GE Fined $200 Million in SEC Probe of Power, Insurance Units

(Bloomberg) -- General Electric Co. was fined $200 million for allegedly misleading investors about the finances of its power unit and an old insurance business, as a multi-year probe culminated in one of the U.S. Securities and Exchange Commission’s largest settlements tied to accounting disclosures.

The industrial giant failed to tell shareholders that a sizable part of its power division’s earnings in 2016 and 2017 stemmed from reductions in prior cost estimates, the SEC said in a statement Wednesday. GE also lowered projected claim costs in its long-term care insurance portfolio from 2015 to 2017 -- but failed to disclose corresponding uncertainties on future liabilities, the SEC said.

“Investors are entitled to an accurate picture of a company’s material operating results,” SEC Enforcement Director Stephanie Avakian said in the statement. “GE’s repeated disclosure failures across multiple businesses materially misled investors about how it was generating reported earnings and cash growth.”

The accord resolves a major source of uncertainty for GE, but the agreement comes at a price: The civil penalty is double the amount that the company set aside in connection with the SEC probe. GE disclosed the investigation after it shocked investors in early 2018 by taking a $6.2 billion charge stemming from the run-off insurance portfolio. The SEC later expanded the inquiry to cover a $22 billion goodwill impairment charge at GE’s power unit.

“We have concluded that it is in the best interests of GE and its shareholders to resolve this matter and put it behind us on the basis announced today,” the Boston-based company said in a regulatory filing.

GE didn’t admit or deny the SEC’s findings. The company won’t be required to restate any previous financial reports, which some analysts had warned was a possibility.

The shares fell 1.2% to $11.25 after the close of regular trading in New York. GE has surged 83% since the end of September, the most on a Standard & Poor’s index of U.S. industrial companies, buoyed by the company’s improving outlook and the progress of coronavirus vaccines.

Epic Meltdown

The alleged misdeeds described by the SEC spanned the final years under GE’s former chief executive officer, Jeffrey Immelt, who stepped down in mid-2017.

The troubled insurance portfolio and power unit continued to haunt Immelt’s successor, John Flannery, before current CEO Larry Culp took the reins two years ago. GE’s shares plummeted a combined 76% in 2017 and 2018, shedding more than $200 billion in market value during the two-year period.

In addition to the SEC probe, GE has said that the Justice Department is also investigating the 2018 power-unit charge.

As part of the settlement with the SEC, GE agreed to report to the agency for a year on compliance issues related to its power business and run-off insurance operations.

The pact with the SEC removes a major item from Culp’s to-do list as he tries to advance a turnaround effort at the maker of jet engines, power equipment and medical scanners.

The probes had bolstered critics of GE’s history of opaque accounting, which Culp has sought to assuage with pledges to improve transparency and enhance investor disclosures. He has also overhauled the executive team and brought in several company outsiders, including Chief Financial Officer Carolina Dybeck Happe, who joined GE this year.

‘Favorable Outcome’

The settlement is a “favorable outcome” for GE, said, Deane Dray, an analyst at RBC Capital Markets.

“It is never a proud moment for a company to have to settle an SEC accounting investigation and pay a civil fine,” Dray said in an email. But the agreement “removes the overhang of the investigation, the fine was within the ballpark of the reserve that had been recently taken, and we believe investors recognize that these legacy accounting issues literally date back two CEOs ago.”

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