BH and GE's consolidated financials. I think the report lays out a pretty clear-cut case why this is a violation of GAAP standards and should lead to a restatement of their 2018 10K.

GE does not operate BH, they merely own shares in that company but it is self-directed and reports its own financials. GE has also been reporting those financials on its own balance sheet rather than booking the value of their shares at fair-market value, as that would require GE to book the loss on the decline in value of those shares.

3) Finally, their consolidated profit margin is 1.6% but their weighted cost of capital is 5.5%. I don't think that points to any fraud on its own but does seem like a major business problem to me. Also, their consolidated profit margin does not match the weighted average profit margin across all their business units of 14.7%, so where is that difference coming from?

The report frankly would've been stronger if he'd focused on just those three. The rest contains a lot of noise (like an exec stating 8% growth on an earnings call when it was actually 7.4%. Big whoop). It also contains some problems that the market already knows about like existing SEC investigations into specific business units and prior fines for accounting fraud.

I think he makes a solid case that GE has been mismanaged but one look at the stock price over the last decade makes it clear the market already knows that.

Here's what I would like to see from Markopolos:

1) What are the incentive arrangements for execs? Eg, show us how this fraud could have helped them in the short term. The specifics of a lot of Enron's fraud could be tied directly to bonus and incentive arrangements.

2) Play your own devil's advocate. Are there charitable explanations for any of these discrepancies? Markopolos just seems to assume he's got them dead to rights.

3) This report imagines some severe consequences for GE. First is a downgrade of their credit rating leaving them at the junk level, second is seeing them locked out of the commercial paper market and third is breaking existing debt covenants. While those are possible, show us reasons to believe they're likely. Show us where that has happened in the past rather than just drawing murky comparisons with Madoff and Enron and AIG.

4) Second opinions. This is the work of his team and they certainly appear qualified to make this assessment, but did they double-check their work with anyone?

5) Outside comments. A lot of the accusations around their LTC business revolve around recent regulatory decisions by the Kansas Department of Insurance. Did he ask for their comment on this?

6) There are some vague accusations that they are hiding toxic assets off their balance sheet. Enron did this quite a bit: in one example, they had a fleet of worthless tankers off Nigeria and each quarter they would arrange to temporarily sell those tankers to a special-purpose entity for a couple weeks to avoid reporting them on their balance sheet (financing came from outside banks). The fraud was failing to report the liability to those banks for the loan that financed that entity.

If GE is up to similar tricks, be more specific. What are they hiding? What assets could they be warehousing off the books?

The slide deck format makes it very difficult to tie together all the accusations. If they've misstated their balance sheet, show us what you believe a correct consolidated balance sheet would look like and show it to us in one place so we can clearly see the impact on their cash flow, earnings and working capital.

My tentative conclusion is that Markopolos may indeed be correct but both parties need to bring their evidence to the table at this point so the market can judge them for itself.

(Again, I am not an accountant, I'm just a software engineer, but my day job involves building internal financial reporting systems for a major tech company and my hobby is studying financial fraud)
The thing is, there are at least three layers of protection here. Internal policies and controls, the external auditors, and the Securities Exchange Commission. You would have to believe that all three layers of protection failed and that management was complicit in fraud. This has all happened before, so it is possible. Also recall that as a result of the failures of Enron, WorldComm, and Washington Mutual; Congress passed Sarbanes/Oxley, affectionately known as SarBox or Sox. Company Executives have to personally vouch for the Financial Statements. Jeff Immelt would have had to override layers of oversight and protection thus exposing himself to both civil penalties and jail. It just seems a bit of a stretch here, particularly when the author of this report and his hedge fund partners stood to gain from a falling GE stock price. Color me a bit skeptical here.
Yes Yes and Yes.

1. Internal Policies and controls...let's assume that for now. All it would take is willingness by the higher ups.

2. See the links in my other post. In short, partners worked with others to steal confidential data from the PCAOB to allow them to avoid checks on their Audits. At least one is already going to do jail time now.

"The three former KPMG US partners who have been accused of using leaked information about audit inspections to cheat the system could face up to 85 years in prison if they are found guilty"

3. The SEC in Oct 2018 widened its probe of GE accounting practices concerning its insurance business, the first probe having opened in Jan 2018
https://www.cnbc.com/2018/01/24/general ... eview.html

There is evidence to suggest that all three layers of protection have failed. (or working as intended)
Last edited by TomCat96 on Sat Aug 17, 2019 5:14 am, edited 1 time in total.

