Pinellas County retiree John Murray was delighted when he read last month that Winn-Dixie Stores would be emerging from bankruptcy.
"I buy there all the time and I see what's going on when I go shopping," he said. "That's a pretty big outfit and I expected it to grow."
Best of all, the grocery chain's stock was trading for just 7 to 8 cents a share. After doing some -but not enough-research, Murray bought 9,000 shares, ignoring his broker's warning that the investment was risky.
Just 11 days later, Winn-Dixie cancelled its stock as part of its previously-announced court-approved reorganization plan. Murray, who is 70, was out $700. He was shocked.
"When I looked, the doggone thing was trading 23-million shares," he said. "That's fraud for them to continue selling stock like that when it's worthless."
In reality, the cancellation of a bankrupt company's stock is just one of many ways investors can be parted from their money in the Wild West-style, over-the-counter market known as the Pink Sheets. Named for the pink paper on which stock prices used to be quoted, it is an electronic quotation market for stocks that either don't qualify for listing or choose not to list on any exchange.
It is the home not just of bankrupt companies, but of scamsters' pump-and-dump schemes, shell companies, thinly-traded bank stocks, big foreign companies and lots of startups that attract hopeful investors.
"We are a nonexclusive market," Pink Sheets marketing manager Tim Ryan said. "We're not like a Nasdaq where we can say you have to be a certain type of company or we can't take you."
A stock only needs a market maker-a brokerage willing to buy and sell shares-to make the Pink Streets list. Currently there are about 200 such market makers who trade the 4,797 stocks quoted on Pink Streets. Trading volume is expected to be about $100-billion this year.
As soon as Winn-Dixie filed for bankruptcy last year and the New York Stock Exchange delisted the stock, the prognosis for shareholders was grim. Even when companies survive bankruptcy, their stock usually doesn't. One academic study found shareholders ended up with nothing in 93 out of 154 companies that continued trading in bankruptcy. Winn-Dixie says it never gave investors reason to hold out hope.
"The company said in numerous ways and numerous statements that the stock would be worthless," said Michael Freitag, spokesman for Jacksonville-based Winn-Dixie. "The company did what it could to educate people about this issue." The information about the pending stock cancellation was in a press release on Winn-Dixie's Web site when Murray bought his shares, but he says he didn't see it.
The stock wasn't technically worthless until the reorganization plan took effect. Speculators continued trading, lured by the potential profits of selling shares for a few pennies more than they paid. The buyers? Other speculators, who might or might not have understood what they were getting into.
Pink Sheets, a privately-held company based in New York, said it is doing more to warn investors of the perils of over-the-counter trading. Quotes for companies in bankruptcy carry a bankruptcy notice along with the price information.
Next May, Pink Sheets plans to introduce symbols to highlight the risks in other types of stocks. A skull and crossbones will be displayed on the Web site next to stocks that have been the subject of spam operations or other questionable promotions. Yield and stop signs will be used for companies that have limited or no public information.
Pink Sheets also is launching a premium trading tier, known as OTCQX, in January for companies that have substantial operating businesses and provide what it considers credible disclosure.
Winn-Dixie meanwhile has landed on the Nasdaq Stock Market with "when issued" shares (symbol WINNV), which will be good for new post-bankruptcy shares (symbol WINN) the company plans to issue in the near future. The when-issued shares were trading last week for around $14 a share. Murray doesn't own any.
Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write firstname.lastname@example.org or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at blogs.tampabay.com/money