The Kansas Insurance Department said today that it’s taking a new attack on General Electric Co.’s reinsurance business accounting seriously but believes that the author has an incomplete understanding of the reinsurance unit’s finances.
Harry Markopolos, an accounting fraud investigator, asserted last week that GE needs to add $18.5 billion to its long-term care insurance (LTCI) reinsurance reserves soon, and that the company has hidden the state of the LTCI reinsurance unit’s finances from investors.
Markopolos said in a disclaimer accompanying the report that members of his company have investments that could rise in value if his report helps make the price of GE’s stock fall.
The Kansas department is the lead regulator for GE’s reinsurance business.
“The Kansas Insurance Department takes seriously all allegations of fraud or misconduct,” department officials said in the statement.
The department first learned about Markopolos’s concerns from the media, officials said.
Department officials put Markopolos’s disclosure about the possibility that members of his company could profit from a drop in GE’s share price in the statement, in italics.
The department routinely reviews news articles and outside reports for information about risks that might affect the insurers the department regulates, and those insurers’ affiliates, officials said.
“After initial review, components of this particular report appear fairly simplistic in nature and don’t appear to incorporate certain technical reserve considerations that were considered during the department’s most recent financial examination as of Dec. 31, 2017, and the annual analysis review of the confidential actuarial opinion memorandum at Dec., 2018,” officials said.
Wall Street’s View
Investors’ sentiment seemed to be leveling off today.
The price of GE shares fell 11.3%, when the Markopolos report came out.
Today, the price fell1.7%, to $8.67.
The CNBC show Squawk Box presented a session on the Markopolos allegations featuring Harvey Pitt, who is a former U.S. Securities and Exchange Commission chairman, and Jacob Frankel, a former SEC enforcement lawyer.
Markopolos “has gone public with very, very loaded allegations that were designed to have an impact on the market,” Pitt said. “On the other hand, of course, there is a fundamental question about whether or not his allegations are correct. Until that’s known, I think it’s hard to categorize him as having been a manipulator.”
Frankel said the SEC will face pressure to look both at Markopolos’s approach to activities disseminating information and at GE’s accounting.
Becky Quick, the host, asked whether Markopolos having a chance to profit from GE’s stock going down due to his report was any different from a famous investor having a chance to profit from making positive comments about a company.
Quick noted that Markopolos is blowing the whistle on Enron’s accounting, and that no one paid attention to him until he went public with his criticisms.
“The real question is what was the intent behind issuing the information publicly, and is it accurate,” Frankel said.
Frankel said that one difference between today and the days of the Enron investigation is that the SEC now has an active whistleblower program that gives a whistleblower a chance to share in any SEC recoveries.
— Read 5 Notes on GE’s $15B in LTCI Reserve Contributions, on ThinkAdvisor.