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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, 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. '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 three 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.

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? "

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Yes, GE did act unethically in their decision to sell $11 billion of long term debt without informing investors, and then later filing documents for a $50 billion debt offering. This is because the investors in the company are the shareholders, and do have a say in what does happen within the company. Everyone desires to become informed of where their money is going, and if for some reason no one tells them, then much anger will arise, and those individuals will not want to invest in the company any longer.

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Solution Summary

This solution provided an opinion on whether or not GE acted unethical in selling $11B of long term debt.