General Electric is once again in hot water with the Securities and Exchange Commission.
The SEC warned GE late last month that it plans to bring an enforcement action over the company’s handling of an insurance portfolio, a filing on Tuesday revealed. GE had previously said the SEC was investigating staggering insurance losses of $6.2 billion.
The warning, known as a “Wells notice,” advised GE that the agency could bring a civil enforcement action for potential violations of securities laws. Such a notice gives companies the opportunity to respond before a formal decision is made by the SEC.
In January 2018, GE shocked Wall Street by reporting the $6.2 billion loss in its portfolio of long-term care insurance. These policies, which protect against nursing home and assisted living costs, have been hurt by soaring healthcare costs and longer life expectancies.
GE warned at the time it would devote a whopping $15 billion to boost insurance reserves — and after that bombshell, the SEC began investigating the reserve increase and the process that led up to it, GE said.
GE shares fell about 4% Tuesday, leaving them down 45% on the year.
The scrutiny is focused on a legacy part of GE Capital, the finance arm that nearly ruined the company during the 2008 financial crisis.
The September 30 Wells notice said SEC staff may recommend penalties related to the “historical premium deficiency testing” for GE Capital’s insurance operations, the filing said.
In other words, the SEC staff may have determined GE was low-balling the amount of money these insurance contracts could lose over time. That would explain why investors were so caught off guard by the magnitude of the sudden 2018 losses and reserve build.
GE said the SEC warning letter noted staff may also recommend penalties over the company’s disclosures linked to these insurance operations.
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The company emphasized that the Wells notice is not a “formal allegation nor a finding of wrongdoing.” GE added that it “disagrees with the SEC staff” over the recommendation and plans to respond through the Wells notice process.
GE said that potential action by the SEC could include civil fines, an injunction against future violations of federal securities laws and “other relief” within the agency’s authority.
“The results of the Wells notice and any enforcement actions are unknown at this time,” GE said.
The Wells notice does not appear to cover another part of the SEC’s investigation into GE: In October 2018, GE said the SEC was also looking into the company’s $22 billion accounting writedown in its slumping power division. That massive, non-cash charge reflected the sharp deterioration of coal and other businesses GE acquired.
GE said Tuesday that it continues to cooperate with the SEC by providing documents into that “ongoing investigation.”
This is hardly the company’s first run-in with the SEC. In 2009, the agency charged GE with accounting fraud, finding that it “misled investors by reporting materially false and misleading results.” GE settled the charges by agreeing to pay a $50 million penalty.