General Electric will $200 million penalty to settle federal claims that it misled investors by failing to disclose problems in its gas-turbine power and insurance businesses. GE recognized some costs and profits, misrepresenting how its power segment was making money. It also failed to inform investors of the risk in its legacy insurance portfolio. That required more than $15 billion to boost its reserves.
The SEC said GE’s misconduct spanned from 2015 to 2017 and involved accounting maneuvers that boosted GE’s earnings by billions of dollars and improved a key measure of its cash flow. The moves to increase industrial cash flow, by about $1.9 billion in 2016 and 2017, involved selling receivables, or money GE was owed from customers, to GE Capital. The company didn’t disclose its increased reliance on selling receivables to goose its industrial cash flow, the SEC said in the settlement order.
GE’s stock went down in 2017 and 2018, erasing more than $200 billion in market value.
The SEC’s investigation found that GE executives boosted the company’s reported profits by lowering the estimated cost of fulfilling long-term GE Power service contracts. The change resulted in higher profits when the adjustment was made but didn’t bring in cash.
As the gap between reported profits and cash flow widened, Wall Street analysts and investors raised concerns, prompting GE to generate cash by selling receivables to GE’s finance division, a practice referred to as “deferred monetization.”
The practice “was described internally as a ‘drug’ because the company needed to continue to do more deferred monetization to achieve equivalent effects period after period,” according to the SEC order. The practice was also costly for GE, as it involved offering discounts to customers and paying interest to GE Capital.
Profits in GE’s power business, which was once the company’s largest in terms of revenue, tumbled after falling demand from utilities left GE stuck with excess supply of turbines and parts. GE also booked a $22 billion charge in 2018 tied to acquisitions in the unit.
Jeffrey Newman represents whistleblowers nationwide including SEC whistleblowers and he can be reached at jeff@jeffnewmanlaw.com or newmanshapiro.com
