Wet Seal Shares Shake Off Word of SEC Probe

Updated from 9:53 a.m. EST

Investors betting on a rebound at Wet Seal (WTSLA) forged ahead Tuesday, despite news that government regulators are informally investigating the company.

Shares of the ailing teen-clothing chain were recently up 15 cents, or 6.8%, to $2.37, reversing a 23% premarket slide after the company announced the Securities and Exchange Commission launched a probe of second-quarter earnings results from 2004.

The shift back into positive territory is a testament not only to the volatility of the stock, but also to the blind faith that some investors have in the underlying value of the company, based on financial support coming from a giant hedge fund, Steve Cohen's S.A.C. Capital Management.

"If you're not S.A.C., and you're an equity investor here, you're just flying blind here," said Kevin Starke, an analyst with Imperial Capital LLC. "The problem for anyone else involved in the situation is that we don't have the access to the financials that S.A.C. has, so we don't know what the relative value of all these moving parts are."

Shares of Wet Seal have added 50% since S.A.C.'s $40 million investment in the company rescued it from the threat of bankruptcy in November. Those gains come despite a 77% collapse in the stock price for all of 2004, thanks to spiraling sales after the brand fell out of favor with finicky teen shoppers.

Regulators also have requested documents related to the recent sale of the company's stock by La Senza, a Canadian lingerie retailer whose chairman and chief executive, Irv Teitelbaum, stepped down as Wet Seal's chairman in August. La Senza announced in July that it would sell its 3.1 million shares of Wet Seal.

This development followed a filing to the SEC last week that disclosed a class-action suit brought against Wet Seal in the U.S. District Court for the Central District of California. The complaint alleges the company violated federal securities laws by misleading investors about its prospects for stemming losses and returning to profitability after its disastrous year.

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