Risks in investing in bankruptcy companies like General Motors

The SEC and FINRA have issued warnings out of concern that the investing public may not realize 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 has since issued a new ticker symbol for the old GM stock—MTLQQ—to avoid having it confused with the new GM, which currently has no publicly traded securities.

The SEC and FINRA alerts are also intended to remind 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 and investors should be leery of any financial advisor that tells them that investing in a bankruptcy company is without risks. In fact, investing in bankruptcy companies is very complicated and there are a lot of facts that go into whether the bankruptcy company will ever again have value. For most conservative or elderly investors, investing in bankruptcy companies should be avoided.

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 Web sites offering online stock tips. Unfortunately, investors often receive confusing, potentially misleading, information about the old bankruptcy entity and the prospects for that company’s reemergence after bankruptcy. As recently as July 10, 2009, newsletters and other promoters were touting the purchase of GM even though the prospects of the company at that time were very much in doubt.

Two Distinct Companies

FINRA’s Alert to the public wants to make sure that investors realize that Motors Liquidation Company and the “new” GM are separate and distinct. As stated on the Web sites 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.

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.

If you have questions about a bankrupt company that you invested in, or if you believe that you have been the victim of a securities fraud, The White Law Group may be able to help. To speak to a securities attorney, please call our Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

To learn more about The White Law Group, visit https://whitesecuritieslaw.com.