I was researching some companies that recently experienced major decreases in stock price, following the issuance of a lawsuit. Particularly, companies such as Sino-forest (TRE; PINK:SNOFF) and Travel Zoo (TZOO), have recently been accused of violating the 1934 SEC act by reporting fraudulent, or otherwise misleading information to its investors.
Such lawsuits present possible opportunity for investors, due to the low price of the stock. On the contrary, additional and significant risk burdens investors who dare to invest during a time of much uncertainty. Clearly, the time period from the issuance of the lawsuit, until its ruling, is a very volatile environment for traders. Events that effect the stock price of these types of companies include:
-majority holders rapidly selling off shares
-established investors/firms buying high volume of shares
-speculative information being released that either supports or denies the fraud claims
-etc..
So, as an investor, I see the following options:
1) buy at such a low price, and reap the benefits in the future if the lawsuit is proven illegitimate
2) suppress the temptation to make huge profits, and ease my fear of loosing money by turning away
3) be a complete pessimist (which, in theory, may be as warranted as being an optimist) and secure a short position to execute on d-day, when the court ruling is released.
I have never invested in a company that was currently battling fraud allegations. Does anyone have experience with a situation similar to TZOO or Sino-forest? What was the outcome of your decision?
FDiCianni |
