Panic in the streets! Redback Networks Inc.'s biggest shareholder is going through tough times, opening the possibility that 9 million shares could be hitting the market.

No -- wait -- it's okay! Today, some of Wall Street's top sell-side analysts came out in defense of the stock, saying they're assured that hedge fund Creeden Keller & Partners isn't planning to immediately shovel those 9 million shares onto the market.

Redback investors fought back today. Redback's stock closed up 38 cents (4.4%) at $8.97 today after falling 3 percent yesterday.

How all this came about is an artifact of Redback's financial reorganization in 2003, which ended up resulting in a 1-for-73 stock split and handed nearly all the equity of the old Redback over to the debt holders (see Redback Closes a Chapter). Creeden runs a convertible arbitrage fund called Alta Partners, the idea being that the fund buys up bonds that can be exchanged for shares in a company's stock. As Redback went through its Chapter 11 bankruptcy throes in January 2004, Creeden bought up some of the router maker's bonds, winding up with a 16.6 percent stake, making Creeden the largest Redback shareholder.

It's a tough year for convertible arbitrage funds, though, so Creeden and others are winding down their funds, a move widely reported in the financial press earlier this year.

That led to questions of what would happen to Redback's stock, which came into Creeden via Alta Partners. Adding to the worry is the fact that Paul Giordano -- chairman of Redback's board and a managing director at Creeden -- has left Creeden, as verified by a quick phone call to the company.

In a note issued yesterday, analyst George Notter of Jefferies & Co. Inc. expressed concern about the Creeden situation after meeting with the hedge firm. Even though Creeden bought another 60,000 Redback shares in April, Notter pointed out the danger of having 9 million shares on the precipice.

"While there are many possibilities for the potential sale/distribution of the stock, we expect that there is a reasonable probability that the shares could come under some incremental selling pressure. At a minimum, we believe that the situation at Creeden bears watching for Redback investors," he wrote.

Once that came out, Creeden was quick to tell analysts that it's not ready to sell.

"Creeden Keller made it emphatically clear that they had no current intent to sell their RBAK stake and felt no external (or internal) pressure to do so," wrote Steve Kamman, an analyst with CIBC World Markets, in a note issued this morning. SG Cowen Securities chimed in with similar thoughts, noting that Redback's stock could outperform the market by 15 percent to 25 percent.

Creeden officials did not return a call for comment.

Redback is still losing money, but analysts are forecasting profits soon -- a penny per share in the December quarter, according to Thomson Financial (see Redback's SmartEdge Perks Up ).

— Craig Matsumoto, Senior Editor, Light Reading