HawkeyePierce
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by HawkeyePierce » Sat Aug 17, 2019 5:13 am

TomCat96 wrote:
Sat Aug 17, 2019 5:03 am
boogiehead wrote:
Sat Aug 17, 2019 2:44 am
AZAttorney11 wrote:
Fri Aug 16, 2019 9:01 pm
nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Fraud is certainly possible, as we saw with Enron, and it is possible to get massive fraud past the auditors. Arthur Anderson signed off on Enron's financial statements and now no longer exists as an auditing firm though the consulting arm of their business lives on. Hard to believe that under threat of a death penalty over a sloppy audit that KPMG would be so reckless. You would think that KPMG would be extra careful here.
I'll tell you who is having a bad week, and that's the lead audit partner from KPMG on the GE engagement. And all of the equity partners at KPMG. And their malpractice carrier(s).
The problem is there is too much to lose for KPMG that they would never truly challenge GE's Accounting Practices. GE is one of KPMG's largest clients (KPMG has been losing clients left and right with numerous scandals in the past 5 years), its been a client for over 100 years (which to me in itself is a red flag, in Europe public companies are forced to rotate auditors I believe every 10 years) so I would almost hold no value in the external audit report.

As for penalties and Enron .... white collar crimes is still just a slap on the wrist. I was looking into conferences to attend earlier this year and one of the ones that I came across the key note speaker was the ex-CFO of Enron which made me do a double take... apparently he is doing well in the speaking circuit nowadays.
Anytime a company changes its auditor it's a major red flag, whether the company initiates it, or whether it's the auditor that withdraws.
I think in this case it's impossible to tell. I agree there's too many years, and too close a tie between KPMG and GE to be able to effectively discern who is the one truly initiating it.

https://www.complianceweek.com/ge-audit ... 59.article
https://www.bloomberg.com/news/articles ... g-missteps
https://money.cnn.com/2018/04/24/invest ... index.html

Take a look at this, and match up the evidence.
"The three former KPMG US partners who have been accused of using leaked information about audit inspections to cheat the system could face up to 85 years in prison if they are found guilty"

Philip Bartlett, the inspector in charge, added, “As alleged, the defendants took advantage of confidential information stolen from the PCAOB and used it to tip off KPMG partners about impending audit inspections.

https://economia.icaew.com/news/january ... rs-in-jail

"A former audit inspector and executive director at KPMG was sentenced to eight months in prison after entering a guilty plea related to a scheme to steal inspection plans."

https://www.complianceweek.com/accounti ... 54.article


It's looking pretty bad. No theres no overt link between that and GE. But I think it at least it shows partners at KPMG were willing to break the law to help someone.
KPMG is also implicated in signing off on false financial statements for 1MDB, the Malaysian sovereign development fund which was a multi-billion dollar scam.

https://www.scmp.com/week-asia/politics ... e-and-kpmg

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nedsaid
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by nedsaid » Sun Aug 18, 2019 5:55 pm

HawkeyePierce wrote:
Sat Aug 17, 2019 4:06 am
boogiehead wrote:
Sat Aug 17, 2019 2:44 am
AZAttorney11 wrote:
Fri Aug 16, 2019 9:01 pm
nedsaid wrote:
Fri Aug 16, 2019 2:10 pm
Fraud is certainly possible, as we saw with Enron, and it is possible to get massive fraud past the auditors. Arthur Anderson signed off on Enron's financial statements and now no longer exists as an auditing firm though the consulting arm of their business lives on. Hard to believe that under threat of a death penalty over a sloppy audit that KPMG would be so reckless. You would think that KPMG would be extra careful here.
I'll tell you who is having a bad week, and that's the lead audit partner from KPMG on the GE engagement. And all of the equity partners at KPMG. And their malpractice carrier(s).
The problem is there is too much to lose for KPMG that they would never truly challenge GE's Accounting Practices. GE is one of KPMG's largest clients (KPMG has been losing clients left and right with numerous scandals in the past 5 years), its been a client for over 100 years (which to me in itself is a red flag, in Europe public companies are forced to rotate auditors I believe every 10 years) so I would almost hold no value in the external audit report.

As for penalties and Enron .... white collar crimes is still just a slap on the wrist. I was looking into conferences to attend earlier this year and one of the ones that I came across the key note speaker was the ex-CFO of Enron which made me do a double take... apparently he is doing well in the speaking circuit nowadays.
Well, he did spend quite some time in prison.

