Question

General Electric^® Capital, a division of General Electric, uses long-term debt extensively. In early 2002, GE Capital issued $11 billion in long-term debt to investors and then within days filed legal documents to prepare for another $50 billion long-term debt issue. As a result of the $50 billion filing, the price of the initial $11 billion offering declined (due to higher risk of more debt).

Bill Gross, a manager of a bond investment fund, “denounced a ‘lack in candor’ related to GE’s recent debt deal.” He said, “It was the most recent and most egregious example of how bondholders are mistreated.” Gross argued that GE was not forthright when GE Capital recently issued $11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that 3 days after the issue, the company announced its intention to sell as much as $50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit, and promissory notes at some future date” (Alban, 2002).

In your opinion, did GE Capital act unethically by selling $11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another $50 billion debt offering? Please explain your answer and discuss whether the action was illegal as well.

Answer 1

Yes, GE Capital acted unethically by selling $11 billion of long term debt without disclosing the investors that a few days later it will issue another $50 billion debt. The additional debt will adversely affect the gearing of GE and the investors will seek more return for the increased gearing. As a result the market price of the bond will reduce. However, the investors of the earlier bond might have invested at a higher price in the absence of the news of adverse gearing effect coming in a few days. Their investment will lose value within a few days .

GE is ethically responsible to disclose all the relevant information and by withholding the sensitive information it has effectively manipulated the Price of the bond issues. So GE is ethically at fault.

Although it is not legally binding that the company discloses all the information regarding issue of subsequent debt, in this case the information was deliberately suppressed as the next bond issue happened within days that too a huge issue of $50 billion.

A complaint to SEC may be definitely lodged for the reason that relevant information was withheld and the price of the earler issue was manupulated and redressal can be sought on this gorund.