There is a very famous saying, that there are two sides to every trade. Last Monday we reported that Seneca Capital dumped millions of Dynegy Inc. (NYSE:DYN) shares’. Seneca can sell at will now, without the need to file with the SEC, since the firm holds less than 5% of shares outstanding. However, we expect the fund to sell off its entire stake. The situation is perciuliar, because in late January of 2011, Seneca stated:

“We believe Dynegy is worth $7.50-$8.50/share today with significant upside in a recovery…. Significant flexibility in debt structure and cost cutting provide levers to support equity value independent of commodity markets movements.”

Today the stock trades at $0.68 a share.

On Tuesday last week, The Wall Street Journal, had an interesting article about Seneca Capital, and the rationale for the sale. Further information can be found  at the following link.

The company is going through a complex bankruptcy. ValueWalk spoke to one of the lawyers representing the largest shareholder, Carl Icahn. He was not authorized to speak, but stated that Icahn has been very involved in the bankruptcy hearings, although this is hardly surprising.

The big news is that a big hedge fund scooped up a massive stake in the company. Litespeed Management LLC bought 11.8 million common shares, representing 9.6% of total outstanding shares. This gives the hedge fund one the largest stakes in the bankruptcy energy giant.

Litespeed Management LLC was founded by Jamie Zimmerman in October 2000. Litespeed is an event-driven hedge fund focusing on special situations, distressed securities, and bankruptcies. The firm has around $1 Billion in assets under management.

We do not have any reason for why the firm bought Dynergy shares. However, the fund as stated above, is focused on distressed securities and bankruptcy. Icahn likely sees value in the  the company’s coal power plants. The company has a total of 17 power plants, which still generate close to 12,000 megawatts. Some are natural gas powered, and if natural gas prices increase, it would be a positive for the company. The company is also deducing Capex in an attempt to lower costs.

The stock however, took a nosedive earlier this month, after a public examiner said that the transfer of coal assets to its parent company was fraudulent.

This is a very complicated situation, and there are legal issues as well, involving possible fraud. However, there could be value depending on various factors. Many are skeptical and think the common shares are worth closer to zero.

(The author has no position in the company)