It was obvious when Enron went bankrupt in December 2001 that it’s stock was to be avoided.? It wasn’t just because of the details of the scandal, but because Enron didn’t really have much in the way of assets.? Enron sold it’s ideas, it’s concepts, it’s people.

When WorldCom went bankrupt 6 months later due to their spectacular scandals, the stock price plummetted to pennies per share.? After the company entered into Chapter 11, I was fascinated that the stock was still active and actively traded as a penny stock for weeks.? When a few weeks went by with no indication that the stock was going to be delisted, I was influenced by various naive things that I read online that the stock still had value thanks to WorldCom’s extensive assets and MCI division.So, I bought nearly 1600 shares at $0.17/share (roughly $300 worth with commissions) and told myself and a few others that I was going to watch and see what happens.? Many speculated that it was guaranteed that WorldCom would emerge successfully from bankruptcy.? They were correct–WorldCom did emerge in 2004 under the name MCI.? But they dumped the stock as worthless in 2002 and gave corporate bond holders 36 cents on the dollar.

I kept my shares and enjoyed watching them drift up to $0.26 (a 50% return!) and then drift just as quickly down to $0.06 (a 65% loss!) when I finally sold out just days before the stock was rendered worthless.? I kept my shares for about 3 weeks and enjoyed being “on the front lines” and watching with vested interest how the scandal and fate of WorldCom unfolded.

It all turned out to be a very cheap lesson that Stocks are last in line for scraps after the banks, corporate bonds, lawyers and plantiffs take their share in a bankruptcy.? With airlines, you might get lucky and have the government step in for a bailout which can salvage the stock.? However, this isn’t always the case and investing in a bankrupt company is the worst form of gambling.? Investing in bankrupt companies does not count as a value investment strategy.? The courts have to protect the interests of the banks and bond holders, but there isn’t a precident to protect the stock holders.

An interesting note:? even though WorldCom was bankrupt, they continued to get major cashflows from their existing customers and assets and received a no-bid contract for setting up cellphone networks in Iraq soon after the invasion.? So, just because a company is still viable doesn’t mean the stock can be spared.