General Electric (GE) – Get Report shares edged higher Wednesday, largely in-line with broader market gains, as investors reacted to the possibility of legal action linked to a Securities & Exchange Commission probe into some of its accounting practices.
GE said Tuesday that it had received a so-called Wells Notice from the SEC that indicate authorities are looking into how the industrial group accounted for the run-off of some of its legacy insurance businesses that sat inside its GE Capital division.
The SEC probe was triggered by a January 2018 move to take a $6.2 billion charge to its fourth-quarter earnings linked to weakness in its North American Life & Health insurance portfolio under then-CEO John Flannery.
GE also said at the time that GE Capital, its financing arm, would make $15 billion payments over the next seven years in order to shore up NALH’s statutory reserves, starting with around $3 billion in the first quarter of this year, and approximately $2 billion annually from 2019 to 2024.
“The Wells notice is neither a formal allegation nor a finding of wrongdoing. It allows GE the opportunity to provide its perspective and to address the issues raised by the SEC staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding,” the company said in a statement Tuesday. “GE disagrees with the SEC staff with respect to this recommendation and will provide a response through the Wells notice process.”
“If the SEC were to authorize an action against GE, it could seek an injunction against future violations of provisions of the federal securities laws, the imposition of civil monetary penalties, and other relief within the Commission’s authority,” the company added. “The results of the Wells notice and any enforcement action are unknown at this time.”
GE shares, which ended the Tuesday session 3.75% lower were marked 1.1% higher in early trading Wednesday to change hands at $6.24 each.
“While short in words, the (statement) issued by GE contained substantial information, though no final resolution,” said Credit Suisse analyst John Walsh. “The event was a negative market catalyst for the stock and we see the potential for it to create an overhang on the stock while GE addresses the SEC during the coming 30 days, as we understand the timeline.”
“However, on the positive side, no new issues have arisen while the SEC conducts its investigation and the Wells notice currently only covers GE Capital’s run-off insurance operations.”
GE’s insurance accounting practices also came to light in August of 2019 when Harry Markopolos, an accounting expert who first found issues surrounding Bernie Madoff’s investment fraud, accused GE of improperly including Baker Hughes’ income, capital and cash to flatter its balance sheet, a charge GE has always strenuously denied.
Markopolos also said at the time that he and his colleagues had found that GE’s insurance unit would need an $18.5 billion boost to its reserves, telling the Wall Street Journal that other accounting issues, including in its oil and gas business, would amount to around $38 billion, and describing GE to CNBC as a “bankruptcy waiting to happen”.
GE shares are down about 29.4% since that accusation — which GE called “meritless” was first levied, and the group has shown notable progress in its free cash flow and earnings projections under CEO Larry Culp.