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Hertz Suspends Sale of ‘Worthless’ Stock Amid SEC Scrutiny

David Welch

(Bloomberg) -- Hertz Global Holdings Inc. suspended plans to raise cash by selling new shares that the bankrupt car renter described as potentially “worthless” after its proposal failed to pass muster with U.S. regulators.

The company halted sales while it deals with issues brought up by Securities and Exchange Commission officials, according to a filing. The stock, whose trading had been halted earlier in the day, rose 5 cents to $2 Wednesday, while its bonds tumbled.

The action puts the brakes at least temporarily on the sale from which the company sought to raise as much as $500 million. The extra scrutiny comes amid a mania, especially among individual investors, for shares of bankrupt and near-bankrupt companies. The enthusiasm has baffled professional traders because common shares typically get canceled at the end of the court process, leaving equity owners empty-handed.

The sale was “promptly suspended pending further understanding of the nature and timing of the staff’s review,” Hertz said in its filing. The company said it’s not currently offering shares and that its advisers have been in regular contact with the SEC. A Hertz representative declined to comment.

Hertz warned at least half a dozen times in its offering that would-be buyers could be wiped out. The company had said stockholders wouldn’t get anything from its bankruptcy plan unless those with more senior claims, including bondholders, are paid in full. The most junior bonds alone have seen more than $2 billion of value evaporate, enough to erase the shares several times over.

“We have let the company know that we have comments on their disclosure,” SEC Chairman Jay Clayton said in a CNBC interview Wednesday. “In most cases when you let a company know that the SEC has comments on their disclosure, they do not go forward until those comments are resolved.”

While the SEC generally lets companies sell shares if their disclosures are robust, the regulator probably wants to take a closer look because of the unusual nature and risks of Hertz’s offering, said Thomas Gorman, a partner with law firm Dorsey Whitney and a former senior counsel at the agency.

“On one side of the line is, if you disclose everything then you can sell whatever you want,” Gorman said. “On the other side of the divide is, we have substantive problems with what you’re selling and the offering is so seriously flawed that it shouldn’t go out. I think they are looking at this and saying this is very troubling.”

Bonds Slump

Hertz’s most actively traded debt, $800 million of 5.5% notes due 2024, slid 4.75 cents on the dollar in New York to trade at 38 cents. The notes were among the biggest decliners in the high-yield market Wednesday.

Hertz asked for the sale after a nearly tenfold increase in its stock from 56 cents on May 26 to $5.53 on June 8. In its earliest version, the plan called for raising up to $1 billion, a sum that was scaled back as the share price receded. The company reasoned that an equity sale would raise money at less cost and with fewer restrictions than a traditional bankruptcy loan.

The idea won approval from a bankruptcy judge last week during a hearing in which an SEC attorney said the commission would be reviewing the proposal. Hertz said it wanted to begin selling shares by June 15 to avoid missing the opportunity presented by the unusual stock rally.

(Updates with comments from lawyer starting in the sixth paragraph.)

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