Risky business: Buying shares in a bankrupt company

Michelle Singletary
Columnist October 11, 2011

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

People are trying to make money any way they can in a stock market where constant turbulence is the new norm. But because investors can be so gullible, it’s still necessary to issue warnings to protect their irrational exuberance.

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

Following the high-profile Chapter 11 bankruptcies of WorldCom, Kmart and General Motors, investors were still purchasing millions of shares of these troubled companies, hoping they could earn a profit when or if the firms emerged from bankruptcy protection. In the end, the old shares of all the companies became worthless.

Often, companies don’t survive bankruptcy. Even if they do, a new entity is created and new shares are issued, making the old shares worthless. That’s what has happened to the securities of BB Liquidation, formerly known as Blockbuster.

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

Last year, the movie rental company, which once had several thousand stores nationwide and was traded on the New York Stock Exchange, filed for Chapter 11 bankruptcy protection. In April, almost all of Blockbuster’s assets, including the “Blockbuster” trade name, were acquired by DISH Network. None of the publicly owned stocks are or will become securities in DISH or the new Blockbuster.

When companies can’t meet the listing requirements to trade on the New York Stock Exchange or Nasdaq, they are delisted. However, shares may still be traded on the OTC Bulletin Board or Pink OTC Markets, formerly known as Pink Sheets, the electronic quotation system that provides pricing and financial information for stocks sold over the counter. Every company in bankruptcy on the over-the-counter market has the letter “Q’’ at the end of its ticker symbol. That letter is supposed to serve as a warning.

In an April news release, the old Blockbuster said its Class A and Class B common shares, which were trading over the counter under the symbols BLOAQ and BLOBQ, would likely be worthless. “There will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios,” the company said. Stockholders of a company in Chapter 11 generally receive value only if all claims of the company’s secured and unsecured creditors are fully satisfied.

And yet, between Aug. 22 and Sept. 21, shares in the old Blockbuster were trading at 6 cents to 8 cents per share with an average daily trading volume of 1.7 million shares, said Gerri Walsh, FINRA’s vice president for investor education.

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

The dramatic increase in trading volume led to the SEC temporarily suspending trading from Sept. 29 until Oct. 12. The SEC cited “third-party press releases to investors concerning, among other things, the company’s current financial condition and business prospects.”

Often with well-known companies, people — through newsletters or Internet sites — will hype the stock hoping to lure less-informed investors. Walsh said in Blockbuster’s case, one report on the Internet said the company was back from the doldrums and “is now becoming a promising comeback story.” Once the price is pumped up, promoters will dump their shares and earn a nice profit, leaving naive investors with losses.

“This is what happens when a company is very prominent,” Walsh said. “In a low-interest environment, people are looking for ways to maximize their investment returns. So these stock promoters make claims that there’s going to be a rich opportunity once the company comes out of bankruptcy.”

Walsh added that buying shares in a bankrupt company, hoping prices will jump down the road, is a risky gamble.

“A lot of people want to believe in the comeback story,” she said. “People want to believe you can strike it rich. But many companies that go into bankruptcy come out with few or no assets even if they re-emerge.”

OTC Markets has discontinued the display of quotes for BLOAQ and BLOBQ and has labeled the securities as caveat emptor, or let the buyer beware. At the top of the warning is a skull and bones stamp.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Questions are welcomed, but because of the volume of mail, personal responses may not be possible.

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