By Ali Levenson
On December 16, 2014, the U.S. Securities and Exchange Commission (SEC) suspended trading of securities of Las Vegas electronic cigarette company American Heritage International, Inc. (“AHII”). The SEC cited to concerns regarding potentially manipulative activity related to AHII common stock. The “potentially manipulative activity” was prompted by a series of unsolicited “robo” calls regarding the company’s common stock. Traditionally, these types of unsolicited calls have been associated with “pump-and-dump” schemes.
Pump-and-dump schemes lure investors with aggressive and optimistic statements about the company through promotions intended to create demand for the shares, causing share price and volume to spike. Once share price and volume are high, those behind the scam sell off their shares at a profit and stop promoting the stock, causing share prices to fall, leaving those who invested with near-worthless stock. AHII, however, released a press release in response to the temporary suspension stating the company had nothing to do with the calls, that management did not sell any of its shares, and that it intends to fully cooperate with the SEC investigation.
The AHII temporary suspension comes as the newest mechanism for “pump and dumps” schemes, which have become increasingly used to induce investments in “hot” stocks. In January 2014, the SEC similarly temporarily suspended trading for numerous marijuana-related companies, and as a result, the Financial Industry Regulatory Authority (FINRA) issued two Investor Alerts to warn the public about the increased potential for these types of investment scams. Pump-and-dump scammers usually generate hype around a “hot” or popular topic. Recent scams include marijuana stocks, e-cigarette companies, and even companies purporting to be developing Ebola treatments.
As a result of fraudsters increasingly using prominently featured news stories to turn a profit, both FINRA and the SEC’s Office of Investor Education and Advocacy publish Investor Alerts to equip investors with tools to aid in avoiding the scams. The alerts list tips for investors to avoid these types of scams. FINRA offers two free online tools to educate investors on spotting and avoiding investment scams, the Scam Meter and Risk Meter. The Scam Meter asks investors questions regarding the nature of the investment and generates “red flags” to help identify potential scams. The Risk Meter compares investors’ responses to two research studies that examined the differences between known investment fraud victims and non-victims. Based on the investors’ responses to the questions, the tool places the investor in a colored “zone” (red, yellow, or green) indicating the degree to which the investor’s responses correspond with known instances of investment fraud. These two tools can provide investors unbiased insight when determining whether any investment opportunity sounds too good to be true.
Education and research seem to be the best defense against falling victim to these types of investment fraud schemes. By reading SEC and FINRA alerts and by using FINRA’s online tools, investors can be more confident in the quality of their investment choices and be less likely to fall victim to fraudsters using the latest news story to generate hype and fund scams.