‘The Worst That Activist Short Selling Has to Offer’

An activist investor war over General Electric is heating up, and short-seller Andrew Left’s Citron Research is the latest to join the fray.  

On Friday, Citron published a defense of GE, calling its stock a “cornerstone” of the industry in the United States and calling the report “the worst that activist short selling has to offer” in a subsequent tweet.   

This comes just one day after Harry Markopolos, the man who blew the whistle on Bernie Madoff’s Ponzi scheme, published a scathing report on the company, calling its purported accounting fraud “bigger than Enron.” 

Markopolos shared the more than 170-page report with an unknown hedge fund ahead of time, which he disclosed in his research. What’s more, though, is that Markopolos stands to gain from doing so – in exchange for sharing that research, the hedge fund is paying Markopolos based on a percentage of profits that result from its trading related to GE. 

“No credible hedge fund or short-seller would ever do this,” the commentary published by Citron stated. Citron noted that in its 18 years of publishing research, it has “never” been compensated by a third party.   

“More important, compensation tied to the ‘success of a trade would not pass internal compliance nor would it pass compliance of any fund that Citron would collaborate with on ideas,” Citron added in its comment.

Markopolos and his team have alleged that the firm has engaged in accounting fraud by hiding $29 billion in long-term care insurance losses and another $9.1 billion of losses from its 2017 investment in oilfield services company Baker Hughes. They also claim that GE’s cash position is much worse than it disclosed to the Securities and Exchange Commission in 2018.

“This is market manipulation – pure and simple,” GE's chief executive officer H. Lawrence Culp said in a statement. He added that Markopolos did not reach out to the company ahead of time to discuss his claims. 

The report isn’t the only problem facing GE, which is under investigation by the SEC and the Department of Justice for potential accounting problems. 

According to the Citron report, the fraud that Markopolos and his team are claiming is rampant at GE “is not exactly Madoff’s secret 17th floor.” Citron argued that aggressive accounting and fraud are “two different animals,” adding that if GE is indeed committing fraud, it would have to be a “grand scale conspiracy” with thousands of accountants, auditors and division chief financial officers collaborating to keep it a secret.  

[II Deep Dive: Bigger Than Enron? Harry Markopolos Sets His Sights on General Electric]

According to Citron, it has joined the likes of legendary investor Stan Druckenmiller, who told CNBC he bought shares of GE yesterday, buying the company on its dip. GE reported that CEO Culp purchased an additional $2 million of shares yesterday, more than 252,000 shares, following a separate purchase of nearly 332,000 shares earlier this week.

On Thursday, GE shares fell roughly 10 percent, to about $8.06 per share. On Friday, GE regained quite a bit of its value, popping roughly eight percent by midday Friday to $8.72 per share.