What is a Wells notice and what does it mean for GE?

A Wells notice is a formal communication from the SEC staff that they are considering recommending that the Commission bring a civil injunctive action against a company. It signifies a potential enforcement action and allows the company an opportunity to respond to the staff's concerns before a final recommendation is made.

What is the financial impact of these accounting issues on GE?

GE has already disclosed these items and corrected its financial statements. The cumulative effect on net earnings from 2001 through December 31, 2007, was a reduction of approximately $300 million. The company has also implemented remedial actions and internal control enhancements.

What are GE's next steps in this process?

GE disagrees with the SEC staff's recommendation and intends to engage in discussions through the Wells process to address the issues with the staff and the Commission. The company will continue to cooperate and explore potential resolutions, though no settlement is guaranteed.

GE 8-K SEC Disclosure — Sep 5, 2008

Q: What specific accounting issues are being investigated?

The SEC staff is considering recommendations related to GE's accounting for derivatives (hedge accounting, fees), accounting for aftermarket spare parts, transactions involving financial intermediaries in the Rail business, and revenue recognition for product sales subject to in-transit risk, primarily concerning periods around 2002 and 2003.

Summary

General Electric (GE) filed an 8-K on September 4, 2008, to disclose that the SEC staff has issued a Wells notice. This notice indicates the SEC staff is considering recommending a civil injunctive action against GE for alleged violations of securities laws. The issues under consideration primarily relate to accounting practices from 2002 and 2003, including the use of hedge accounting for derivatives, accounting for aftermarket spare parts, transactions involving financial intermediaries in the Rail business, and revenue recognition on product sales subject to in-transit risk. GE states these matters have previously been disclosed and their financial statements corrected, with a cumulative impact of a $300 million reduction in net earnings from 2001 through December 31, 2007. GE disagrees with the SEC staff's recommendation and intends to use the Wells process to address the issues. While GE is cooperating and has had preliminary discussions for resolution, there is no certainty an agreement will be reached. If an action is brought, the SEC could seek an injunction, penalties, and other relief. GE anticipates that any resolution would involve neither admitting nor denying the allegations but agreeing to an injunction.

Key Highlights

1GE received a Wells notice from the SEC staff, indicating potential civil injunctive action for alleged securities law violations.
2The SEC staff's potential action centers on accounting practices related to derivatives, spare parts, financial intermediaries, and revenue recognition from 2002-2003 and earlier.
3GE has previously disclosed these accounting issues and corrected its financial statements, with a cumulative earnings reduction of approximately $300 million from 2001-2007.
4GE disputes the SEC staff's recommendation and plans to engage in the Wells process to discuss and address the issues.
5The company is cooperating with the SEC and has had preliminary discussions for a potential resolution.
6Any resolution would likely involve GE neither admitting nor denying the allegations but agreeing to an injunction, with no guarantee of a settlement.
7The SEC could seek an injunction, penalties, and other relief if an action is authorized.

GENERAL ELECTRIC CO 8-K Report, Corporate Update (Sep 5, 2008)

Summary

Key Highlights

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