Background

In the late 19^th century, Thomas Edison co-founded General Electric (GE). Over the years, GE became a behemoth of industry in the United States and around the world. In 2019, a researcher, Harry Markopolos, retained by an unnamed hedge fund, alleged that GEs accounting irregularities amounted $38 billion and that the company had understated its costs and liabilities thereby misleading investors in its financial statements.

The GE CEO, Lawrence Culp responded that he takes any allegation of financial misconduct very seriously but that the allegation was market manipulation pure and simple. He continued that the fact that the 170-page report was written without any conversation with GE personnel was proof that the researcher and his undisclosed partner were more interested in downward volatility of GE stock than in accurate financial analysis.

The Markopolos report contends that the GE Insurance segment reported earnings when policyholders were young and not filing insurance claims, but then miscalculated how much it would have to spend to issue those benefits. It added that GE does not have adequate reserves to cover the liabilities on its long-term care business, even though it boosted those reserves by $15 billion last year. The researcher contends that GE is understating its potential losses on insurance claims adding that they will climb at an exponential rate and put GE at risk of bankruptcy unless it finds a way to cover these costs.

In response, GE said that it stands behind its financial reporting and calls the claims meritless. It stated that it had the reserves to support its insurance portfolio and that it has a strong liquidity position.

GE stock fell 11% to $8.01 per share on publication of the report and the SEC began an investigation into the GEs $6 billion charge to its insurance business and a $22 billion write down to its struggling power division.

Other relevant facts

When the price of GE stock fell to $7.93 per share, the CEO, Lawrence Culp bought $2 million of the companys shares deepening his financial ties to the company. Other investors also did the same.

The researcher, Harry Markopolos revealed that he will get a decent percentage from any profits the hedge fund he worked for earns from betting against the conglomerate (GE).

Harry Markopolos was the researcher who exposed the Bernie Madoff Ponzi scheme the biggest in US history- in 2008.

Required: Using information learned in this course, discuss the ethical issues in this case. Be sure to identify the stakeholders in your analysis.