Stock Is Worthless, But It Finds Buyers On a Top Exchange
By DIANA B. HENRIQUES
03/18/92
The New York Times
Under a recently negotiated bankruptcy plan, the common stock of Continental Airlines Holdings is officially worthless. Even the
company says so.
Yet for more than six weeks, over the company's increasingly strident objections, the American Stock Exchange has continued to permit
Continental shares to trade on the exchange floor. Investors, apparently unaware that the company has negotiated a plan that will wipe
them out, have paid as much as $1.50 apiece for more than seven million shares over the last week.
Continental itself refused to pay a $13,000 bill for its 1992 listing fee to drive home its view that the exchange should stop trading the
shares.
A spokesman for the American Exchange said the company's board had yet to submit a formal resolution that is required along with its
request to withdraw.
Such trading raises questions about how the American exchange and rival stock markets are handling the sticky problems posed by the
flood of bankruptcy cases among publicly traded companies. And while the Continental situation is described by traders as particularly
egregious, it is not an isolated case.
To be sure, investors regularly bid stocks up to gravity-defying levels for reasons that elude even the most knowledgeable observers,
including company executives. But the bankruptcy process, which has turned the shares of several familiar companies into little more
than wallpaper, has compounded these mysteries.
Bankruptcy investment experts say that shares of several major companies -- the LTV Corporation, Ames Department Stores, the
Salant Corporation, Orion Pictures -- continue to trade on prominent national exchanges despite court developments that cause these
experts to doubt whether the shares are worth anything close to their current prices.
There are a number of instances where it is virtually certain that the stockholders will get almost nothing," said George Putnam 3d, an
investor and publisher of the Bankruptcy Datasource, which monitors bankruptcy court filings. "Yet the shares continue to trade. It
makes no sense at all."
A Continental spokesman, Art Kent, said, "This company has no interest in having innocent shareholders throw their money away."
Christopher Finn, the spokesman for the exchange, said last night that the exchange would honor any company's request to withdraw,
but only when it was accompanied by a formal resolution of the company's board and an application to the Securities and Exchange
Commission.
"The exchange is now in receipt of a formal request," he said, referring to Continental's demand. "We have still not received a board
resolution."
Otherwise, Mr. Finn said, the exchange will drop Continental only after its bankruptcy plan wins court approval.
A senior executive at the New York Stock Exchange, who refused to be identified, said the exchange would continue to list bankrupted
companies, but would remove the shares when a court-approved debt settlement plan "indicates that the security is substantially without
value."
The exchange weighs each bankruptcy situation case by case, since each company's financial condition is different, the official said.
But because an exchange listing may suggest to unsophisticated investors that a company remains financially sound, some state securities
regulators are concerned about cases like Continental's.
"The exchanges have been saying for years that an exchange listing means something, that there are standards and protections there,"
said Wayne Klein, Idaho's chief securities regulator. "That may cause people to let their guard down. And if these shares are really
about to be worthless, and the professionals all know that, we know who these shares are being sold to."
The Bloomberg Financial Markets service shows that many of the seven million shares that traded in the last five trading days involved
small orders, suggesting that individual investors were among the purchasers.
Rumors of Acquisition
The rally seems to have been ignited by rumors that the airline was going to be acquired, Mr. Putnam said. But bankruptcy specialists
say an acquisition would almost certainly not benefit shareholders because bondholders and other creditors are owed far more than the
company would probably fetch in a sale.
"People seem to know enough to know that acquisitions usually affect the stock price," Mr. Putnam said, "but they don't know enough
about bankruptcy to know that the creditors get paid first."
A company cannot elect on its own to cancel an exchange listing. Although the American exchange requires a resolution of the
company's board and the New York exchange a shareholder vote, both exchanges have the right on their own to drop companies that
no longer meet their financial standards. Continental executives say they have argued since Feb. 6 that the American exchange should do
just that.
The recent rally was the final straw for the executives at Continental. On Monday evening, Robert R. Ferguson 3d, president and chief
executive of Continental Holdings, sent an urgent letter to James R. Jones, the chairman of the exchange. Mr. Ferguson argued that the
continued listing of the shares, with the publicity and visibility that listing affords, "is detrimental to the public interest," said Mr. Kent, the
airlines' spokesman.
Copy to the S.E.C.
"What the letter says, in effect," Mr. Kent added, "is that we have repeatedly relayed our desire for the securities to be delisted and we
have been rebuffed." Mr. Kent said a copy had been sent to Richard C. Breeden, chairman of the Securities and Exchange
Commission.
As more of corporate America's household names have filed for bankruptcy court protection, it is becoming increasingly common for
their shares to continue trading on prominent national exchanges as the bankruptcy negotiations continue. Exchange officials say they
have an obligation to offer a trading forum for investors in those companies. They also point out that stockholders sometimes receive
some payback when the haggling with the banks, bondholders and other creditors is over.
But since shareholders are the company's owners, not its creditors, they are most often left empty-handed. Sometimes, companies settle
with creditors by giving them new stock, rendering the old shares worthless. But given the complexities of negotiations and the resulting
deals, casual investors may be unable to distinguish one case from the other.
Or, as some regulators fear, unscrupulous brokers may suggest that the old common stock has value when it does not. These factors,
and investors' own faith in finding someone willing to pay still more for their shares, sometimes produce prices that bear scant
relationship to how shareholders will fare in the eventual debt settlements.
The proposed LTV settlement, for example, would give current shareholders less than 3.5 cents for each share, said Charles Palmer, a
company spokesman. Yet the shares trade on the New York Stock Exchange for more than 87 cents a share.
Max Holmes, director of bankrupt company research at Salomon Brothers, said the Continental situation "is not, by any stretch of the
imagination, an isolated case." He has had calls from nearly a half-dozen individuals who bought shares in other bankruptcy cases,
including Lomas Financial. "They clearly didn't understand that what they had been sold was the old common stock, which was about to
be wiped out, as opposed to the new common, which had true value," he said.
In a bid to crack down on investment fraud, Congress and the S.E.C. have put tight restrictions on telephone sales of speculative, risky
stocks. But stocks that are listed on major national exchanges are exempt from these restrictions.
"If the exchanges themselves are not going to create those protections," said Mr. Klein, the Idaho regulator, "then we need to
re-evaluate the extent to which we have been deferring to their regulatory efforts. And we need to be sure that the brokers have been
doing their job to talk people out of buying worthless shares ." |