Nedsaid: I’ll defer to you on the accounting questions as I don’t have experience there. I’d love to hear your opinion on the Baker Hughes section of the report. To my layman reading the GAAP rules cited seem straightforward but I’m keen to hear if Markopolous is reaching here.
Certainly, GE practiced what I called financial engineering. Nothing illegal about that necessarily but it seems to be more about managing the stock price and the earnings numbers rather than the businesses themselves. GE did two things I am aware of: one they would sell or spin off divisions with slow earnings growth to focus on higher growth businesses, two they would time asset sales in order to maintain earnings growth. Probably what is involved here is probably incompetence. GE used to do a wonderful job of training executive talent, they also were an early adoptee of six sigma, a set of techniques and tools for process improvement. My best guess is that GE hollowed itself over time, probably their best people who cared the most left, that is what happens when a company gets too focused on cost cutting. Eventually everyone realizes they are a hired gun, company loyalty goes out the window, and no one really gives a darn anymore. Sad. Really sad.

Problem is with the whole Markopolos thing, GE has a new CEO trying to clean up the mess, hard to believe the new CEO would be complicit with fraud. Again possible, but I am skeptical.
A fool and his money are good for business.

illumination
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by illumination » Sun Aug 18, 2019 7:11 pm

I'm also highly skeptical, especially with the comparison to saying a fraud "bigger than Enron". If this ends up being just hyperbole, I really think people that engage in this should face real penalties. This report wiped out billions of dollars all to turn a profit. It sure looks like someone trading their "celebrity" name to make a quick buck.

For the record, I'm no fan of GE, I think it was an iconic brand that sadly is in shambles. I wouldn't want to touch the stock.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by TomCat96 » Mon Aug 19, 2019 4:14 am

https://www.youtube.com/watch?v=3jE10T250bo

Yahoo finance interview with Harry Markopolos.

But just as Nedsaid wrote:
"GE has a new CEO trying to clean up the mess, hard to believe the new CEO would be complicit with fraud. Again possible, but I am skeptical." and says he's skeptical because it would require internal control failures, failures of auditors, and failure of the SEC,

Color me skeptical that things are ok.

The whole thing reeks. 109 years relationship with KPMG? You know what that leads to. GE isn't merely a business client for KPMG. That level of closeness with an american icon Dow Component is no ordinary business relationship, and would lead me to question their independence. According to one website, they earned 142 million in fees from GE in 2017.

Secondly, KPMG partners were prosecuted and have already pled guilty to stealing documents from the PCAOB, the public company accounting oversight board. Apparently confidential information was stolen which would allow KPMGs audits to evade oversight by the PCAOB, created by Sarbanes Oxley in 2002.

What that means to me is that KPMG is engaging in criminal activity. That is already proven. Why do they need a way to figure out how to get their audits to evade further scrutiny if they're on the up and up. No. They need to help someone cover their tracks. Who are they helping?


Second John Flannery is CEO from 2017-2018. Lasting one year? Red Flag.
KPMG nearly ousted as Auditor? Red Flag. Also Why? Does a 109 year long relationship simply end?
Jamie Miller, CFO from Oct 2017 stepping down too? Red Flag.

SEC investigates the insurance unit in Jan 2018? Red Flag.
SEC decides to expand the probe in Oct 2018? Red Flag.

Larry Culp joined the board in 2018.
This is where I say Larry Culp being a "good guy" isn't enough.

Read this article from Cramer which came out in October 2018, nearly a year ago. And before we start dimissing Cramer as a loon, I would say he has some good, insightful points--perhaps not all the time...but in this case he's no fool.

https://www.cnbc.com/2018/10/02/cramer- ... nnery.html


For years, GE’s long-term health care business was “an asterisk” on the company’s “ridiculously opaque” financials, Cramer explained. But the policies themselves were simply bad business, he said, allowing middle-aged people to pay very low amounts for long-term health insurance plans that included things like live-in care.

So why did Flannery, at risk of being ousted, not act on the multi-billion-dollar charges that were coming GE’s way? Cramer’s best guess was the business world’s “mafia-style code of silence.”

“In short, Flannery got fired because the board was in the dark, clueless as to how bad things really were because no one seriously examined the Immelt era,” he continued.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Hector » Mon Aug 19, 2019 3:06 pm

GE! I remember its dividend looked great during subprime crisis. I bought it thinking I was getting a great deal. GE cut the dividend. I sold it at ~50% loss after a friend of mine convinced me to do so for TLH.

