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Hol' up. While in bankruptcy, some fools ran up the price of Hertz stock. Then, while the price was up in the middle of bankruptcy proceedings, Hertz sold som

Hol' up. While in bankruptcy, some fools ran up the price of Hertz stock. Then, while the price was up in the middle of bankruptcy proceedings, Hertz sold some new shares to the same fools. The final result of the bankruptcy wiped out all of the shareholders. While the buyers were obviously fools, Hertz should have known that zero shareholder value was a likely outcome. How was selling more stock in that situation legal? I see that the sale was quickly shut down... but it shouldn't have happened in the first place.

djbebs 6y ago
Why would it be illegal? Hertz was in bankruptcy because it couldnt pay its debts, a capital injection might have raised enough cash to pay off its debts and exit the bankruptcy proceedings. They disclosed the low likelyhood of such a thing happening but its not the law or the SECs job to make everyone take wise financial decisions.
- xur17 6y ago
  > Hertz was in bankruptcy because it couldnt pay its debts, a capital injection might have raised enough cash to pay off its debts and exit the bankruptcy proceedings. While I do agree that it shouldn't be illegal, wouldn't they know how much money they would raise, and hence be able to determine if the capital raise would provide sufficient capital?
  - geoduck14 6y ago
    If they need to raise $1000, and you but $10 - no one knows if your investment is worthless until after no one buys the additional $990
dwohnitmok 6y ago
As usual, Matt Levine covered this pretty well in his newsletter: https://www.bloomberg.com/news/newsletters/2020-06-12/money-stuff-if-you-want-hertz-have-some-hertz https://www.bloomberg.com/news/newsletters/2020-06-12/money-... The relevant quote: > Really I can’t decide how to feel about this. On first principles, you should not sell a billion dollars of stock in a bankrupt company to small retail investors who just installed Robinhood on their phones a few months ago. On the other hand, people are definitely doing that anyway [emphasis original]; a notable feature of this weird pandemic market is exactly that hundreds of millions of dollars of stock in Hertz, which is bankrupt, are being sold to small retail investors every day. Hertz just wants permission to do some of that selling itself.
- brandmeyer 6y ago
  I like his argument. Its pretty reasonable in its principles. But it doesn't work in this situation. Hertz raised 10^7 dollars this way when they were 10^9 in the hole. Looks to me like the executives saw an opportunity to part some people from their money and took it. An outside investor is sharing shares they already have, or short-selling shares with the promise to buy them back later. That's wildly different from issuing new shares when you have inside information which prices them at zero.
  - lotsofpulp 6y ago
    > Looks to me like the executives saw an opportunity to part some people from their money and took it. AKA business. > That's wildly different from issuing new shares when you have inside information which prices them at zero. That’s wildly different from Hertz’s bankruptcy being public information. If people want to gamble on unlikely outcomes, that’s their business.
    - foerbert 6y ago
      That description also fits straight up robbery. I don't think it's a particularly meaningful statement in this situation.
      - lotsofpulp 6y ago
        Yes, that’s my point. It’s a meaningless statement in a discussion about fully informed buyers and sellers engaging in voluntary transactions.
      - brewdad 6y ago
        People were buying a lottery ticket. The difference in this case is that there were no jackpot winners.
        zaphar 6y ago
        It's not uncommon for actual lotteries to have no jackpot winners in a given timeperiod. That's why the pot size keeps growing. At some point the hype from how many big the potential but unlikely payout got increases the share of people buying the ticket. The different between the Hertz stock and a lottery ticket is that eventually the Lottery will payout. But with a stock like Hertz there is no such guarantee.
ISL 6y ago
