"Don't kick a person when they're down." That's one of the cardinal rules of sporting behavior - one that'll serve you well pretty much anywhere on or off the field... pretty much.
But let's face it: Sportsmanship ends where the market begins. Across that line, massive fortunes can be made "kicking" a company when it's down...
Take a certain shadowy hedge fund I'm following. These investors have decided to move in for the kill on a fallen American legend: General Electric Co. (NYSE: GE).
They've fallen in behind Bernie Madoff whistleblower Harry Markopolos, who's made very public, very shocking allegations of fraud and manipulation in GE's Boston C-suite.
Markopolos - the forensic accountant who, as I said, called shenanigans on Bernie Madoff's $64 billion Ponzi scheme - has potent "do-gooder" credibility.
In fact, these allegations probably would've been front-page news had they been brought in GE's prime, or had markets not been sinking on the day. Be that as it may, the accusations battered GE's shares and made massive waves just the same.
Before you put up your hard-earned capital and take a position one way or another on GE, let me show you what I've found...
Sure, GE Has Made Mistakes - but There's No Fraud
I can think of few companies that have, on their merits, at least, fallen as far or as hard as GE. The stock has tanked more than 88%, from $59.94 in early September 2000 to a low of $7.06 in March 2009.
The reasons for its fall from great heights are well known. It made some grievous missteps, lost sight of its "core" engineering and manufacturing competencies, and made some frankly colossally stupid moves in the financial sector, of all places.
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New management has taken some prudent steps to reverse that decline, though that didn't stop the Dow Jones from kicking GE off the index.
The one thing GE executives haven't done is defraud anyone. I should know: I wrote the book on corporate fraudsters.
I'll tell you a story from my grad school days. My thesis was called "The Impact of Financial Crisis on Corporate Leadership."
It is 108 pages long. And until Thursday, if you were seeking something to help you sleep... you couldn't do much better than cracking this thesis open.
I spent two years of my life writing this paper; it took me nine minutes to defend in front of a thesis committee.
And now it's finally relevant.
There are 40 pages devoted to big-league cons, like Enron and WorldCom. It cites the laws that failed to hold them accountable and the reasons why corporate fraud occurs.
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At the end of the day, the most important thing to watch is human behavior. What are the executives involved actually doing?
When it comes to executives, the easiest thing to watch is what they do with their money.
Enron executives were selling stock left and right before their accounting fraud was discovered.
At WorldCom, CEO Bernard "Bernie" Ebbers was taking money from its board of directors to cover his margin calls, for crying out loud. The board was trying to stop him from selling his stock, which would only drive the stock lower.
In both of these cases, insider activity looked... guilty as hell. And it looked that way because it was that way.
In other words, insider activity - the stock transactions conducted by corporate execs - are an incredibly important thing to watch. You especially want to watch what the CFO and CEO are buying or selling.
So, when Markopolos laid charges of massive fraud at GE execs' feet last week in a "bombshell" report, the first thing I did was look at the pattern of executive buying and selling.
Here's What GE Insiders Have Actually Been Up To
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They've been buying the stock over the last three weeks.
CEO Lawrence Culp bought nearly $3 million in stock last week. After the fraud accusation (and the 12% drop in price), he bought another $2 million worth.
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Director Thomas Horton bought nearly $500,000 last week.
Senior Vice President Kevin Cox bought nearly $1 million at the same time; Director Paula Reynolds purchased almost $100,000 yesterday.
I find it comforting that the CEO of the company - who recently purchased $3 million of stock in his own company - turned around and bought another $2 million right after the accusation.
Guilty people tend to get the hell out of Dodge when their crimes are exposed.
But what these execs are doing is the equivalent of moving halfway across the country to Dodge, buying a house there, getting married, having kids, and sponsoring the Dodge Little League team.
That's hardly what you'd expect them to do if they were on the verge of going down, no?
Put another way, the best way to detect fraud is to find out what the fraudsters are doing with their own money. If insiders are selling the stock or trying to hide the money, then that's a red flag.
You'd be stunned (or maybe not) to hear how often this has happened with fraudulent cryptocurrency "ventures." The U.S. Securities and Exchange Commission (SEC) continually busts crypto-frauds because the insiders sell all their currencies before they are hit with charges. The SEC had to create an entire division because there are so many cases of fraud in that space with misallocation of capital.
Yes, I read Markopolos' report. And I give him all the credit in the world for warning feckless regulators about Madoff years before his fraud was ultimately addressed.
Markopolos argues that the company must significantly increase its insurance reserves in the coming months. It raises questions about accounting with its oil and gas unit.
Smoke may exist on the long-term health of GE's balance sheet, but I didn't discover much fire.
The allegation Markopolos makes that, in my view, calls into question his credibility, is his contention that GE has engaged in accounting tricks since the 20-year tenure of ex-CEO Jack Welch.
That is true - as financial engineering and its financial unit nearly sank the firm in 2009.
But you can effectively make the same case against almost every single company today depending on its industry.
Amazon's stock received a major boost recently because of changes to generally accepted accounting principles and how it quantifies leases in its web services.
I talked to several analysts in 2015 about Amazon.com Inc. (NASDAQ: AMZN). While the accounting seemed murky, standards have been followed and regulators are watching.
Meanwhile, the stock has surged, and people keep buying.
They're different businesses; one is a struggling legacy industrial firm... the other is Amazon.
And I'm not comparing the two accounting practices or balance sheets. I think it's important to note that a lot of shareholders and media outlets aren't caught up on financial accounting standards. They're prone to having their opinion manipulated - and that's key to what's really going on here...
This Is a Bald-Faced Short Attack on GE
As I alluded to earlier, there's another, much, much more troubling element to Markopolos' report. He didn’t go to the SEC or any regulators with this information first…
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He's compiled this "damning" report for a hedge fund he refuses to name; it's totally anonymous, but it is short GE shares. He's reportedly receiving a stake in the fund's short position against GE.
In fact, former SEC Chair Harvey Pitt even questioned Markopolos’ motivation. The SEC has a whistleblower provision. As Pitt explained to CNBC Monday – “if [Markopolos] had brought all of his data to the SEC first, he would reap potentially up to 30% of the potential recovery that the SEC might obtain in connection with this case.”
“Instead what he did was go public, blast the company without giving the company a chance even to address his concerns,” Pitt continued. “Those are factors that make this look suspicious.”
Of course, I'd love to be able to identify this hedge fund and outline the exact size of its short position, but since it's not actually buying the stock - only "borrowing" it and hoping it'll drop - it's not legally required to disclose its position. The same thing happens in the oil sector all the time; it's how manipulation gets done.
This hedge fund received Markopolos' report.
Then regulators got hold of it.
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Then it went to the press.
That's a really fishy "process" to follow if you're legitimately trying to warn about fraud.
I'm not saying that GE doesn't face challenges in its turnaround. I simply find it interesting that, if Markopolos is so concerned about fraud in GE's boardroom, that he'd have a short stake, build a case, and then engage in a media assault.
Fortunately, not everyone is buying into Markopolos' allegations.
One of my favorite fund managers, Stanley Druckenmiller, bought big in GE last week as he defended CEO Larry Culp. While everyone was heading for the exits, he saw a bargain.
I set my Quantum Tracker readers up with a nice, long-term, low-risk options recommendation on GE shares. The shares are up by single digits, but the option is well into double-digit gain territory.
In fact, a long-term call like that is the perfect, safe way to play a rebound in a company that's fallen victim not to internal fraud, but to an external bear attack.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.