I bought it again bought it few years ago. It has cut the dividend again. If it falls further, I would do TLH.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by Oakwood42 » Mon Aug 19, 2019 3:17 pm

PrettyCoolWorkshop wrote:
Thu Aug 15, 2019 11:21 am
Vanguard Fan 1367 wrote:
Thu Aug 15, 2019 11:15 am
There are so many laws about insider trading and other things involved with knowledge about how a stock could go. How could it be legal for a company to take a short position and then publish information that might make the stock tank?
I believe that there is a fairly large amount of case law about this, and it is fairly nuanced. Speculatively, it is probably fair to say that all of Markopolos's research material was sourced from publicly available documents. All he did was interpret this information in a more accurate way than most other researchers.

If he had access to priveleged internal documents it would be an issue.
Mosaic Theory

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by boogiehead » Mon Aug 19, 2019 3:24 pm

illumination wrote:
Sun Aug 18, 2019 7:11 pm
I'm also highly skeptical, especially with the comparison to saying a fraud "bigger than Enron". If this ends up being just hyperbole, I really think people that engage in this should face real penalties. This report wiped out billions of dollars all to turn a profit. It sure looks like someone trading their "celebrity" name to make a quick buck.

For the record, I'm no fan of GE, I think it was an iconic brand that sadly is in shambles. I wouldn't want to touch the stock.
Of course its a hyperbole ... its to draw attention or else no one would care or even talk about it at all. Now there will be more scrutiny on GE and only time will tell, but we need have whistle blowers as a form of checks and balances.

illumination
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by illumination » Mon Aug 19, 2019 3:51 pm

boogiehead wrote:
Mon Aug 19, 2019 3:24 pm
illumination wrote:
Sun Aug 18, 2019 7:11 pm
I'm also highly skeptical, especially with the comparison to saying a fraud "bigger than Enron". If this ends up being just hyperbole, I really think people that engage in this should face real penalties. This report wiped out billions of dollars all to turn a profit. It sure looks like someone trading their "celebrity" name to make a quick buck.

For the record, I'm no fan of GE, I think it was an iconic brand that sadly is in shambles. I wouldn't want to touch the stock.
Of course its a hyperbole ... its to draw attention or else no one would care or even talk about it at all. Now there will be more scrutiny on GE and only time will tell, but we need have whistle blowers as a form of checks and balances.

I don't think though you get a blank check to commit fraud in order to expose fraud and hope it all balances out. So if this is "hyperbole" making a claim like that, that's the same as fraud. And in this case, it would also be to make money. So we're back at square one.

Several of Enron's executives went to prison and it took out the whole company. To claim that level of fraud at GE, there better be real evidence.

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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by X528 » Mon Aug 19, 2019 5:20 pm

"... in Europe public companies are forced to rotate auditors I believe every 10 years) ..."

One more good reason to diversify globally.

TomCat96
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Re: GE shares tank more than 13% after Madoff whistleblower calls it a ‘bigger fraud than Enron'

Post by TomCat96 » Mon Aug 19, 2019 6:53 pm

X528 wrote:
Mon Aug 19, 2019 5:20 pm
"... in Europe public companies are forced to rotate auditors I believe every 10 years) ..."

One more good reason to diversify globally.
There is nothing wrong with this as an argument in favor of diversifying globally. In fact, it might be quite a strong argument if teased out further.

But if you've been reading the scores of Pro International Arguments here, that's not how it's been. The argument has been that regulations simply don't matter. The reason why I say this is the argument taken is because being pro US, I argue that regulations do in fact matter, and that the disparate regulations of other countries is a hinderance in their variations of capitalism. I argued that the US has the most experience in implementing its capitalism and that other nations in varying degrees of corruption and lack of development of personal property law and its jurisprudence simply isn't there yet.


viewtopic.php?t=281855

The counter arguments and push back I got was that regulations simply don't matter--that markets know best--and that the disparate legal frameworks of different countries don't matter because countries possessing a more impoverished capitalism will accurately discount its securities to ensure equal growth.

What this tells me, (and I argued for this in another thread) is that the pro-international people on this site have entrenched their heels into the debate not as a matter of debate, but as a matter of dogma. Because they want their "side" to win. People have become irrationally attached (irrational as in emotional) to a side and will defend it while taking personal offense.

So going back to your point, does the regulation of forcing rotating auditors every 10 years something that you should seek out in a jurisdiction to invest in, or is it something we need not worry about because the market will accurately discount and price everything?


Frankly, I would agree with you here. I believe a forced 10 year rotation is a superior rule to ensure a functioning market. Rules and regulations which stymie fraud and encourage transparency are the hallmarks of creating an efficient market. Such things, as we have learned in the US, do not simply come out left to natural market forces.

I suppose to the pro-international crowd that just wants to "win", they get this one from me.
Last edited by TomCat96 on Mon Aug 19, 2019 6:58 pm, edited 3 times in total.

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