IndyMac Bank was shuttered by regulators more than 18 months ago, but just last week hundreds of thousands of its shares changed hands.
The same goes for shares of FirstFed Financial, which continue to trade even though the thrift was seized by regulators in December and its assets sold off.
Each is a zombie stock – a name given to the shares of insolvent or near-insolvent companies. And so why anyone would be willing to trade them is something that leaves traditional stock market watchers dumbfounded.
“I’m always baffled by that,” said Dennis McCarthy, president of Aries Management Inc., a financial services firm in Los Angeles.
Actually, there are reasons why they trade.
While most mainstream investors won’t go anywhere near the zombies, some risk-takers are attracted to the literal penny stocks, which are known to swing 20 percent, 40 percent or more in a single day.
Some are short sellers who buy them to close out their positions. Others may simply be earnest investors hoping there will be some residual value when a bankruptcy is finalized. But many are likely day traders who buy large blocks of the stock – often 100,000 or more shares at a time – and through this high volume generate decent returns on changes of just a few cents.
Regardless, the stocks can be huge gambles.
“There’s a tremendous amount of risk,” said John Gannon, a senior vice president at the Financial Industry Regulatory Authority, the brokerage industry’s self-regulatory body.
FINRA recently felt the need in conjunction with the Securities and Exchange Commission to clear up confusion surrounding the stock of General Motors Corp., which filed for bankruptcy and was reformed as a new company that does not publicly trade.
The alert issued by the agencies noted that “buying common stock of companies in Chapter 11 bankruptcy is extremely risky.”
The SEC, in fact, recently began exploring whether it has the authority to ban or restrict the trading of zombie stocks, though it has not yet come to any conclusion.
Since the companies traded typically have no underlying fundamentals or operating business, the shares can rally on seemingly no news. IndyMac, which has traded for much of the past year for less than a nickel, surged to 14 cents in late September, mimicking rallies by higher-profile zombies such as investment bank Lehman Bros.
Indeed, there is no lack of investors willing to play the game as long as they see some stocks making investors a profit.
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