GE Says It Has Received ‘Wells Notice’ From SEC Relating to Accounting Investigation – The Wall Street Journal

A Wells notice is a letter saying the SEC staff is recommending that the commission bring an enforcement action against the recipient and offers an opportunity to argue why the action shouldn’t be taken. It often serves to cap investigations that can drag on for years, as the final step before formal litigation begins.

The SEC and the Justice Department have been investigating GE’s accounting for about two years after the company disclosed large write-downs tied to the insurance business and its power business.

In a statement, GE said it has cooperated with the SEC and strongly disagrees with the staff’s recommendation that the commission sue. The company said it would respond through the Wells notice process.

The company also made some executive changes on Tuesday, including the retirement of the head of the GE Capital unit, which houses the insurance business. GE for years has been shrinking GE Capital, once a sprawling lending operation that rivaled the biggest U.S. banks, but nearly sank the company during the 2008 financial crisis.

Accounting problems surfaced in late 2017 as GE was struggling with declining profits and cash flow following the departure of former CEO Jeff Immelt. The company later disclosed, in January 2018, that it needed to bolster its insurance reserves by $15 billion and booked a $6 billion charge. In early 2018, GE said it was also the subject of a criminal probe by the Justice Department.

Many investors were surprised by the insurance situation, partly because GE executives had repeatedly declared the company had shed its insurance risk. GE spun off most of its insurance holdings into Genworth Financial Inc. in 2004 and sold much of the rest to Swiss Reinsurance Co. two years later.

But GE kept the risk for a bloc of long-term-care insurance policies, written by GE Capital until 2006. Such policies pay for nursing homes and assisted-living facilities. They have proved to be an expensive problem for the insurance industry, which underestimated how much the policies would need to pay out.

GE removed the long-term-care liabilities from its annual report for 2012 and didn’t put them back until 2018. That’s when GE reported insurance liabilities of $38 billion, up from $11.1 billion the previous year.

Former GE employees said the insurance business failed to internally acknowledge worsening results over the years, the Journal has reported. These employees described what they called lax managerial oversight and buried risks that kept the company from booking bigger reserves. One former GE Capital employee said it was clear at the time of the 2004 Genworth IPO that a bloc of long-term-care policies were toxic.

Former GE executives said the company conducted regular reviews of its insurance liabilities, and accelerated a deeper review of the insurance book after noting worrisome trends during 2017. Those executives say GE acted quickly and responsibly to shore up the reserves after the liabilities unexpectedly surged.

A shareholder lawsuit brought in 2017 by pension funds alleged the insurance accounting fueled a yearslong fraud that inflated GE’s results. GE has sought to dismiss the suit, saying in court filings that management mistakes, not fraud, were to blame for the company’s problems.

The insurance problem is a hangover from GE’s one-time reliance on financial services to drive its profits. At its height, GE Capital accounted for more than half of GE’s profits, driving some who followed the company to criticize the unit as a black box that primarily served to paper over uneven performances in its industrial units.

GE says it has brought on new leaders to run the insurance portfolio from outside the company and reviewed its accounting practices. In 2019, GE insurance executives said they were pushing to raise premiums and boost investment returns on reserves.

In recent months, CEO Larry Culp has said the coronavirus has eased some pressure on the long-term care claims, since some people have been reluctant to enter nursing homes. The lethality of the pandemic has driven up claims in GE’s life insurance assets, he said in July.

In addition to the company’s insurance accounting, the SEC is investigating revenue recognition practices in GE’s power business and a $22 billion charge the company booked in 2018 tied to acquisitions in GE’s power unit, the company has said.

The SEC staff hasn’t made a decision whether to recommend any action on those matters, GE said in its Tuesday afternoon filing.

GE’s stock has tumbled, and the company has slashed its dividend to a token penny per share. It also has sold off various business units, cut jobs and switched leaders, installing Mr. Culp as CEO in October 2018. GE also decided to change auditors after more than a century with KPMG, hiring Deloitte starting next year.

GE shares slipped nearly 4% to $6.17 in Tuesday trading. The company, once the most valuable in the U.S., was removed from the Dow Jones Industrial Average earlier this year.

As part of Tuesday’s executive shuffle, GE said the new head of GE Capital would report to the company’s finance chief while the head of the company’s plane-leasing unit, Gecas, would now report directly to Mr. Culp.

Write to Theo Francis at theo.francis@wsj.com and Ted Mann at ted.mann@wsj.com