By Bloomberg's Rick Green and Madeleine Ngo
The warning to shareholders of newly bankrupt Ascena Retail Group Inc. could hardly have been more direct. There it is, in black-and-white, on page 5 of the court declaration filed by Ascena’s most senior official just hours into the case:
"Existing common equity in Ascena will be canceled." Full stop. Creditors will take ownership of the retail chain, which Ascena also made plain.
So how did stock investors respond? By bidding up the shares just shy of 120%, on off-the-charts volume.
It was a similar story for bankrupt Global Eagle Entertainment Inc. The airborne Wi-Fi service jumped more than 50% on July 24 after its court filing, despite warning shareholders earlier in July that they stood to lose everythingto creditors in a Chapter 11 case. And it hearkens back to Hertz Global Holdings Inc., whose stock became Example A of post-bankruptcy rallies.
The persistent mania for busted companies baffles financial advisers. “What’s going on here? I really couldn’t tell you; it’s not something I would ever recommend to anyone,” said George Gagliardi at Coromandel Wealth Management in Lexington, Massachusetts.
“People have too much money to play with,” said Dennis Nolte, an adviser at Florida’s Seacoast Investment Services.
“Most of these traders won’t be around when the bankruptcy proceedings are complete. Just turn the light off when you leave the room, if the lights aren’t turned off by the utility company because there’s no money to pay the bill.”