Zero shareholder value was the overwhelmingly likely outcome, but not completely certain. (If Hertz magically recovered from bankruptcy, however unlikely, the payoff might have been >1000%). The prospectus clearly stated that there was negligible likelihood of return. On the flip side, from the creditor's perspective: "We loaned you a bunch of money, you can't pay it back, and there are some people who would like to buy shares in your company today? How can you not sell it to them?" The unsecured creditors in this situation don't appear to be investment banks, they appear to be auto repair companies, perhaps exposed to counterparty risks from transacting with Hertz[1]. Your question brings to mind part of an exchange from one of my favorite pieces of financial cinema [2]: SAM ROGERS: And you are selling something you know has no value. JOHN TULD: (cuts him off cold) We are selling to willing buyers at the current fair market price, so that WE may survive, Sam. SAM ROGERS: You'll never sell a thing to any one of them again. JOHN TULD: I understand. SAM ROGERS: Do you? JOHN TULD: Do you!!! This is it, Sam, this is it! [1] https://www.repairerdrivennews.com/2020/05/25/hertz-will-continue-operating-paying-new-bills-after-chapter-11-bankruptcy/ https://www.repairerdrivennews.com/2020/05/25/hertz-will-con... [2] https://www.youtube.com/watch?v=7prnY2FOxns https://www.youtube.com/watch?v=7prnY2FOxns
- lotsofpulp 6y ago
  Even that exchange is not analogous, since Hertz told everyone what they were selling is worthless.
- brandmeyer 6y ago
  No. No! I reject this rationale. Just because its in the domain of finance and business doesn't make it ethical. For example, you can't just disclose your way into arbitrary medical experiments on people. Regardless of how you rationalize the principles, it will end up exploiting the most vulnerable citizens. While I readily admit that the law does not forbid all forms of unethical behavior, I do believe that it should forbid blatantly exploitative acts. Like this one.
  - ISL 6y ago
    I understand the sentiment and might have had difficulty approving the sale if I were on the Hertz board of directors, however, there is a chance, however slim, that the dumb money knows something the smart money doesn't. This is much more-readily seen post-GameStop. The AMC theater chain, mid-hoopla, managed to discharge much of its debt. The gamblers at home literally saved a major US business from dire financial straits. Some of them got paid for it, too. The company is in an undeniably better position today, as are any of the retail investors who bought and held. (The share price is up 10% today, too. The world is a complicated place.) On the scale of exploitative acts, enabling informed gamblers to play chicken with the Bankruptcy Bus, while it may be exploitative at some level, may not be as egregious as other exploitation (Casinos? State lotteries?) that we tolerate every day.
H8crilA 6y ago
This is kind of the core principle of capitalism, informed consent. Also the primary objective of the SEC. Hertz has issued a regulatory filing that basically says "lol this is worthless, but we can sell you some shares" and then sold some shares. Look up the filing, it's kind of hilarious. I've posted it on HN and it got popular, titled it jokingly as "Hertz Initial Bankruptcy Offering", the moderation has changed the title to the official name of the document.
dehrmann 6y ago
> Hertz should have known that zero shareholder value was a likely outcome. How was selling more stock in that situation legal? This disclosure helps: https://www.sec.gov/Archives/edgar/data/1657853/000110465920073132/tm2022223-1_424b5.htm#tRIFA https://www.sec.gov/Archives/edgar/data/1657853/000110465920... Since it went before the bankruptcy judge, they might have been obligated to bondholders to sell more shares.
pkaye 6y ago
I think that sale never went through. https://www.marketwatch.com/story/hertz-ends-plan-to-sell-stocks-2020-06-18 https://www.marketwatch.com/story/hertz-ends-plan-to-sell-st...
0xy 6y ago
Hertz in official filings: "Hey guys, this stock is most likely totally worthless" Meme stonk buyers: buys stock Hertz: "Hey guys, here's some new stock. Remember we disclosed that it's likely totally worthless" Meme stonk buyers: continues buying worthless stock Meme stonk buyers: "How could you do this to us?"
- joshuaissac 6y ago
  > Meme stonk buyers: "How could you do this to us?" Did this step actually happen? From what I understand, it was the SEC, not meme stock buyers, who disagreed with the sale.
- renewiltord 6y ago
  Actual last few lines are actually look like the following. Meme stonk buyers: Guys, look at this loss porn. I lost $2.5 mil on Hertz LMAO my trust fund is gone. Other meme stonk buyers: HAHAHA you fucking retard Third party worrywarts: How could we let this happen?
  - benibela 6y ago
    It was worth it for the internet points
addicted 6y ago
