Shares of UAL ( UALAQ), parent of United Airlines, the nation's second-largest, have doubled over the last two weeks -- even though they will be worthless when the carrier emerges from bankruptcy protection sometime in the next five months. And United insiders, employees and institutional traders have sold shares, leaving retail investors holding the bag.

A flurry of recent Securities and Exchange Commission filings reveals insiders and institutions have rushed for the exits, dumping shares before United finalizes its plan for reorganization. Once a plan is in place, United can emerge from bankruptcy and carry out plans to cancel the current equity shares, which trade over the counter, leaving current investors with nothing.

On page 21 of its annual report, filed on Tuesday, United warned investors of this possibility.

"We believe that UAL's presently outstanding equity securities will have no value, and it is expected that those securities will be canceled under any plan of reorganization that we propose. For this reason, we urge that caution be exercised with respect to existing and future investments in any UAL security," said the company, in the 10-K filing.

With shares soon to be worthless, United officers and directors have been selling. Since Nov. 1, Fred Brace, United's CFO, and Douglas Hacker, executive vice president of strategy, have sold more than 30,000 shares each, according to SEC filings. Filings show company directors Paul Tierney, James O'Connor, Douglas Ford, Sara Fields and Hazel O'Leary also have unwound positions in the last four months.

Insiders are cashing out and so are employees. State Street Bank, the trustee of the employee stock-ownership plan, reduced its position in the carrier's common stock by 82% over the last year. According to a 13-G filing on Feb. 12, the ESOP held 5.9 million shares, down from the 33.2 million listed in a similar filing Feb. 7, 2003.

United They Sell
With the cancellation of equity shares approaching, United management, employees and institutional investors have been reducing their positions
SEC Filing Date Common Shares Owned
State Street, ESOP Trustee
Feb. 7, 2003 33.2 million
Mar. 10, 2003 20.1 million
April 10, 2003 17.2 million
Aug. 8, 2003 11.2 million
Feb. 12, 2004 5.9 million
Susquehanna Investment Group
Feb. 10, 2003 4.4 million
Feb. 5, 2004 1.4 million
HMC Investors
June 11, 2003* 5 million
Dec. 31, 2003* 3.3 million
*Amendments to original 13-Gs filed on Feb. 26, 2004 Source: SEC filings, TSC research

Institutional investors also are fleeing. In the last year, Susquehanna Investment Group reduced its share position to 1.4 million from 4.4 million, according to a 13-G filing earlier in the month. And as of a Feb. 26 filing, HMC Investors had 3.3 million shares at the end of 2003, one-third less than it had in its June 11, 2003, filing.

If all these insiders are dumping worthless positions, why have the shares been rallying?

Much of the blame falls on individual investors, many of whom don't understand how bankruptcy works. Consequently, they think they're buying into a recovery story, eyeing the kinds of gains that AMR ( AMR), parent of American Airlines, saw in 2003, when its shares rose 1,000% from their March low to the end of the year, as the company's deep cost-cutting efforts put it on a path to profitability a year ahead of schedule.

"The stock is worthless and the rise is probably due to some short-covering and retail buyers," said Ray Neidl, airline analyst at Blaylock & Partners. "I don't think the retail investors understand bankruptcy, but most of the professional money managers do."

When a company files Chapter 11, it uses bankruptcy protection to pay off creditors and bondholders, filing a plan of reorganization that tells the court exactly how this will be accomplished. But because the bankrupt company's debts exceed its assets, it must pay the creditors and bondholders with a new currency, and that's equity shares in the postbankruptcy company.

In order to use new equity to pay off its debt, companies almost always cancel the old equity in the bankrupt company. Consider the case of US Airways ( UAIR). After filing for bankruptcy in August 2002, the carrier was delisted from the NYSE and traded as "UAWGQ" on the over-the-counter markets. But when US Airways emerged from bankruptcy in April 2003, over-the-counter shareholders got nothing and creditors received shares in the new company, which now trades as "UAIR" on the Nasdaq.

United shareholders face the same fate, which is soon approaching.

In the last two months, visibility surrounding United's reorganization plan has become clearer, driving interest in the stock. On Feb. 20, shares got a big boost after the carrier's request for a June 30 extension to file its reorganization plan was denied by the bankruptcy court. Instead, the court gave United a 30-day extension until April 7.

On the day of the ruling, shares closed above $2, gaining 19%. Nearly 11 million shares were traded, more than triple the usual daily volume. And in the two weeks since, shares and interest have been rising, peaking at $3.70 on Monday, which is higher than where the stock traded before United entered bankruptcy.

But with the plan of reorganization coming sometime in the next few months, shares have no place to go but down -- and fast -- leaving retail investors with potentially nothing. Tuesday afternoon, United stock was down 62 cents, or 17.4%, to $2.92. Some 13 million shares had been traded, four times its usual daily volume.

"It's going to plunge any day," said a hedge fund manager, who owns United bonds and said he expects a plan to come out before April 15. "And when the plan of reorganization comes out, it will say, the common stock gets canceled and the preferred stock gets canceled."