By Micah Maidenberg and Mark Maremont
General Electric Co. pushed back further on Monday against claims by an accounting expert that the company hasn't been forthright about its finances.
In a new investor update, the company said it believes the current reserves for its long-term-care insurance business are well supported by its portfolio of investments. GE also defended the accounting for its oil-and-gas business.
Last Thursday, Harry Markopolos, the accounting expert who raised red flags about Bernard Madoff's Ponzi scheme, accused GE of masking its financial problems and filing inaccurate or fraudulent information with regulators.
GE Chief Executive Larry Culp said then the allegations from Mr. Markopolos amounted to market manipulation, adding his report contained false statements and was motivated by personal profit. Mr. Markopolos on Thursday dismissed GE's criticism of his motivation and methods.
Shares of GE dropped 11% after Mr. Markopolos, who was working with an undisclosed hedge fund, went public with his report. The stock rebounded 9.7% on Friday, but closed off 1.4% at $8.67 a share on Monday.
On Monday, GE focused its rebuttal on its long-term-care business and Baker Hughes, its oil-and-gas unit. The message was sent by Steve Winoker, GE's vice president for investor communications.
The company said it has "been up front and transparent about the long-term liabilities," and there are "a lot of viewpoints in the market regarding the risks and financial obligations across the entire [long-term-care] industry."
It said that as a reinsurer, it isn't responsible for 100% of every risk in that business. GE also said the "adverse differences" between its policies and those from other companies are significantly overstated.
Mr. Markopolos said GE's response didn't touch on one of his group's main points, which is GE's allegedly weak cash and working-capital position. He said his group intends to respond in detail later this week.
Mr. Markopolos's group estimated, in its report, that GE will need to increase its insurance reserves by $18.5 billion in cash and take a $10.5 billion charge because of an accounting change in 2021.
GE said Monday it wouldn't need to make a cash contribution of $29 billion to the long-term-care insurance business.
"Our future liabilities depend on variables that will play out over decades, not years, and are dictated by rigorous testing processes, sound actuarial analysis, and the application of regulatory and accounting rules," the company said.
GE also said Monday it is required to report financial information about its Baker Hughes business as part of its own results. The company said when it reduces its investment in Baker Hughes and is no longer the controlling owner, it expects to record a noncash charge.
"This will not impact GE's cash needs and liquidity, and the sale of our remaining stake will also generate additional cash that can be used for deleveraging," the note on Monday said.
GE also said that consolidating Baker Hughes into its business doesn't skew investor perceptions of its cash flows.
Based on GE's explanation, the company is properly accounting for its 50.2% investment in Baker Hughes, according to two accounting professors contacted by The Wall Street Journal.
The Markopolos group's critique was based on GE's prior statements on the matter in securities filings, which were "confusing," said Joshua Ronen, an accounting professor at New York University's Stern School of Business who reviewed the filings.
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