AIG Warrant Terms Still Befuddling

Updated to clarify information on "due bills" segment.

NEW YORK ( TheStreet) -- While American International Group's ( AIG) plans to pay back the U.S. government for its bailout may be good for taxpayers, some everyday investors may have gotten burned.

Some ordinary investors were hurt by the sharp changes -- or apparent changes -- in AIG's share price over the past few weeks as confusion set in over the nature of price movements and the issuance of a special dividend.

The investors' tale begins on Jan. 6, when AIG said it would issue 75 million warrants to purchase common equity at $45 per share, in the form of a special dividend. Each warrant would represent 0.54 shares of common stock.

AIG's press release says the warrants would be distributed on Jan. 19, to shareholders of record as of Jan. 13.

It wasn't entirely clear, though, whether an investor would need to have owned stock earlier, perhaps by the close of business on Jan. 10, to provides enough time for the trades to settle. This is known as the "must own" date by dividend-oriented investors. This information was tucked under a heading about taxes in a regulatory filing.

"Holders of AIG Common Stock who sell shares of AIG Common Stock before January 11, 2011 will not be record holders of such shares on the Record Date," AIG said in an 8-K report with the Securities and Exchange Commission on Jan. 7.

Covestor CIO Raphael Mennicken explains that "being on the record implies that the trade has settled (normally three days after the trade)."

However, another part of the warrant term stipulates that AIG shares would have "due bills" attached between the time of the warrant issuance and the time the stock began trading "ex-dividend." As a result, investors who bought the shares between Jan. 10 and Jan. 19 would be guaranteed delivery of the attached warrants -- as long as they still held the stock.

John Liu, president and CEO of online brokerage Firstrade explains, "You never have to own 'for a period of time' to qualify for a warrant or dividend. The key is that the first date of Jan 13 is the trade date, and since stocks settle after T+3, add in the MLK holiday, the 19th will be the day when the stock settles."

Some investors who owned AIG from Jan. 10 through now were puzzled by the lack of a deposit in their online brokerage accounts. Scottrade spokeswoman Carrie Trent explains that investors won't get the deposit until the The Depository Trust Company, a government-sanctioned clearing and settlement authority, pays out the positions to brokers.

"Scottrade will not place those shares in the customer account until we are paid, so to speak," says Trent.

Such nuances appear to have left many small retail investors confused, to say the least. And anyone who exited his position expecting to get rid of the stock and keep the warrants was out of luck.

Message boards have been rife with questions the past few days, as panicked investors awaited warrants that never came. One Yahoo! Finance member whose user name is "raymond_hui888" posted a note on Thursday asking "pls pls I get the warrant or no ?." Calling the terms of the dividend issuance "very confusing," he asked fellow users whether he would get the warrants under four different scenarios: Having purchased the stock on or before Jan. 13, after Jan. 13, on Jan. 19 or "today."

On Friday, another user named "GUSPENTOUP" said he had purchased 2,000 AIG shares on the 19th, asking: "Warrants or not? If yes, how many? Thanks."

Confusion was exacerbated by sharp moves -- or apparent moves -- in AIG's share price recently, as Wall Street prepared for the warrant announcement, then acted on it.

AIG's share price started to become "linked" to the price of the warrant as far back as Sept. 30, when AIG announced its recapitalization plan. Analysts began speculating over the strike price of the warrants, and AIG's common share price began to reflect deeper value.

Shares flew up from below $40 on Sept. 30 to a pinnacle of $62.87 the day after management outlined terms of the issuance. Since then, though, the stock declined, to close just over $51 on Wednesday when the warrants were issued.

Additionally, while the warrants were not to be issued until Jan. 19, they began trading on Jan. 13 -- under the symbol "AIG WS," on the New York Stock Exchange. Initial prices above $23 eventually drifted down to $15.50 the day the securities were issued. Because each warrant was worth less than 0.54 of a share, each represented $8.27 in additional value to each share of common stock.

As a result, AIG's closing share price of $51.02 on Wednesday was really $42.75. The stock rose as much as 7.6% on Thursday -- but, nominally, only reached $46 -- leaving some investors scratching their heads.

As Wells Fargo equity analyst John Hall put it in a note on Jan. 7, "once this all occurs, AIG common shares will no longer be a bundled security ... and we expect the shares to trade more on the basis of the underlying fundamental value of the company's insurance businesses."

He values AIG at just $20 to $30 per share, though UBS analyst Andrew Kligerman believes the stock might be worth $42 ex-dividend, but needs to "revisit" that estimate when all is said and done.

For some less sophisticated investors, the tricky language and complicated math didn't add up. They just wanted to know, in plain English, how to trade the stock.

One message board poster called "investpest" had another complaint: "Now I have to pay taxes," she posted, unsure of whether the dividend ought to be priced at the $62 trading level or the $43 trading level.

TheStreet reader John Van Wart inquired Wednesday evening whether he would receive the warrants, having been a "shareholder of record" on Jan. 13 who sold his stock the following day as the price declined. On Thursday, Van Wart realized that he wouldn't be getting the warrants after all.

"The communication from AIG was poorly written," said Van Wart. "Many people understood the requirement to be a shareholder of record as of 1-13-11, not the case."

AIG spokesman Mark Herr directed TheStreet to AIG's initial press release, which explained that shareholders of record as of Jan. 13 would receive so-called "due bills" on the 19th.

"Due bills are essentially an assignment from a seller of common stock to a buyer of the right to receive the dividend if the condition to the dividend is satisfied," says the release. "If the condition is not satisfied, the due bills will be immediately cancelled and no warrants will be issued."

Unfortunately, Van Wart had set up a trade against AIG shares using put options, believing that the stock would continue to decline in value after the warrants had been issued. Not only did he miss out on the warrants, but the put options tumbled as AIG shares climbed.

"Oh well, lesson learned," he concluded.

-- Written by Lauren Tara LaCapra in New York.

>To contact the writer of this article, click here: Lauren Tara LaCapra.

>To follow the writer on Twitter, go to

>To submit a news tip, send an email to:

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

More from Stocks

Steel Stocks Are Monday's Biggest Losers From Cooling China Trade Tensions

Steel Stocks Are Monday's Biggest Losers From Cooling China Trade Tensions

Tesla's $78,000 Model 3 Is a Bargain. Here's Why

Tesla's $78,000 Model 3 Is a Bargain. Here's Why

Is Tesla's Stock Set to Nearly Double to $500?

Is Tesla's Stock Set to Nearly Double to $500?

Dow Rises Sharply as U.S.-China Trade Tensions Thaw

Dow Rises Sharply as U.S.-China Trade Tensions Thaw

GE's $11.1 Billion Deal With Wabtec Should Have Warren Buffett Feeling Very Sad

GE's $11.1 Billion Deal With Wabtec Should Have Warren Buffett Feeling Very Sad