I mean, they were in bankruptcy court. Those arent secret proceedings. If someone still wants to buy their stock while they are in court loudly proclaiming their stock is worthless why would you make that illegal?
skybrian 6y ago
Under this argument, why should it be legal for anyone to sell Hertz stock? Should trade be halted? Or if other people can sell the stock, why not Hertz?
- lupire 6y ago
  Shares were available on the old stock (discounted for pieces of bankruptucy liquidations) Hertz tried to create and sell new shares that would never be worth anything.
  - avalys 6y ago
    This is incorrect. The new shares were of the same class as the existing publicly traded shares.
dragontamer 6y ago
> How was selling more stock in that situation legal? They asked the bankruptcy court, and the bankruptcy court's job is to maximize value for the bondholders. Turns out that selling worthless stock (for money) is really good for the bankruptcy proceedings (getting maybe 70% of the money back instead of 60%). Then the SEC came in (whose job is to protect retail investors), and the SEC told them to knock-it-off. Different jobs for different courts and bureaucracies. Ultimately, the SEC determined it was illegal for them to proceed. But I guess the SEC assumed the bankruptcy courts would do the right thing. When that clearly wasn't the case, the SEC stepped in (a bit late: after $29 million was raised. But better late than never)
- dalbasal 6y ago
  That's very well explained. I think that trips people up, in stories like this, is that the SEC has a pause button but not a reverse button. What's done is done, for the most part.
- thaumasiotes 6y ago
  What I don't understand is that Hertz specifically wanted to sell an amount of shares that wouldn't raise enough money to pay off their debts. Their prospectus noted that shares sold would automatically become worthless unless their debt was paid off, which they didn't anticipate. But why not try? What if they sold so much stock that the bondholders could just be paid back? Why do the stock sale specifically planning for failure? Why include a limit that guarantees failure even if you would have otherwise succeeded?
  - dragontamer 6y ago
    Many would suggest that such an action you propose is fundamentally immoral. Lets say a hypothetical company is overall $-4 Billion in debt (total assets - liabilities). You successfully raise $5 Billion from some means. Now you're in a position where you sold $5 Billion worth of shares on a company that (by all fair evaluations) is only worth $1 Billion after the capital raise.
    - 6y ago
vkou 6y ago
> How was selling more stock in that situation legal? Why should it not be? Consider the following situation: 1. Alice owns 5 shares of Hertz. 2. Hertz owns 5 shares of Hertz. 3. Bob is an ape. For some stupid reason, Bob wants to buy 5 shares of Hertz. Is it immoral or illegal for Alice to sell her 5 shares to Bob? If not, why should it be immoral or illegal for Hertz to do so? Especially if they are up front about their incredibly bleak financial prospective. Is the sale defrauding someone? Who is it defrauding? Bob? Bob wants to buy the stock anyways, because it's a meme stock - why does he care if it's Alice, or Hertz selling him that stock? If allowing Bob to buy stock is such a bad thing that we need to protect Bob from it, then the correct thing to do is for the stock to be delisted.
- sigstoat 6y ago
  and: if it is fine for Alice to sell those shares, what if Hertz is willing to sell them for less than Alice? Should Bob have to pay Alice's higher price for a worthless thing, to avoid some immorality happening?
- Spooky23 6y ago
  1. Alice owns three cartons of unfiltered cigarettes. They are harsh and kids don’t buy them. 2. RJ Reynolds owns many cartons of Camels. Reynolds creates a cartoon camel called Joe Camel, who is as recognizable to 6 year olds as Mickey Mouse. 3. Bob is a 11 year old. For some stupid reason, Bob wants to smoke Camels and be cool like Joe. Is it immoral for Reynolds to sell to an 11 year old? Is it immoral for Alice to sell her cigarettes to Bob?
  - vkou 6y ago
    It's immoral for Alice to sell cigarettes to a minor, and it is also immoral for Reynolds to do so, so the analogy doesn't work. Since, uh, nobody has an issue with regular stock holders selling their shares to other stock holders. If Bob is not 'sophisticated' enough to be allowed to buy shares of Hertz regardless of who is selling them, then sure, prevent him from buying. Delist the stock. Require you to be an accredited investor to buy shares of a company undergoing bankruptcy. These are all reasonable solutions to the problem. Stopping Hertz from selling shares... Is not. Because if Bob is an informed/sophisticated/accredited investor, then Hertz selling him shares isn't actually defrauding him.
