GE Settles SEC Accounting/Disclosure Issues, Paying $200 Million

Cases tied to issuer accounting questions and disclosures have long been a staple of the Commission’s Enforcement Division. In recent years the agency has launched a number of initiatives focused on these issues. While some cases were generated, eventually the efforts seemed to fade.

There are some recent suggestions that the Division may be about to regenerate earlier trends in the area with a data driven approach. For example, as the fourth quarter of the last government fiscal year ended the Division filed several accounting cases in the blitz of actions initiated before year end. Last week a settled action centered on false statements by an issuer built on a failure to disclose certain accounting data shared with potential lenders but not the public.

This week the agency filed another settled action built on issuer failures to disclose how the company made its numbers in key areas. Stated differently, the company did not disclose changes that permitted the firm to make certain financial goals. In the Matter of General Electric Company, Adm. Proc. File No. 3-2-165 (December 9, 2010).

The action is built on two key omissions: First, GE failed to tell investors how its Power division made the numbers. Second, investors were not told about deteriorating trends in the insurance area and potential losses that eventually resulted in pre-tax charges.

At an investor conference in May 2015 GE detailed future plans for growth. While the firm faced substantial challenges, GE told investors that its framework to grow non-GAAP Industrials and Verticals Operating Earnings per share would yield $1.25 to $1.35 in 2015 to $2 per share in 2018.

GE Power, a significant line of busines that manufactures gas turbines, faced challenges in the marketplace. Business in Power was flat, according to internal documents. A large portion of the segment’s earnings and cash came from very profitable agreements that ran for years.

A plan was developed. The division had a $5 billion “deferred balance” of unbilled revenue reported in GE’s financial statements. Key was to reduce expenses. If costs and estimated costs for the division were reduced, greater revenue would result and Power would hit its financial goals.

In 2016 GE did not tell investors that 25% of Power’s reported profits were generated by reducing estimates of costs to complete the work under the longterm contracts. The next year the same technique was used in the first three quarters to significantly boost profits. Investors were told only that Power generated $1.4 billion in 2016 and $1.1 billion for the first three quarters of 2017. Investor were not told that the revenue increases were generated in part by changing estimates that compromised the cash flow for future years.

The company used a similar approach to report increased industrial cash collections for 2016 and 2017. GE decided to sell or factor long term receivables from the Power service multi-year agreements primarily to GE Capital, a subsidiary of the company. This practice – called “deferred monetization” boosted reported cash flow by over $1.4 billion in 2016 and over $500 million for the first three quarters of 2017.

Finally, there were issues in the insurance area. Beginning in 2004 the firm explored exiting the line of business. Portions of its insurance portfolio were divested. The long-term care insurance policies remained – a sale would generate huge losses.

By 2015 and 2016 costs exceeded revenues. Despite the known trends, GE lowered projected claims costs for the distant future while concluding that it did not have insurance losses. The company did not disclose its rising claim costs and the resulting potential for material insurance losses.

In 2017 and 2018 GE made a series of public announcements. They described the disappointing cash and earnings in GE Power and a $9.5 billion pre-tax insurance charge. The share price dropped about 75%. The Order alleges violations of Securities Act Section 17(a0(2) & (3) and Exchange Act Sections 13(a), 13(b)(2(A) and 13(b)(2)(B).

In resolving the matter, the Commission acknowledged the remedial actions taken by the firm which included replacing key personnel. The company consented to the entry of a cease-and-desist order based on the Sections cited in the Order and agreed to pay a penalty of $200 million. A fair fund will be created.

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