July 11, 2009 By MICHAEL J. de la MERCED and ZACHERY KOUWE Shares in “General Motors,” the company says, are worthless. But many investors apparently have missed the message. G.M.’s stock, which now represents the company’s bankruptcy estate, continued an improbable rise in price on Friday, prompting concern by company officials and securities regulators that investors are confused. The stock, which trades under the ticker symbol GMGMQ, gained as much as 43 percent on Friday, after G.M. announced that it had completed the sale of its assets to an entirely new company. Nearly 75 million shares traded hands until the securities industry’s self-regulator, Finra, halted trading at 2:09 p.m., citing “extraordinary events.” The stock closed at $1.15 a share, up 31.3 cents, or 37 percent, for the day, giving the bankrupt company a market value of $702 million, up from $512 million on Thursday. “This certainly has all the hallmarks of market manipulation, but it’s very hard for the S.E.C. to prove,” said Peter J. Henning, a law professor at Wayne State University in Detroit. “Someone made a lot of money here.” G.M. has issued statements telling investors not to buy the shares because they are destined to become worthless. The shares represent ownership in the old G.M., now known as the Motors Liquidation Company, which will be wound down in bankruptcy court. It contains unwanted factories and equipment, and billions of dollars in unsecured claims related to asbestos litigation and product liability lawsuits. Proceeds from the wind-down will go toward repaying secured and unsecured creditors. The new G.M., formally the General Motors Company, is privately held and will not seek a public listing until next year at the earliest. In a letter sent to the Securities and Exchange Commission on Thursday, lawyers for Motors Liquidation said they had gone to great lengths to discourage trading in the stock. The company said it “strongly believes that stockholders will receive no value in the bankruptcy liquidation process” and has cited the bankruptcy court’s decision, which calls the company “hopelessly insolvent,” several times in press releases and on its Web site. Finra decided to halt trading in the stock after concluding that investors thought they were buying shares of the new G.M. Over recent weeks, the regulator received numerous calls from brokerage firms and investors asking which company the securities represented, officials said. Trading in GMGMQ shares can be halted for the next 10 trading days, and Finra officials are expected to release an official notice to investors next week explaining exactly what the securities represent. The regulator also plans to change the stock’s ticker symbol before allowing investors to resume trading, officials said. Between June 3 and June 24, an average of 60.6 million GMGMQ shares traded every day on the over-the-counter market. Regulators say some investors may have been encouraged to buy the shares after receiving e-mail messages from several publications that provide tips on penny stocks. For example, a company called Penny Stock Chaser, which runs a Web site that gives stock tips, issued a news release on Friday saying it expected GMGMQ shares to rise after surging 39 percent “as the company emerged from the remains of bankrupt General Motors Corporation by taking over the best assets of the biggest U.S. automaker.” The release noted that the “new GM” currently has no publicly traded securities and shares of the “old GM” will not become securities of the General Motors Company. The company did not respond to phone calls or e-mail messages seeking comment. It is not uncommon for public companies that have filed for Chapter 11 protection to maintain stock listings, and a small market remains for shares in Lehman Brothers, Delphi and others. For some companies, those shares could regain real value some day. Some companies are able to retain enough value in their reorganizations that equity holders, who are last in line for repayment under the federal bankruptcy code, can gain some recovery when they emerge from bankruptcy. That is not expected to be the case with Motors Liquidation. As part of G.M.’s reorganization, bondholders — the next rung up from shareholders — were asked to take a large cut to their investments’ value, all but ensuring stockholders would receive nothing. “Management continues to remind investors of its strong belief that there will be no value for the common stockholders of Motors Liquidation Company in the bankruptcy liquidation process, even under the most optimistic of scenarios,” Motors Liquidation said Friday.
This article is true to it’s form by an uninformed author, commentary by some theoretical professor with no real experience, & by the f’n regulators that still can’t get anything right… it has nothing to do with manipulation or anything of that sorts for that matter. Penny Chaser? Are you kidding me? you think that will move $60MM worth? There is a huge short position on this stock with borrow as high as 30%. The speculators juiced it for all it’s worth, the hedgers got there downside protection, so who would be selling here? These guys are covering their stock to take off their books and have huge positions to move, not many sellers down here, so what happens? do we need to pull out the supply and demand curve for Professor Henning?
>> These guys are covering their stock to take off their books and have huge positions to move << Why do these guys need/want to cover if they know that the stock will be going to zero anyhow. Is it because the owners of the borrowed shares all are selling and so the borrowers receive some sort of “short cover” call from their brokers that must be complied with? Or (total speculative stretching on my part) is it that the final closure of a zero print will take too long (years?) and so margin collateral would be tied up too long? Obviously I’m pretty clueless about how these final death throes play out, but I sure do find it interesting… Heck, one could possibly take good advantage of such throes if the dynamics are well understood.