fossuser 6y ago
There’s a good moneystuff on this, the sale was also stopped by the SEC even though it wasn’t really illegal (mostly just in poor taste). Hertz’s job in bankruptcy is to try and pay creditors, if a bunch of dummies want to give you money even though you tell them you’re bankrupt and their investment will likely be worth nothing then how is that Hertz’s fault? Arguably Hertz even has a responsibility to sell shares if they're able to raise money to pay creditors. The dummies are speculatively buying swings, or more likely just seeing the stock advertised as high traffic in Robinhood.
Lazare 6y ago
1) US securities laws are very focused on disclosure and filling out the correct forms. Hertz did say the stock was (likely) worthless when they filled out the correct form to sell some stock. 2) People were buying (and selling) Hertz stock every day, before, during, and after Hertz's brief offering. If it should be illegal for Hertz to sell the stock, why should it be legal for anyone else to sell the stock? (The obvious reason is "well, what if Hertz had information nobody else did?", but in this case, they didn't. And they were required to disclose that they didn't.) In a pretty real sense, the victims of Hertz selling stock is not the people who bought it (they would have done so regardless), but the other sellers who might have lost out on a sale (or more likely, made the sale, but for a fraction of a penny less than they otherwise would have done) to a sucker who ended up buying from Hertz instead. And it's hard to feel too sorry for people offloading worthless stock to suckers, no? (Of course, note that nobody who bought the stock from Hertz will have seen those disclosures. It was an at the money offering; the purchasers won't have any idea who they bought their shares from or how old those shares were. But again, US securities law is extremely focused on disclosure to the exclusion of all else...even if the disclosure won't be seen by anyone.)
- chii 6y ago
  > If it should be illegal for Hertz to sell the stock, why should it be legal for anyone else to sell the stock? Hertz wasn't selling existing stock, but were creating new stock. They cannot be equated to an existing shareholder selling his holdings.
ineedasername 6y ago
Hertz explicitly stated that shareholders were highly likely to get absolutely nothing. I think it's also highly obvious to even retail investors that this is an incredibly risky bet with potential for a total loss. I don't think there's a strong argument here that buyers didn't know what they were getting in to. Besides, how is this different than any other shareholder selling their stock, also knowing full well it is entirely likely to be worthless?
- PebblesRox 6y ago
  One difference is it increases the supply, no? With shareholders selling existing shares it's more of a zero sum game. I don't know if that's an important difference, but it has a different feel to it.
rurp 6y ago
If people are choosing to buy the stock, why does it matter if the seller is the company rather than anyone else in the world? The purchasers are getting the same deal. If it's perfectly fine for a purchaser to pay a random investor $2.58 for a share of Hertz, it should be fine for them to purchase the exact same share for $2.58 when the counter party happens to be Hertz. If Hertz had been dishonest or misleading about the situation then that would be a problem, but they were completely upfront about the risks.
krick 6y ago
I see zero problems with Hertz being allowed to do that. You either forbid stock markets, or you let people sell what other people want to buy. But in the hindsight, I don't really understand why Hertz wanted to do that. It's obviously good for bankruptcy court, that's clear. It might be good for WSB, for some independent speculators. But what does Hertz as a company gain from that? How can it benefit any of decision-makers? They are going bankrupt anyway, whatever they raise is not their money anymore. Surely they didn't hope selling stock would save them from bankruptcy? So why even bother doing something so sketchy?
rcurry 6y ago
> How was selling more stock in that situation legal? “We are selling to willing buyers at the current fair market price.” - Margin Call, 2011
centimeter 6y ago
Parting a fool from his money is a socially beneficial activity.

