GE’s stock falls off a cliff after ‘Wells notice’ disclosure

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Shares of General Electric Co. took a sudden dive Tuesday afternoon, after the industrial conglomerate disclosed that the Securities and Exchange Commission is considering civil action against the company for possible securities law violations.

The SEC has been conducting an investigation of GE’s revenue recognition practices and internal accounting controls over financial reporting related to long-term service agreements.

The SEC expanded the scope of the investigation after GE GE, -3.74%  said in January 2018 that it was taking a multibillion charge following a review of GE Capital insurance portfolio. The investigation was expanded again after the company announced in October 2018 another multibillion charge related to its power business.

See related: Investors who paid attention to GE’s accounting saw trouble coming.

In an 8-K filing with the SEC at 2:00 p.m. Eastern, GE said that on Sept. 30, the SEC staff issued a “Wells notice” advising the company that it was considering a recommendation that the SEC bring a “civil injunctive action” against GE for possible violations of securities laws.

FactSet, MarketWatch

The stock was up about 1.6% just before the 8-K was filed, then fell off a cliff on heavy volume to sink as much as 4.5% at about 2:31 p.m., before paring some losses. The stock closed down 3.7% at $6.17, above the intraday low of $6.11. Trading volume ballooned to 169.1 million shares, enough to make it the most actively traded stock listed on the New York Stock Exchange, and well above the full-day average of about 101.2 million shares.

“GE has been informed that the issues the SEC staff may recommend that the SEC pursue relate to the historical premium deficiency testing for GE Capital’s runoff insurance operations, as well as GE’s disclosures relating to such runoff insurance operations,” GE said in a statement. “The staff has not made a preliminary decision whether to recommend any action with respect to the other matters under investigation.”

GE stressed in the 8-K filing that a Wells notice is “neither a formal allegation nor a finding of wrongdoing.” The company said it is allowed the opportunity to provide its perspective and to address the issues raised by the SEC staff before any decision is made regarding the commencement of enforcement proceedings.

GE’s stock has tumbled 44.7% year to date, while the SPDR Industrial Select Sector exchange-traded fund XLI, -1.21%  has slipped 4.4% and the S&P 500 index SPX, -1.39%  has gained 4.0%.