GE Gets SEC Civil Action Warning Tied To Insurance Operations; Shares Drop 3.7%

Shares in General Electric took a 3.7% hit on Tuesday after the industrial conglomerate said that the US Securities and Exchange Commission (SEC) staff is considering recommending a civil action for possible violations of the securities laws.

GE (GE) received a notification that the SEC issued a so-called “Wells notice” informing the company of the decision to recommend to pursue an injunctive action. The action is related to the historical premium deficiency testing for GE Capital’s run-off insurance operations, as well as its disclosures relating to such run-off insurance operations. In response, GE said that it disagrees with the SEC staff with respect to this recommendation and will provide feedback through the Wells notice process.

“The Wells notice is neither a formal allegation nor a finding of wrongdoing,” GE said in a statement. “It allows GE the opportunity to provide its perspective and to address the issues raised by the SEC staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding.”

GE added that if the SEC decides to take action against the company, it could seek an injunction against future violations of provisions of the federal securities laws, the imposition of civil monetary penalties, and other relief within the regulator’s authority.

The SEC has been conducting an investigation of GE’s revenue recognition practices and internal controls over financial reporting related to long-term service agreements. Folllowing GE’s investor update back in January 2018 about raising future policy benefit reserves for GE Capital’s run-off insurance operations, the SEC staff expanded the scope of its investigation to include the reserve increase and the process leading to the reserve increase.

In addition, GE’s announcement in October 2018 about the expected non-cash goodwill impairment charge related to GE’s Power business, prompted the SEC to widen its investigation to include that charge as well. The SEC staff has not made a preliminary decision whether to recommend any action with respect to the additional issues under investigation, GE said.

“We are providing documents and other information requested by the SEC staff, and we are cooperating with the ongoing investigation,” GE said.

GE’s CEO Larry Culp recently disclosed that he expects to see positive industrial free cash flow (FCF) in the second half of 2020. In addition, the company is making “good progress” in reducing costs by $2 billion and generating cash savings of $3 billion to cope with the coronavirus pandemic, Culp said. (See GE’s stock analysis on TipRanks).

Following the comments, RBC Capital analyst Deane Dray reiterated a Buy rating on the stock with a $9 price target (46% upside potential).

“Consistent with recent peer updates, GE is seeing broadly improving activity in its end markets, or at a minimum, some signs of stabilization, such as in Aviation,” Dray wrote in a note to investors. “This news is a relief for investors as there had been growing doubts about the company’s ability to achieve this target after the lack of specifics provided during [second-quarter] earnings.”

The rest of the Street is cautiously optimistic on the stock. The Moderate Buy analyst consensus rating is split between 5 Buys and 6 Holds. With shares down 45% so far this year, the $7.98 average price target indicates investors could be reaping a 29% gain in the shares in the next 12 months.