djbebs 6y ago

Why would it be illegal? Hertz was in bankruptcy because it couldnt pay its debts, a capital injection might have raised enough cash to pay off its debts and exit the bankruptcy proceedings. They disclosed the low likelyhood of such a thing happening but its not the law or the SECs job to make everyone take wise financial decisions.

xur17 6y ago
> Hertz was in bankruptcy because it couldnt pay its debts, a capital injection might have raised enough cash to pay off its debts and exit the bankruptcy proceedings. While I do agree that it shouldn't be illegal, wouldn't they know how much money they would raise, and hence be able to determine if the capital raise would provide sufficient capital?
- geoduck14 6y ago
  If they need to raise $1000, and you but $10 - no one knows if your investment is worthless until after no one buys the additional $990

dwohnitmok 6y ago

As usual, Matt Levine covered this pretty well in his newsletter: https://www.bloomberg.com/news/newsletters/2020-06-12/money-stuff-if-you-want-hertz-have-some-hertz https://www.bloomberg.com/news/newsletters/2020-06-12/money-... The relevant quote: > Really I can’t decide how to feel about this. On first principles, you should not sell a billion dollars of stock in a bankrupt company to small retail investors who just installed Robinhood on their phones a few months ago. On the other hand, people are definitely doing that anyway [emphasis original]; a notable feature of this weird pandemic market is exactly that hundreds of millions of dollars of stock in Hertz, which is bankrupt, are being sold to small retail investors every day. Hertz just wants permission to do some of that selling itself.

brandmeyer 6y ago
I like his argument. Its pretty reasonable in its principles. But it doesn't work in this situation. Hertz raised 10^7 dollars this way when they were 10^9 in the hole. Looks to me like the executives saw an opportunity to part some people from their money and took it. An outside investor is sharing shares they already have, or short-selling shares with the promise to buy them back later. That's wildly different from issuing new shares when you have inside information which prices them at zero.
- lotsofpulp 6y ago
  > Looks to me like the executives saw an opportunity to part some people from their money and took it. AKA business. > That's wildly different from issuing new shares when you have inside information which prices them at zero. That’s wildly different from Hertz’s bankruptcy being public information. If people want to gamble on unlikely outcomes, that’s their business.
  - foerbert 6y ago
    That description also fits straight up robbery. I don't think it's a particularly meaningful statement in this situation.
    - lotsofpulp 6y ago
      Yes, that’s my point. It’s a meaningless statement in a discussion about fully informed buyers and sellers engaging in voluntary transactions.
    - brewdad 6y ago
      People were buying a lottery ticket. The difference in this case is that there were no jackpot winners.
      - zaphar 6y ago
        It's not uncommon for actual lotteries to have no jackpot winners in a given timeperiod. That's why the pot size keeps growing. At some point the hype from how many big the potential but unlikely payout got increases the share of people buying the ticket. The different between the Hertz stock and a lottery ticket is that eventually the Lottery will payout. But with a stock like Hertz there is no such guarantee.