I don’t think anyone knows why the stock’s defying gravity, but I think short covering is not a large factor anymore given that the stock hasn’t been shortable since bankruptcy 40 days ago. When I worked at a hedge fund in 2000 we shorted 3-4 names down to almost 0 and left them on the book without ever covering because a) the margin requirements at that point were next to nil and b) you never have to declare a capital gain if you never close the position.
So, from your point-of-view ConvertArb’s explanation doesn’t make much sense, I take it. Regardless, thanks for clearing up much of what was confusing me there. Real-life experience trumps speculative musing any day. 
Well he’s probably right in that someone like Penny Chaser isn’t going to move the stock and that speculators are probably contributing to running the stock up. If I had to throw in my worthless guess I would say the wholesale market makers (those that deal in pink sheets) are probably making crazy markets for the stock too regardless of fundamentals. I don’t think they’re manipulating anything – as a former market maker, I can tell you that these clowns have less control over a stock and know even less about the fundamentals that you would ever imagine – but I think they’re just hapazardly trading order flow without really understanding that the stock’s going to 0 at some point.
I am not talking about companies shorting the last month and covering now… I am talking about short positions put on 1 year+ (in the teens+) and now the BK event has happen. Hedgers are closing their main positions out, ie Long bond, (short CDS) and now have naked short on their books. I am not in the business of shorting 5mm shares outright at $1. MOST sophisticated hedge funds aren’t either. If you are, then I wouldn’t call you a HF. you are a levered casino. Plus you are paying out 30% a year on borrow fees IF you can get a borrow, and for the existing borrows. Freeing up capital, deleveraging has been going on for HF since at least May of last year, why would you tie it up for that extra $0.75? I do disagree that cap requirements are small, I’ll may call my PB tomorrow to get you a quote if you interested, i bet it’s 50% margin at LEAST. possible 100%+ You honestly think short covering had nothing to do with this stock rally? hell i think we have been on a market short covering rally since march… btw. capital gains are not even considered if fund is structured properly, you can avoid paying cap gains.
I don’t think anyone who shorted at 30 is covering at 1 and paying capital gains on $29 when all they have to do it wait another few months and never have to pay capital gains at all. I don’t have any problem holding a 100 bps position in my portfolio that costs 150 bps in margin requirements when it saves me 1000 bps of taxes. Hedge funds aren’t stupid enough to cover just to get it off their books when the cost to cover in terms of taxes exceeds the benefit in terms of freeing up margin.
JohnThainsLimoDriver Wrote: ------------------------------------------------------- > I don’t think anyone who shorted at 30 is covering > at 1 and paying capital gains on 29 when all they \> have to do it wait another few months and never \> have to pay capital gains at all. I don't have any \> problem holding a 100 bps position in my portfolio \> that costs 150 bps in margin requirements when it \> saves me 1000 bps of taxes. Hedge funds aren't \> stupid enough to cover just to get it off their \> books when the cost to cover in terms of taxes \> exceeds the benefit in terms of freeing up margin. NO TAXES! Offshore entities setup as trust vehicles. Plus it's not risk free, so it's not 'stupid'. The stock could rise based on nothing but fear. ie VW. I've seen bankrupt companies trading as low as .001 rise to $4+ 2 years after they declared. I have personally experience watching several millions evaporate because of this. Trust me, it’s short covering. I also know of individuals in their PA that would short into these short covering rallies, but you must have great connections and get good rates. shorts know crazier things have happened then to watch a BK company rally 100%+ in one day.
I don’t disagree with you, but I think if even FINRA doesn’t know what’s moving the stock it’s hard to definitively label the rally as short covering. As I mentioned before, as a former market maker who’s traded pink sheets I’ve seen traders unwittingly do stupid things to cause major stock movements so I would put at least as much probability on bad market making as I would on short covering.
>> I’ve seen bankrupt companies trading as low as $.001 rise to $4+ 2 years after they declared. I have personally experience watching several millions evaporate because of this << I’m curious as to what can cause such a startling turnaround? Bankrupt company gets an equity infusion and a new lease on life. They say, heck, lets just use the old script that’s trading at pennies and issue more of it, diluting by 95% or whatever. Or just do an attractive tender to get most of the script back so as to save on SEC new-issue headaches. Then the stock’s in treasury and ready for reissue to management and new investors. Company goes on to perform an excellent rebound, and bingo, stock price bounces back big? If these sort of scenarios aren’t what you’ve seen, could you elaborate a little? Thanks a lot.
GM reopened as MTLQQ.PK, down 51% so far today. Back to +100% on my long put/short call position, hopefully this is the death knell for this sh@t company.