G.E. is accused of $38 billion fraud

Good Friday morning. Just in: The C.E.O. of the Hong Kong-based airline Cathay Pacific, Rupert Hogg, has resigned, a week after the Chinese authorities criticized the involvement of its staff in protests. (Was this email forwarded to you? Sign up here.)

A famous fraud hunter takes aim at G.E.

Harry Markopolos raised the first alarms over Bernie Madoff’s Ponzi scheme. Now, Mr. Markopolos has published a report claiming that accounting fraud “bigger than Enron and WorldCom combined” lurks within G.E.

• The 170-page report alleges that the conglomerate’s accounts conceal $38 billion in fraud, equivalent to 40 percent of its value.
• That, he says, stems from understated liabilities in its insurance business, misrepresentation of its cash situation, and improper accounting for its acquisition of a stake in the oil field services provider Baker Hughes.
• “I think that they’re a bankruptcy waiting to happen,” Mr. Markopolos told CNBC.
• “Mr. Markopolos said he and his colleagues are working with an undisclosed hedge fund, which is betting G.E.’s share price will decline,” the WSJ reports, and his group “will receive a portion of any trading proceeds.”
• He also submitted the report to the S.E.C. and the Department of Justice. Those agencies give tipsters a cut of any financial penalties resulting from investigations, as part of a program to encourage whistle-blowing.

GE vigorously denied the claims. “This is market manipulation — pure and simple,” G.E.’s C.E.O., Larry Culp, said in a statement. “Mr. Markopolos’s report contains false statements of fact,” he wrote, adding, “He is not interested in accurate financial analysis but solely in generating downward volatility in G.E. stock so that he and his undisclosed hedge fund partner can personally profit.”

The company’s shares plummeted on the news, falling by 8 percent to a seven-month low. Mr. Culp responded by buying $2 million of G.E. stock.

G.E. is already under investigation by the S.E.C. and the Justice Department for potential accounting problems within its insurance holdings and power division. It has denied accounting fraud in that case.

Trump’s big bet on the Fed 

President Trump has insisted that his tariffs on Chinese imports are hurting only China. But he may be gambling that the Fed can ward off the prospect of a U.S. recession, Jim Tankersley, Jeanna Smialek and Ana Swanson of the NYT write.

• “Economists say the tariffs are causing damage unacknowledged by the administration,” they write.
• The outlook is gloomy around the world, with slowing growth in China and an economic downturn in Germany. Central banks in many countries are cutting rates as recession concerns mount, and the European Central Bank is reportedly planning big stimulus measures next month.
• Some forecasters warn that the U.S. could also face a recession. The bond market is flashing warning signs, and economic data yesterday revealed a decline in industrial production in July and a shrinking in the manufacturing sector over the past year.

“The president seems to be playing a dangerous game,” by stirring “stuff up just enough to get the Fed to cut interest rates,” Phil Levy, the chief economist at Flexport, a freight company, told the NYT.

• Some of Mr. Trump’s advisers have reportedly suggested that the delay this week of further tariffs on China could help keep inflation in check, which might make the Fed more likely to cut interest rates — something he has often sought.
• But it “may actually have taken pressure off the Fed to act by increasing the chances that China and the United States will reach some sort of a deal” on trade.

“Sticking with the trade war could bet the health of the economy on the Fed’s ability to provide a sufficient buffer if a global downturn sets in,” Mr. Tankersley, Ms. Smialek and Ms. Swanson write.

More: Mr. Trump plans to speak with President Xi Jinping of China “soon.”

Hong Kong’s billionaires are losing money fast

The stock market rout in Hong Kong has wiped as much as $15 billion from the net worth of the territory’s wealthiest residents, according to the FT.

• “Li Ka-shing, Hong Kong’s richest man, has racked up paper losses of more than $3 billion since the end of July, according to Financial Times calculations based on Bloomberg data tracking the billionaires’ disclosed positions in listed companies.”
• “Mr. Li, as well as Lee Shau-kee, head of Henderson Land, and Lee Man-tat, chairman of the parent company of sauce maker Lee Kum Kee, have seen their fortunes drop almost one-tenth in August.”

Hong Kong’s total market capitalization has plummeted by about 2.67 trillion Hong Kong dollars, or $340 billion, this month. Its Hang Seng Index has fallen about 8 percent over the past two weeks, putting it in the red for the year.

Capital One security staff had concerns before data breach

Before the bank publicly admitted that a hacker had gained access to the personal data of about 106 million of its customers, its cybersecurity unit had raised concerns about staffing and some working practices, according to a report by the WSJ.

• The cybersecurity unit had reportedly “cycled through senior leaders and staffers in recent years,” with one source telling the WSJ that “about a third of its employees left in 2018.”
• Some staff members worried about a lackadaisical approach, too, with software that was bought in 2017 to improve hack detection taking more than a year to install, according to some of the WSJ’s sources.
• And “while the bank was generous with cybersecurity funding, the unit struggled to stay within its budget last year, one of the people said. This year, budget issues have continued and possible money-saving measures, including staff cuts, have been discussed.”

Capital One said that “safeguarding information is essential” to its mission, and added that it has “invested heavily in cybersecurity and will continue to do so.”

When a C.E.O. dates a Russian agent

On Monday, the e-commerce company Overstock.com took the unusual step of issuing a news release that called attention to the relationship between its C.E.O., Patrick Byrne, and Maria Butina, a Russian agent now serving 18 months in prison. Michael Corkery of the NYT reports on what happened.

