Keep a 10-Foot Pole's Distance

Some investors see the troubles in the mortgage and real estate industries as an opportunity to go bargain-hunting for depressed but basically solid stocks.

And then there are those who buy stock in companies that have filed for Chapter 11 bankruptcy protection, betting that these distressed shares, now trading for pennies, will rise rapidly once the companies emerge from bankruptcy.

If you count yourself among the latter group, you would be better off playing a slot machine.

Chances are, if you own stock in a company that has filed for bankruptcy, that stock will eventually become worthless. What many common shareholders fail to realize is that the owners of a company under bankruptcy protection are last in line for claims on any assets.

Take, for example, American Home Mortgage Investment of Melville, N.Y., once a major mortgage lender. Early this month, the company announced that it would no longer originate new loans. Then it filed for Chapter 11, citing troubles in the secondary mortgage and real estate markets. On Monday, the company's stock closed in over-the-counter trading at 28 cents. That was down from a 52-week high of $36.40.

In its press release, included in a Securities and Exchange Commission filing, American Home Mortgage said that "while the Chapter 11 process is intended to help preserve and protect the value of the company's assets, it is highly unlikely that these values will be sufficient to pay its creditors in full, and that it is realistic to conclude that ultimately there will be no shareholder equity value remaining."

Simply put, if you're a shareholder, don't expect to get anything. Although the company may emerge from bankruptcy, in all likelihood its reorganization plan will cancel the existing equity shares.

So my question is: Why would an individual investor buy stock in a company under bankruptcy protection? On Monday, American Home Mortgage had a trading volume of more than 1.8 million shares.

Some of that trading could be shareholders trying to lock in their losses for tax purposes, said R. Cromwell Coulson, chief executive of Pink Sheets, the electronic quotation system and leading provider of pricing and financial information for stocks sold over the counter.

And some of the trading is probably being done by investors who don't know what they're doing, Coulson said.

When companies can't meet the listing requirements to trade on the Nasdaq Stock Market or the New York Stock Exchange, they are delisted. But shares may continue to trade on either the Over the Counter Bulletin Board, otherwise known as OTCBB, or the Pink Sheets.

Companies in bankruptcy have the letter "Q" at the end of their ticker symbol. If you go to the Pink Sheets Web site ( http://www.pinksheets.com) and type in the symbol for such a company, a big red "Warning" box comes up with a link to the SEC's Web site with information on corporate bankruptcy.