(FORTUNE Magazine) –

At the market close on Nov. 7, John Orrico, a money manager with $5 million invested in Guidant (GDT, $58), is scanning four flat-screen monitors and listening intently as CNBC's Maria Bartiromo recaps the latest news about the Indianapolis company. Earlier that day Guidant, the second-largest maker of cardiac devices in the U.S., announced it was suing Johnson & Johnson to force it to complete the merger the companies agreed on last year. It's been a lousy day for investors who hoped the companies would come to terms. Yet Orrico, who runs the $200 million Arbitrage Fund, a mutual fund that invests in stocks involved in mergers, seems unfazed. Orrico has used options to hedge his Guidant position. Moreover, he thinks Guidant is a good buy whether or not the acquisition goes through.

The devastating developments surrounding the $25.4 billion deal have roiled Wall Street and cost investors millions. Guidant's problems started in May when the New York Times reported that the company had kept doctors in the dark about a heart defibrillator that had repeatedly short-circuited. In June, Guidant said it was recalling tens of thousands of defibrillators and issued warnings on others. Since mid-October, when J&J started to balk at the takeover, Guidant stock has plummeted almost 22%, and many arbitrageurs who had bet on the deal have taken a beating. But now, some investors are saying that most of the bad news has been priced into the stock.

Guidant has several things going for it, they say. First, it has a robust pipeline, including a new drug-coated stent called Xience V. It also has a net cash position of $2.6 billion and only $355 million in debt, according to Fitch Ratings. And many experts hold that some of the regulatory issues Guidant is facing are common in the high-risk, litigious medical-device field. They believe Guidant can clean up its problems relatively quickly.

Still, betting on a jilted Guidant isn't for the faint of heart. The company recently announced that the Securities and Exchange Commission was investigating the timing of insider stock trades and its disclosures about problematic heart devices. The Food and Drug Administration is looking into Guidant for possible criminal misconduct regarding nondisclosure. And the Justice Department is looking at Guidant and medical-device makers Medtronic and St. Jude Medical for possible violations of anti-kickback statutes. Then there are investor class-action suits, not to mention a suit by the New York attorney general alleging fraud. Guidant has stated that it is cooperating with the investigations and that it doesn't comment on lawsuits.

The dollar impact of all this could run into the hundreds of millions--and that's what makes Guidant a gamble. But Orrico, for one, contends that Guidant CEO Ron Dollens is now bending over backward to cooperate with regulators and placate the public by making all Guidant's product-performance data transparent. "What they're doing is practically overkill," he says.

Meanwhile, there's still a chance that a deal will go through. The best outcome for Guidant investors would be a court ruling forcing J&J to complete the deal at the original price, $76 a share. Next best, the companies could agree on a lower price to avoid a court battle. That could happen, contrary to market expectations. Alex Arrow of Lazard Capital Markets, who upgraded Guidant to a buy on Nov. 4, wrote, "We believe odds still favor the deal being completed." And if the J&J deal falls apart, another company--Abbott's name has been mentioned--might swoop in to make a play for Guidant.