Harry Markopolos, who is best known as the whistleblower on Bernie Madoff's massive fraud, has set his sights on another target: General Electric (NYSE:GE). In an extensive report, Markopolos referred to the company as a fraud and claimed that its issues are far worse than investors realize. However, there's more to this story than meets the eye.

In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matthew Frankel explain the situation.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on Aug. 19, 2019.

Jason Moser: We wanted to kick this week off with, I think this is the biggest story over the last week here. Pretty amazing to see. Last week, GE shares got hammered, falling 11% on a report out from Harry Markopolos claiming that their financials were a sham and that GE is a bigger fraud than Enron. Now, Mr. Markopolos is known for uncovering Bernie Madoff's scheme, so he has a level of credibility there. Matt, the thing that I can't get past with this, though, is that he wrote this at the behest of a hedge fund taking a short position on GE's stock, right?

Matt Frankel: Yeah. This literally feels like the opposite of what he did in Madoff case. [laughs] That was on behalf of the general investing public. And that's why everyone took this so seriously, because he was the big Madoff whistleblower. But when you actually dig into it, like you said, he wrote this on behalf of a hedge fund, and the wording is convoluted in his disclosure statement. Basically, it's saying that this is a hedge fund that has a short position in GE, and Markopolos is getting compensated based on a percentage of the profits that this hedge fund makes from shorting the stock. That sounds like a pretty big conflict of interest.

Moser: Seemingly, seemingly.

Frankel: Right. It falls into the "how could this possibly be legal" category. I'm not totally convinced it is.

Moser: Maybe that's the case. If you look at market manipulation, according to the internet -- and if it's on the internet, it's got to be true, right, Matt? But, this is actually a sourced definition of market manipulation -- it's a type of market abuse where there's a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false, or misleading appearances with respect to the price of or market for a product security, commodity, or currency. Market manipulation, of course, is prohibited in most countries. In particular, it's prohibited in the United States under Section blah, blah, blah of the Securities Exchange Act of 1934. So, clearly, we know what market manipulation is, we know that it's illegal. On the surface, I agree with you, this really does look like it.

I'm not one to say, "Hey, I'm coming to the defense of GE," because GE's not a stock I want to own anyway -- not before this, not after it. I've got my eyes on other things here. But I feel like GE is getting the shaft here. There's almost nothing they can do to combat this.

Frankel: They've done pretty much all they could to combat this. The CEO spent $2 million on stock the day this happened. I probably would have spent more myself if I had my laptop with me at the time. I'm a GE shareholder, full disclosure. I think they're worth more than they're trading for right now. And board members were pointing out parts of the report that were based on outdated information. The only gray area in that definition that you just read is, did he mean to be misleading to the investing public? It was definitely an attack on the stock. It was, I'd say, a biased report in its wording, to put it mildly. It was definitely meant to drive the stock price down.

Moser: I feel like, right there, that is the intention to be misleading, almost. Bias is essentially the intention to lead in whatever direction he wants, and he knows whether it's leading or misleading, so to speak. I'm not trying to make any accusations here. But man, I tell you, when you look at the option, he could have gone to the SEC with this information as a whistleblower, and there would have been the potential for him to profit from that. There is whistleblower status with the SEC, where he would be able to share in some of those gains if there were any gains that were recovered based on the proof that there were fraudulent activities going on.

Frankel: Yeah, that sounds like something that was done primarily for the money. The proof that this report didn't have a whole lot to stand on is, what is it, two market days later, the stock's pretty much back where it was? All it took was the CEO doubling his investment and a few analysts coming out and saying, "This report isn't all it appears to be. Don't pay too much attention to the name of the person who wrote it. This is a completely different situation than when he investigated Madoff." It's a completely different situation. It's like using a brand name for a different reason. That's kind of what it feels like here.

Moser: It feels like, to me, he had a clear ethical choice here. Listen, we live in a world of right and wrong and a lot of in between. I saw one of his quotes, he said [something like], "I've got a family to support, a family to feed," like, so do I, dude. A lot of people do. I understand he probably had a very big paycheck coming from this. The hedge fund probably gave him a lot of money to do this based on what we understand. It also feels like there was a pretty clear ethical choice there. He's a smart guy, clearly. He knew going into this what was going to happen and the criticism that was going to be lobbed his way after it. So, yeah, I'm not one to sit here and immediately come up to the defense of GE. I think there have been a lot of things that they've done in regard to managing the company that they could have done better. Financial chicanery, manipulating those financials all the way back to 1995, is a really big accusation that spans a lot of leadership, really throws KPMG, their auditor, under the bus as well. Hey, listen, let's find out if there is something going on here. And if there is fraud to that extent, then thank you, Mr. Markopolos. But I suppose I feel like he could have gone about this a better way.

Frankel: It's also worth pointing out that generally in situations like this, the company that's under attack stays silent. That wasn't the case. GE immediately snapped to its defense. Said all this could have been cleared up if he would have just called them and asked them to verify certain figures and information, and it could have been cleared up that way. So, just the fact that GE's been so vocal about it shows how this is a lot different than other situations. Short-sellers issue reports attacking companies all the time. The standard response is "no comment." And that wasn't the case here. It's also worth noting that GE said, "Wait, all of this is public information that was already known. All this is baked into the stock price already. We're putting our money where our mouth is by buying more." It's a unique situation. I don't want to rush the judgment one way or the other. As you said, there's a lot that GE should not be defended on, but I feel like this is just a rehash of old information with a big-name person who's had success in the past exposing fraud, so everyone just assumed that must be the case here.

Moser: Yeah. We'll follow it and see how this all shakes out. But, yeah, tough week for GE last week. I'm feeling for them in this case. I'm not sure they got necessarily the fair shake. But we will keep on this story for our listeners.