Expert: GE hid fraud in Baker Hughes

Baker Hughes used to hide billions in losses, Madoff whistleblower alleges

A well-known fraud expert claims that General Electric hid $38 billion dollars in losses and accused the industrial giant of using the financial results of its subsidiary, Houston oilfield service company Baker Hughes, as one of the vehicles — allegations which the Boston-based conglomerate strongly denies.

Harry Markopolos, a financial analyst and corporate fraud expert who was the first person to expose the Ponzi scheme of investment manager Bernie Madoff, released a 175-page report Thursday morning scrutinizing General Electric’s finances. The company closed 2018 with a $22.8 billion loss on $121.6 billion of revenue, but Markopolos said the losses should have been much higher.

Calling the findings “bigger fraud than Enron,” Markopolos alleges that General Electric cooked the books to osbcure its accounting misdeeds, some of which were hidden through the company’s majority ownership of Houston oilfield service company Baker Hughes. Baker Hughes, which was not accused of wrongdoing, was mentioned 11 times in the report.

General Electric disputed the accuracy of Markopolos’ findings and denied its allegations.

General Electric merged its oil and gas division with Baker Hughes in a $7.4 billion acquisition deal that closed in June 2017. Although General Electric held 62.5 percent of the merged company’s stock, Baker Hughes remains independent and continues to be traded under its own stock ticker symbol, BHGE.

In his report, Markopolos alleged that General Electric hid what should have been a $9.1 billion loss when the company reduced its ownership stake in Baker Hughes to 50.4 percent in a November 2018 stock sale. The report claims that General Electric did not properly classify the transaction or its legal consequences with federal regulators and investors.

Markopolos also alleged that General Electric has improperly inflated its earnings by counting Baker Hughes assets and revenues as part of General Electric’s assets and revenues, despite the two companies being traded separately on the New York Stock Exchange.

The report sent General Electric stock plummeting by more

than 11 percent at the closed of trading while Baker Hughes stock fell by nearly 6 percent.

Baker Hughes officials deferred comment to General Electric.

“The claims made by Mr. Markopolos are meritless,” General Electric said in a statement. “The company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual

with no direct knowledge of GE would choose to make such serious and unsubstantiated claims. GE operates at the highest level of integrity and stands behind its financial reporting. We remain focused on running our businesses every day, following the strategic path we have laid out.”

As the majority owner in Baker Hughes, General Electric is required by accounting standards for reporting quarterly earnings to include the Houston oilfield service company’s financial results in its financial results. In its most

recent quarterly earnings, General Electric disclosed how selling its ownership stake in Baker Hughes at current stock prices could result in a $7.4 billion loss for the industrial giant.

In a statement, General Electric board member and audit committee chair Leslie Seidman said the report was full of inaccuracies and noted that Markopolos openly acknowledges to being compensated by unnamed hedge funds that are betting against the company on the stock market.

“The report contains numerous

novel interpretations and downright mistakes about the actual accounting requirements, making his conclusions about GE’s reporting questionable at best,” Seidman said. “In his own words, he stands to personally financially benefit from today’s significant market reaction to his report, and he is selectively frontrunning widely reported regulatory processes and rigorous investigations without the benefit of any access to GE’s books and records.”