• “The relationship, Mr. Byrne said in the interview, began in Las Vegas, where he was giving a talk at the FreedomFest convention, an annual gathering of libertarians.”
• Mr. Byrne said they hit it off, discussing Russian history, literature and philosophy. “She said, ‘You are a very famous man in Russia,’ he recalled.”
• “After the convention, Mr. Byrne and Ms. Butina kept in touch through text messages,” and a “rendezvous in New York quickly became romantic.” They met several more times in different cities around the U.S.
• “Still, Mr. Byrne described being somewhat suspicious of Ms. Butina’s intentions. Eventually, he said, he began to communicate with the F.B.I. about their interactions.”
• “Mr. Byrne said he was motivated to come forward in recent weeks because he believed that top law enforcement officials had not handled the investigation into Ms. Butina properly.”

Capitalism’s roots in slavery

The NYT is taking a fresh look at American history in the 1619 Project, a series observing the 400th anniversary of the beginning of American slavery. In an essay, Matthew Desmond looks at how slavery shaped capitalism.

• “In a capitalist society that goes low, wages are depressed as businesses compete over the price, not the quality, of goods; so-called unskilled workers are typically incentivized through punishments, not promotions; inequality reigns and poverty spreads.”
• “In the United States, the richest 1 percent of Americans own 40 percent of the country’s wealth, while a larger share of working-age people (18-65) live in poverty than in any other nation belonging to the Organization for Economic Cooperation and Development.”
• “Recently, historians have pointed persuasively to the gnatty fields of Georgia and Alabama, to the cotton houses and slave auction blocks, as the birthplace of America’s low-road approach to capitalism.”
• “It is the culture of acquiring wealth without work, growing at all costs and abusing the powerless. It is the culture that brought us the Panic of 1837, the stock-market crash of 1929 and the recession of 2008. It is the culture that has produced staggering inequality and undignified working conditions.”

Revolving door

Deutsche Bank appointed Jürg Zeltner, UBS’s former head of wealth management, to its supervisory board.

Jack Cheng, a co-founder and former executive vice-president of the Chinese electric vehicle start-up Nio, left the company as it faces financial pressures.

Johnny Williams rejoined Bank of America Merrill Lynch as a managing director with a primary focus on software, internet, digital media and venture clients.

Executive turnover at Tesla is higher than at any other comparable company, according to research from the investment manager Bernstein.

The speed read

Deals

• Revlon is reportedly being advised by Goldman Sachs about options including the potential sale of parts or all of the business. (Bloomberg)
• The Department of Justice’s antitrust division has asked United Technologies and Raytheon for more details about their planned merger. (Reuters)
• The internet infrastructure company Cloudflare filed paperwork with the S.E.C. for its initial public offering. (TechCrunch)
• The activist hedge fund Engine Capital urged Care.com to explore selling itself. (WSJ)
• UPS has bought a minority stake in the self-driving company TuSimple. (Reuters)

Politics and policy

• Israel has blocked a West Bank tour by Representatives Rashida Tlaib and Ilhan Omar, after President Trump asked it to do so. But it will let Ms. Tlaib visit her grandmother.
• Mr. Trump’s cautious approach to Hong Kong’s pro-democracy movement has left him politically isolated. (NYT)
• The Labor Department proposed a rule that would allow more federal contractors to base employment decisions on religion, raising concerns about future discrimination. (NYT)
• The White House is seeking reauthorization of a law that lets the N.S.A. access Americans’ phone and text logs. (NYT)
• Mr. Trump has reportedly been urging aides to explore a way to buy Greenland from Denmark. (NYT)

Brexit

• President Trump said that the U.S. was quickly moving toward a “fantastic and big” trade deal with Britain that would take effect after it leaves the E.U. (Reuters)
• A Conservative lawmaker in Britain has suggested that Boris Johnson could take the country out of the European Union in the next 10 days — without a deal — as a surprise maneuver. (Bloomberg)

Trade

• Despite this week’s delay to tariffs, toy makers are still worried about the U.S.-China trade war. (NYT)

Tech

• Amazon is deputizing warehouse employees to fight online criticism of its warehouses. (NYT)
• What a new set of global money laundering rules could mean for cryptocurrencies. (MIT Technology Review)
• Microsoft has contractors listen to user audio, and doesn’t plan to stop. (Gizmodo)
• Alibaba’s strong financial results suggest that Chinese consumers are still spending. (NYT)
• It’s five years since Gamergate. What have we learned? (NYT Op-Ed)
• How very Silicon Valley: “Dropbox had to evacuate its headquarters when an electric scooter caught fire.” (Verge)

Best of the rest

• The London Stock Exchange started trading an hour and 40 minutes late this morning, because of technical glitches. (NYT)
• Traveling to mainland China from Hong Kong? Be prepared to have your phone searched. (NYT)
• “How A.I. will change the way you manage your money.” (FT)
• When Wells Fargo closes customers’ accounts, it doesn’t always mean that money stops going out — and that can leave customers with hefty overdraft charges. (NYT)
• Andrea Vella was a superstar banker at Goldman Sachs. But since he got dragged into the 1MDB scandal, he’s been “on leave and in limbo.” (Bloomberg)
• How to explain the yield curve with a sports gambling analogy. (Upshot)

Thanks for reading! We’ll see you next week.

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