On August 1, 2007, BloggingStocks' Peter Cohan reported on Bally Total Fitness' decision to file for Chapter 11 bankruptcy protection. Now, almost two years -- and a second bankruptcy filing -- later, the company is set to emerge with senior lenders as the new majority shareholders.

The Wall Street Journal reports (subscription required) that "Under the plan, which requires court approval, secured lenders owed $242 million will get 94% of the reorganized company's equity. The rest will be used in part to pay noteholders and unsecured creditors, which will see a recovery of no more than 1.5%."

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and I seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

I first suggested selling short Bally Total Fitness, Inc. (Pink Sheets: BFTH) last November at $2.59. Why? Bally owed $512 million this year, was spending $7 million more cash than it was taking in, and I doubted that banks would lend it enough money to stay afloat. Back then my biggest concern for the short position was that hedge fund billionaire Stevie Cohen had placed a big bullish bet on Bally -- his SAC Capital Advisors owned 6.9% of the company. I figured he must know something that I didn't.

But on Thursday, Cohen's bet went bust as Bally filed for bankruptcy. According to its filing, "Under the prepackaged restructuring plan, there will be a reduction in the principal outstanding on Bally's existing senior subordinated notes by $150 million by exchanging all existing senior subordinated notes for a new class of notes, common equity and the right to participate in a $77.5 million rights offering."

SAC's wipe out provides a useful insight for investors -- even the most talented players make mistakes. It's just that they make more good calls than bad ones. Meanwhile, those who followed my suggestion to short Bally could cover their position on Monday at $0.31 a share, pocketing a 736% return -- not bad for eight month's work.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Bally.

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and I seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

Last November, I analyzed Bally Total Fitness (NYSE: BFT) and concluded it was a good candidate for a short sale. With its announcement today that it may file for bankruptcy, that looks like a good bet. If you had shorted BFT at $2.53 on November 6th and closed your position at today's $0.67, your return would have been 278%.

Back then I was concerned that hedge fund giant Stevie Cohen, who had bought shares of the company, knew something I did not -- his fund, SAC Capital Advisors, owned 6.9% of BFT. I guess Stevie can afford to lose money on BFT which had $827 million in outstanding debt as of March 14, and said that it may need to reorganize its operations under Chapter 11 if it's unable to restructure that debt. BFT also noted that it won't be able to file its Form 10-K for the fiscal year ended December 31 by today's deadline and it sees a loss from continuing operations for 2006.

I still don't know what Cohen saw in this investment but he still owns a 32,000 square foot mansion in Greenwich, CT -- and I don't.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Bally.

Battling a huge debt load and rising costs, Bally Total Fitness (NYSE:BFT)admitted that it would consider filing for Chapter 11 bankruptcy protection, in a note accompanying its SEC filing indicating that it would not be filing its 10-K for 2006 on schedule. Ouch. On March 12th, the company recognized the need to take an impairment charge of roughly 36 million dollars to reflect the declining returns of past leasehold improvements. The company is also battling past shareholders, as it faces class-action lawsuits stemming from the company's poor performance. The company has 45 million dollars in cash, compared with 827 million dollars in debt.