"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
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.