Investing in a Bankrupt Company: A High Risk Venture

The SEC and FINRA are issuing this Alert because we believe there may be widespread misunderstanding by investors that stock in the "old" General Motors Corporation (now known as Motors Liquidation Company) is related to the "new" General Motors Company (new GM). FINRA halted trading in old GM (which had been using the GMGMQ trading symbol) on July 10, 2009, and then issued a new ticker symbol for the old GM stock—MTLQQ—to avoid having it confused with the new GM, which had no publicly traded securities at the time.

 

This Alert also reminds investors that holding shares of any company involved in bankruptcy, or buying shares in a bankrupt company in the hope that those shares will surge in value down the road, are highly risky courses of action.

 

Furthermore, as with the GM situation, companies in bankruptcy are often the subject of rumors in fax or email newsletters, Internet message rooms or on websites offering online stock tips. Unfortunately, investors may have received confusing, potentially misleading, information about the old GM via newsletters or other promotional activity by those touting the stock.

 

Two Distinct Companies

 

Motors Liquidation Company and the "new" GM are separate and distinct. As stated on the websites of both Motors Liquidation Company and the new GM, the new GM currently has no publicly traded securities, and none of Motors Liquidation Company’s publicly owned stocks or bonds are or will become securities of the new GM. Motors Liquidation Company is currently winding its way through bankruptcy court—and there is a real possibility that stockholders will receive nothing from these proceedings. While the common stock of Motors Liquidation has not been cancelled, investors should not interpret that as indicating the shares have any value.

 

"Q" is for Caution

Investors are often confused by the fact that, despite the likelihood that the common stock of a bankrupt company will be cancelled, the company's securities may continue to trade after the company has filed for bankruptcy protection and before it emerges as a newly reorganized company. This confusion may be aggravated by the lengthy bankruptcy process—which may take months, if not years. Such securities typically trade on either the OTCBB or the Pink Sheets and the stock symbol will have a fifth letter "Q" at the end to denote the company’s bankrupt status.

 

Risks of Trading in Securities of Bankrupt Companies

 

When a company files for reorganization under the federal bankruptcy laws, investors are often tempted to buy or hold the company’s common stock in anticipation that the company that emerges from bankruptcy will be profitable. The reality is, however, that when companies emerge from bankruptcy, the common stock of the “old” company is usually worthless. In most instances, the company's plan of reorganization will cancel the existing equity shares.

 

In general, while a typical bankruptcy reorganization plan allows the "new" company to distribute new shares under a new trading symbol, holders of the common stock of the "old" company generally do not receive any of these shares. A company must pay off existing debt before it emerges from bankruptcy—and creditors, including bondholders, usually receive shares in the new company as partial payment. This leaves little or nothing of value for the common stockholders of the “old” company. This may seem unfair, but it reflects the established priority scheme of bankruptcy and the fact that, in contrast to bondholders, common stockholders take greater risk, but have the potential for the greater gain. For more information on the corporate bankruptcy process, see the SEC’s brochure entitled Corporate Bankruptcy.

 

We are concerned that some investors purchase shares of companies in Chapter 11 bankruptcy in the belief that if the company survives, the old common stock will have value—not recognizing that the old common stock is likely to be cancelled, even if the company emerges from bankruptcy. Investors should understand that buying common stock of companies in Chapter 11 bankruptcy is extremely risky and can lead to financial loss.

 

If you own shares in a company that has, or may be filing, for bankruptcy, or are considering purchasing shares of a bankrupt company, check the company’s website for information about the bankruptcy. Also check the company’s SEC filings, available through the SEC’s EDGAR database or on the company’s website, and other publicly available information for company statements about its reorganization plan as well as a copy of the reorganization plan itself. For more information on using EDGAR and where to find information on a company’s bankruptcy, see Researching Public Companies Through EDGAR: A Guide for Investors.

Last Updated: 7/14/2009