Zombie Stocks Rise Again

October 5, 2009
Michael Sheehan

Zombies aren't just popular in Hollywood, they are alive and well on Wall Street too. Several million shares of moribund companies like Washington Mutual and Lehman Brothers are being swapped every day.

Zombies aren’t just popular in the entertainment world, where there are a couple of zombie films due this Fall and one or two TV series in the works. Zombies are alive and well on Wall Street, too, as trading in stocks of dead or dying companies continues as if they were still alive and well. Shares in moribund companies like Washington Mutual and Lehman Brothers are being swapped in huge numbers, often as many as several million shares a day.

The attraction of these zombie stocks, as they’re known on Wall Street, is that they’re cheap and they have well-known names, according to regulators. That makes them almost ideal for penny-stock promoters looking to make a quick score off unwary investors. New technology is also allowing aggressive traders to buy or sell millions of shares in nanoseconds, which can translate into hefty profits for those who can buy huge blocks of stock and then sell at a small profit. A gain of a penny a share on a million-share block of stock translates into $10,000 on the plus side, and some players are doing even better than that, on shares that can double and even triple in value.

The Securities and Exchange Commission and the Financial Industry Regulatory Authority are concerned that the combination of well-known names, cheap shares, and the lure of easy money may tempt some novice stock buyers to get into an arena that carries an extremely high risk. Both organizations, however, admit that there’s not much they can do to restrict the trading in what are essentially worthless stocks. One piece of advice: Check out the SEC’s statement on corporate bankruptcy before you invest. Also, be leery of stocks with a ticker symbol that ends in Q — that means the company is bankrupt.