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Wednesday, 5 August 2009

Crime of the Week: GE

OK, crime of about 6 years ago, but GE have just settled with the U.S. Securities and Exchange Commission.

Nothing to do with GE, but Martha Stewart was the most potent mix of stockbroking and home cooking, a successful TV cook who started a company and floated it, making her a paper billionaire in 1999. According to the SEC, Stewart avoided a loss of $45,673 by selling 3,928 shares of ImClone stock in late 2001. The day following her sale, the stock value fell 18%.

The case dragged on for a few years and came to court in 2004. After a highly publicised, five-week jury trial, Stewart was found guilty of conspiracy, obstruction of an agency proceeding, and making false statements to federal investigators and sentenced to serve a five month term in a federal correctional facility and a two year period of supervised release (to include five months of home confinement).

Remember this all started because of a share trade that was supposed to save a billionaire $45,673.

Yesterday, GE settled its own case with the SEC relating to four accounting matters that arose in 2002 and 2003, a year after the Stewart share sale and probably before the investigations that led to her indictment for obstruction of justice. The settlement concluded the SEC investigation of these accounting issues, and GE was able to do so without admitting or denying allegations of any wrongdoing. GE consented to a judgement that requires the company to pay a civil penalty of $50 million and to comply with the federal securities laws.

The matters at issue related to some rinky dink swap transactions where up front fees were booked as income rather spread over the life of the transaction, profit recognition in GE's spare parts business, and the booking of profits on sales to finance companies that had not been completed at the relevant balance sheet date. Does that last item sound more than a little like Enron and the Nigerian barges to you? It does to me.

The amount of the mis-statement (since restated in later year accounts): $780 million.

The Chairman and CEO of GE at the time, Jeffrey Immelt, is still CEO and Chairman, and with a base salary of $3.3 million but potential bonus compensation several times that figure, Mr Immelt stood to gain substantially more from the overstated profits than Martha Stewart's $45,673. Certainly Mr Immelt would have benefitted from the higher share price that resulted from high earnings boosted by less than dubious accounting. But it looks like there will be no personal charges against Immelt or any other directors.

Indeed, nobody seems to question whether Immelt should retain his seat on the board of GE or that of the New York Federal Reserve Bank or President Obama's Economic Recovery Advisory Board.


Grenville said...

Alex I like your blog but it is always so riddled with minor typos and small grammatical errors / missing letters etc that one does begin to wonder.....?

Alex said...

Sorry about that but I have to get these ideas out otherwise I forget them. I am not the FT and I don't have sub-editors. Also I have a bit of a dodgy keyboard at the moment, which may need a quick dose of vacuuming to sort it out. I usually go back and correct typos when I have time.