ISL 6y ago

Zero shareholder value was the overwhelmingly likely outcome, but not completely certain. (If Hertz magically recovered from bankruptcy, however unlikely, the payoff might have been >1000%). The prospectus clearly stated that there was negligible likelihood of return. On the flip side, from the creditor's perspective: "We loaned you a bunch of money, you can't pay it back, and there are some people who would like to buy shares in your company today? How can you not sell it to them?" The unsecured creditors in this situation don't appear to be investment banks, they appear to be auto repair companies, perhaps exposed to counterparty risks from transacting with Hertz[1]. Your question brings to mind part of an exchange from one of my favorite pieces of financial cinema [2]: SAM ROGERS: And you are selling something you know has no value. JOHN TULD: (cuts him off cold) We are selling to willing buyers at the current fair market price, so that WE may survive, Sam. SAM ROGERS: You'll never sell a thing to any one of them again. JOHN TULD: I understand. SAM ROGERS: Do you? JOHN TULD: Do you!!! This is it, Sam, this is it! [1] https://www.repairerdrivennews.com/2020/05/25/hertz-will-continue-operating-paying-new-bills-after-chapter-11-bankruptcy/ https://www.repairerdrivennews.com/2020/05/25/hertz-will-con... [2] https://www.youtube.com/watch?v=7prnY2FOxns https://www.youtube.com/watch?v=7prnY2FOxns

lotsofpulp 6y ago
Even that exchange is not analogous, since Hertz told everyone what they were selling is worthless.
brandmeyer 6y ago
No. No! I reject this rationale. Just because its in the domain of finance and business doesn't make it ethical. For example, you can't just disclose your way into arbitrary medical experiments on people. Regardless of how you rationalize the principles, it will end up exploiting the most vulnerable citizens. While I readily admit that the law does not forbid all forms of unethical behavior, I do believe that it should forbid blatantly exploitative acts. Like this one.
- ISL 6y ago
  I understand the sentiment and might have had difficulty approving the sale if I were on the Hertz board of directors, however, there is a chance, however slim, that the dumb money knows something the smart money doesn't. This is much more-readily seen post-GameStop. The AMC theater chain, mid-hoopla, managed to discharge much of its debt. The gamblers at home literally saved a major US business from dire financial straits. Some of them got paid for it, too. The company is in an undeniably better position today, as are any of the retail investors who bought and held. (The share price is up 10% today, too. The world is a complicated place.) On the scale of exploitative acts, enabling informed gamblers to play chicken with the Bankruptcy Bus, while it may be exploitative at some level, may not be as egregious as other exploitation (Casinos? State lotteries?) that we tolerate every day.

H8crilA 6y ago

This is kind of the core principle of capitalism, informed consent. Also the primary objective of the SEC. Hertz has issued a regulatory filing that basically says "lol this is worthless, but we can sell you some shares" and then sold some shares. Look up the filing, it's kind of hilarious. I've posted it on HN and it got popular, titled it jokingly as "Hertz Initial Bankruptcy Offering", the moderation has changed the title to the official name of the document.

dehrmann 6y ago

> Hertz should have known that zero shareholder value was a likely outcome. How was selling more stock in that situation legal? This disclosure helps: https://www.sec.gov/Archives/edgar/data/1657853/000110465920073132/tm2022223-1_424b5.htm#tRIFA https://www.sec.gov/Archives/edgar/data/1657853/000110465920... Since it went before the bankruptcy judge, they might have been obligated to bondholders to sell more shares.

pkaye 6y ago

I think that sale never went through. https://www.marketwatch.com/story/hertz-ends-plan-to-sell-stocks-2020-06-18 https://www.marketwatch.com/story/hertz-ends-plan-to-sell-st...

0xy 6y ago

Hertz in official filings: "Hey guys, this stock is most likely totally worthless" Meme stonk buyers: buys stock Hertz: "Hey guys, here's some new stock. Remember we disclosed that it's likely totally worthless" Meme stonk buyers: continues buying worthless stock Meme stonk buyers: "How could you do this to us?"

joshuaissac 6y ago
> Meme stonk buyers: "How could you do this to us?" Did this step actually happen? From what I understand, it was the SEC, not meme stock buyers, who disagreed with the sale.
renewiltord 6y ago
Actual last few lines are actually look like the following. Meme stonk buyers: Guys, look at this loss porn. I lost $2.5 mil on Hertz LMAO my trust fund is gone. Other meme stonk buyers: HAHAHA you fucking retard Third party worrywarts: How could we let this happen?
- benibela 6y ago
  It was worth it for the internet points

addicted 6y ago

I mean, they were in bankruptcy court. Those arent secret proceedings. If someone still wants to buy their stock while they are in court loudly proclaiming their stock is worthless why would you make that illegal?

