Risky Business: Buying Stocks in a Bankrupt Company

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I don’t blame investors for thinking there has to be a way to get in on something big.

People try to make money in every way they can in a stock market where constant turmoil is the new normal. But because investors can be so gullible, there is always a need to issue warnings to protect their irrational exuberance.

In the wake of the high-profile Chapter 11 bankruptcies of WorldCom, Kmart, and General Motors, investors were still buying millions of shares of these struggling companies, hoping they could turn a profit when or if the companies rolled out of bankruptcy protection. . Ultimately, the old stocks of all the companies became worthless.

Often, companies do not survive bankruptcy. Even if they do, a new entity is created and new shares are issued, rendering the old shares worthless. This is what happened to the titles of BB Liquidation, formerly known as Blockbuster.

On Monday, the Financial Industry Regulatory Authority, or FINRA, issued an investor alert after some stock promoters began touting a Blockbuster comeback.

Last year, the movie rental company, which once owned several thousand stores across the country and was listed on the New York Stock Exchange, filed for Chapter 11 bankruptcy. In April, nearly all of Blockbuster’s assets, including the business name “Blockbuster”, were acquired by DISH Network. None of the public shares are or will become securities of DISH or the new Blockbuster.

When companies cannot meet the listing requirements to trade on the New York Stock Exchange or the Nasdaq, they are delisted. However, stocks can still be traded on the OTC notice board or Pink OTC Markets, formerly known as Pink Sheets, the electronic quotation system that provides financial and price information for stocks sold over-the-counter. . Every bankrupt company in the OTC market has the letter “Q” at the end of its ticker symbol. This letter is meant to serve as a warning.

In an April press release, the former Blockbuster said its Class A and Class B common stock, which traded over-the-counter under the symbols BLOAQ and BLOBQ, would likely be worthless. “There will be no value to common shareholders in the bankruptcy liquidation process, even under the most optimistic scenarios,” the company said. The shareholders of a Chapter 11 corporation generally only receive value if all claims from both secured and unsecured creditors of the corporation are fully satisfied.

And yet, between August 22 and September 21, shares of the former Blockbuster were trading between 6 and 8 cents per share with an average daily trade volume of 1.7 million shares, said Gerri Walsh, FINRA vice president for investor education.

Between September 22 and September 28, the stock hit a 52-week high of 38 cents per share. Average daily volume had climbed to 37.4 million shares. The high volume trading occurred even though Blockbuster had said in a July filing with the Securities and Exchange Commission that its bankruptcy would be converted into a Chapter 7 liquidation and “at this point our business existence will be terminated. and our common and preferred shares. will be canceled. “

The dramatic increase in trading volume led the SEC to temporarily suspend trading from September 29 to October 12. The SEC cited “third-party press releases to investors regarding, among other things, the current financial condition and business prospects of the company.”

Often times, with well-known companies, people – through newsletters or websites – will hype the stock in the hopes of attracting less informed investors. Walsh said that in the case of Blockbuster, an internet report said the company was back from the doldrums and “is turning into a promising comeback story.” Once the price is inflated, promoters will get rid of their shares and make a handsome profit, leaving naive investors with losses.

“This is what happens when a business is very large,” said Walsh. “In a low interest rate environment, people are looking for ways to maximize the return on their investments. So these stock promoters claim that there will be a rich opportunity once the company comes out of bankruptcy.

Walsh added that buying shares in a bankrupt company, hoping prices will rise, is a risky bet.

“A lot of people want to believe the comeback story,” she said. “People want to believe you can get rich. But many companies that go bankrupt come out with little or no assets, even if they do reappear. “

OTC Markets has stopped posting quotes for BLOAQ and BLOBQ and labeled the securities as caveat emptor, or left the buyer wary. At the top of the warning is a skull and bone stamp.

Readers can write to Michelle Singletary at the Washington Post, 1150 15th St. NW, Washington, DC 20071. Her email address is [email protected] Questions are welcome, but due to the volume of mail, personal responses may not be possible.


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