Harry Markopoulos is a private financial investigator who claims to use various mathematical techniques to determine the accuracy of statements released by companies regarding their financial positions.
He is best known for making detailed written submissions to the United States Securities and Investment Commission (the SEC) in May 2000, October 2001, October 2005, June 2007 and April 2008 which advised the financial regulator that hedge fund manager, Bernard Madoff, was engaging in a monumental Ponzi Scheme and pleaded with it to investigate him.
A Ponzi scheme is typically where a person offers generous returns to investors, generating returns to existing investors by acquiring new ones – all the while investing little or none of the funds received. These schemes generally fall apart when investors demand the return of their capital, or where the operator is unable to acquire sufficient new investment to fulfil the interest payments of existing investors.
The SEC first looked into Mr Madoff in January 2006, but concluded 11 months later that although he had misled the SEC about a number of his supposed investments, he had not engaged in fraud.
The regulator neglected to open a formal investigation into Mr Madoff despite the fact there was no evidence he had made investments in stock markets as claimed.
Madoff ultimately confessed to the fraud in December 2008, after which he was found to have defrauded 4,800 investors of $US64.8 billion. He pleaded guilty to 11 felony charges and was sentenced to 150 years in prison.
Many lost their life savings and were left destitute as a result of the hedge fund manager’s conduct.
Had the SEC properly investigated and acted upon Mr Markopoulos’ initial complaint, it is estimated that the total amount defrauded would have been in the order of $US3 billion.
When asked in March 2009, ‘How long did it take you to know something was wrong?’, Mr Markopoulos responded ‘It took me five minutes to know it was a fraud. It took me, maybe, another four hours of mathematical modelling to prove it was a fraud’.
New fraud claims
Mr Markopoulos has now pointed the finger at General Electric, accusing the multi-national of issuing false financial statements and concealing billions of dollars in losses.
In a recently-released 150-page report titled ‘General Electric: A Bigger Fraud Than Enron’, Markopoulos says he obtained access to the statutory financial statements of eight Long Term Care (LTC) insurance companies which account for approximately 95% of GE’s market exposure.
“What they revealed’ according to Markopoulos ‘was that GE was hiding massive loss ratios, the largest ever seen in LTC insurance history, along with exponentially increasing dollar losses being absorbed by GE”.
“What’s even more doubtful is GE becoming cash flow positive in 2021 as management would have you believe”.
“After we accounted for the $38 billion in accounting fraud, GE’s debt to equity ratio goes from the 3:1 ration that it reported at the end of the 2nd quarter of 2019 to a woefully deficient 17:1”.
Mr Markopoulos adds, “In fact, the $38bn in accounting fraud amounts to over 40% of GE’s market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds.”
The claims comes a decade after General Electric agreed to pay $US50 million to settle financial fraud charges filed by the SEC.
Response by General Electric
Shortly after the submission of Mr Markopoulos’ report, General Electric issued a statement vehemently denying the allegations of fraud.
“The claims made by Mr. Markopolos are meritless”, the statement reads.
“The Company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims. GE operates at the highest level of integrity and stands behind its financial reporting. We remain focused on running our businesses every day, following the strategic path we have laid out.”
The statement points to the fact that, “Mr. Markopolos openly acknowledges that he is compensated by unnamed hedge funds”, all but accusing the investigator of stock market manipulating by saying, “Such funds are financially motivated to attempt to generate short selling in a company’s stock to create unnecessary volatility.”
Indeed, the company’s shares have fallen around 15% since the publication of the report.
The company’s CEO, Lawrence Culp, reportedly ‘put his money where his mouth is’, buying an additional $2 million of GE shares.
The veracity of Mr Markopoulos’ allegations remains to be seen.
The Offence of Fraud in NSW
Section 192E of the Crimes Act 1900 (the Act) is the most frequently prosecuted fraud offence in New South Wales.
The section prescribes a maximum penalty of 10 years in prison for any person who obtains property belonging to another, or obtains any financial advantage or causes a financial disadvantage to another, where this is done dishonestly and by any deception.
To establish the offence, the prosecution must prove beyond reasonable doubt that:
- By a deception, the defendant acted dishonestly, and
- These actions created a financial advantage over another person’s property, or caused them to suffer a financial disadvantage, and
- The actions were intentional or reckless.
Section 192B of the Act defines ‘deception’ as any deception, by words or other conduct, as to fact or as to law, including:
- a deception as to the intentions of the person using the deception or any other person, or
- conduct by a person that causes a computer, a machine or any electronic device to make a response that the person is not authorised to cause it to make.
Section 4B of the Act makes clear that ‘dishonesty’ is to be assessed ‘according to the standards of ordinary people and known by the defendant to be dishonest according to the standards of ordinary people.’
Defences to fraud charges include:
- Necessity, and
- Claim of right – which means you genuinely believed you were legally entitled to the whole of the property
For those who wish to plead guilty, the court can impose any of the following penalties for fraud:
- Section 10 Dismissal
- Conditional Release Order
- Community Correction Order
- Intensive Correction Order
When determining the appropriate penalty for a particular offence, the court must take into account the following matters:
- The amount of money involved,
- The length of time over which the offences were committed,
- The motivation for the crime,
- The degree of planning and sophistication, and
- The extent of any breach of trust.
Going to court for fraud?
If you have been charged with a fraud offence, call Sydney Criminal Lawyers anytime on 9261 8881 to arrange a free first conference with an experienced criminal defence lawyer who will advise you of your options, the best way forward and fight to secure you the optimal result.