skybrian 6y ago

Under this argument, why should it be legal for anyone to sell Hertz stock? Should trade be halted? Or if other people can sell the stock, why not Hertz?

lupire 6y ago
Shares were available on the old stock (discounted for pieces of bankruptucy liquidations) Hertz tried to create and sell new shares that would never be worth anything.
- avalys 6y ago
  This is incorrect. The new shares were of the same class as the existing publicly traded shares.

dragontamer 6y ago

> How was selling more stock in that situation legal? They asked the bankruptcy court, and the bankruptcy court's job is to maximize value for the bondholders. Turns out that selling worthless stock (for money) is really good for the bankruptcy proceedings (getting maybe 70% of the money back instead of 60%). Then the SEC came in (whose job is to protect retail investors), and the SEC told them to knock-it-off. Different jobs for different courts and bureaucracies. Ultimately, the SEC determined it was illegal for them to proceed. But I guess the SEC assumed the bankruptcy courts would do the right thing. When that clearly wasn't the case, the SEC stepped in (a bit late: after $29 million was raised. But better late than never)

dalbasal 6y ago
That's very well explained. I think that trips people up, in stories like this, is that the SEC has a pause button but not a reverse button. What's done is done, for the most part.
thaumasiotes 6y ago
What I don't understand is that Hertz specifically wanted to sell an amount of shares that wouldn't raise enough money to pay off their debts. Their prospectus noted that shares sold would automatically become worthless unless their debt was paid off, which they didn't anticipate. But why not try? What if they sold so much stock that the bondholders could just be paid back? Why do the stock sale specifically planning for failure? Why include a limit that guarantees failure even if you would have otherwise succeeded?
- dragontamer 6y ago
  Many would suggest that such an action you propose is fundamentally immoral. Lets say a hypothetical company is overall $-4 Billion in debt (total assets - liabilities). You successfully raise $5 Billion from some means. Now you're in a position where you sold $5 Billion worth of shares on a company that (by all fair evaluations) is only worth $1 Billion after the capital raise.
  - 6y ago

vkou 6y ago

> How was selling more stock in that situation legal? Why should it not be? Consider the following situation: 1. Alice owns 5 shares of Hertz. 2. Hertz owns 5 shares of Hertz. 3. Bob is an ape. For some stupid reason, Bob wants to buy 5 shares of Hertz. Is it immoral or illegal for Alice to sell her 5 shares to Bob? If not, why should it be immoral or illegal for Hertz to do so? Especially if they are up front about their incredibly bleak financial prospective. Is the sale defrauding someone? Who is it defrauding? Bob? Bob wants to buy the stock anyways, because it's a meme stock - why does he care if it's Alice, or Hertz selling him that stock? If allowing Bob to buy stock is such a bad thing that we need to protect Bob from it, then the correct thing to do is for the stock to be delisted.

sigstoat 6y ago
and: if it is fine for Alice to sell those shares, what if Hertz is willing to sell them for less than Alice? Should Bob have to pay Alice's higher price for a worthless thing, to avoid some immorality happening?
Spooky23 6y ago
1. Alice owns three cartons of unfiltered cigarettes. They are harsh and kids don’t buy them. 2. RJ Reynolds owns many cartons of Camels. Reynolds creates a cartoon camel called Joe Camel, who is as recognizable to 6 year olds as Mickey Mouse. 3. Bob is a 11 year old. For some stupid reason, Bob wants to smoke Camels and be cool like Joe. Is it immoral for Reynolds to sell to an 11 year old? Is it immoral for Alice to sell her cigarettes to Bob?
- vkou 6y ago
  It's immoral for Alice to sell cigarettes to a minor, and it is also immoral for Reynolds to do so, so the analogy doesn't work. Since, uh, nobody has an issue with regular stock holders selling their shares to other stock holders. If Bob is not 'sophisticated' enough to be allowed to buy shares of Hertz regardless of who is selling them, then sure, prevent him from buying. Delist the stock. Require you to be an accredited investor to buy shares of a company undergoing bankruptcy. These are all reasonable solutions to the problem. Stopping Hertz from selling shares... Is not. Because if Bob is an informed/sophisticated/accredited investor, then Hertz selling him shares isn't actually defrauding him.

fossuser 6y ago

There’s a good moneystuff on this, the sale was also stopped by the SEC even though it wasn’t really illegal (mostly just in poor taste). Hertz’s job in bankruptcy is to try and pay creditors, if a bunch of dummies want to give you money even though you tell them you’re bankrupt and their investment will likely be worth nothing then how is that Hertz’s fault? Arguably Hertz even has a responsibility to sell shares if they're able to raise money to pay creditors. The dummies are speculatively buying swings, or more likely just seeing the stock advertised as high traffic in Robinhood.

Lazare 6y ago

1) US securities laws are very focused on disclosure and filling out the correct forms. Hertz did say the stock was (likely) worthless when they filled out the correct form to sell some stock. 2) People were buying (and selling) Hertz stock every day, before, during, and after Hertz's brief offering. If it should be illegal for Hertz to sell the stock, why should it be legal for anyone else to sell the stock? (The obvious reason is "well, what if Hertz had information nobody else did?", but in this case, they didn't. And they were required to disclose that they didn't.) In a pretty real sense, the victims of Hertz selling stock is not the people who bought it (they would have done so regardless), but the other sellers who might have lost out on a sale (or more likely, made the sale, but for a fraction of a penny less than they otherwise would have done) to a sucker who ended up buying from Hertz instead. And it's hard to feel too sorry for people offloading worthless stock to suckers, no? (Of course, note that nobody who bought the stock from Hertz will have seen those disclosures. It was an at the money offering; the purchasers won't have any idea who they bought their shares from or how old those shares were. But again, US securities law is extremely focused on disclosure to the exclusion of all else...even if the disclosure won't be seen by anyone.)

chii 6y ago
> If it should be illegal for Hertz to sell the stock, why should it be legal for anyone else to sell the stock? Hertz wasn't selling existing stock, but were creating new stock. They cannot be equated to an existing shareholder selling his holdings.

ineedasername 6y ago

Hertz explicitly stated that shareholders were highly likely to get absolutely nothing. I think it's also highly obvious to even retail investors that this is an incredibly risky bet with potential for a total loss. I don't think there's a strong argument here that buyers didn't know what they were getting in to. Besides, how is this different than any other shareholder selling their stock, also knowing full well it is entirely likely to be worthless?

PebblesRox 6y ago
One difference is it increases the supply, no? With shareholders selling existing shares it's more of a zero sum game. I don't know if that's an important difference, but it has a different feel to it.

rurp 6y ago

If people are choosing to buy the stock, why does it matter if the seller is the company rather than anyone else in the world? The purchasers are getting the same deal. If it's perfectly fine for a purchaser to pay a random investor $2.58 for a share of Hertz, it should be fine for them to purchase the exact same share for $2.58 when the counter party happens to be Hertz. If Hertz had been dishonest or misleading about the situation then that would be a problem, but they were completely upfront about the risks.

krick 6y ago

I see zero problems with Hertz being allowed to do that. You either forbid stock markets, or you let people sell what other people want to buy. But in the hindsight, I don't really understand why Hertz wanted to do that. It's obviously good for bankruptcy court, that's clear. It might be good for WSB, for some independent speculators. But what does Hertz as a company gain from that? How can it benefit any of decision-makers? They are going bankrupt anyway, whatever they raise is not their money anymore. Surely they didn't hope selling stock would save them from bankruptcy? So why even bother doing something so sketchy?

rcurry 6y ago

> How was selling more stock in that situation legal? “We are selling to willing buyers at the current fair market price.” - Margin Call, 2011

centimeter 6y ago

Parting a fool from his money is a socially beneficial activity.