by Peter Capacchione
On January 10, 2014, FINRA reissued an Investor Alert titled Marijuana Stock Scams, in response to the rollout of new state laws regarding the legalization of marijuana for both medical and recreational purposes. With the introduction of such laws, more and more investors have been looking to profit by investing in marijuana-related companies. While traditionally thinly traded, marijuana-related stocks have become more and more volatile, especially with increased coverage of recent legalization efforts and successes. Price volatility creates an opportunity for investors to buy low and see huge growth, but with chance also comes risk—here, such volatile stocks carry the risk of burning investors, while also opening the doors to hopeful scammers wishing to defraud eager investors.
FINRA first advises investors on how to weed out potential stock scams. Oftentimes, investment scammers send out alluring sales pitches through faxes, e-mails, text messages, infomercials, tweets, or even blog posts. Such correspondence will typically attempt to entice investors with overly optimistic—and sometimes false—market data. If you have seen Scorcese’s The Wolf of Wall Street, just think of Leo suavely pitching penny stocks from a garage-turned-trading-floor. FINRA calls such ploys “pump and dump” routines, as the scammers will first pump up unwarranted demand for shares of marijuana-related companies, thanks to the willingness of investors that fall for the sales pitch. Following the pump, as share prices top off, the fraudsters sell off their shares, profiting while hooked investors are left in the dump.
In the InvestorAlert, FINRA provides a number of tips on how to avoid being duped by dealers of fraudulent stock scams. First off, investors should always ask why a stranger would be telling them about an incredible investment opportunity. Investors should also be weary of the source of information that indicates the potential for explosive growth—multiple in-house press releases and promotional information dispersed in a short timeframe should heighten suspicions. FINRA also warns that research should not simply be limited to the company. Instead, investors should also conduct research on corporate officers and major shareholders of any marijuana-related company. A search with the Federal Bureau of Prisons Inmate Locator can help investors learn whether company players or investors have been involved in narcotics crimes or financial fraud.
Furthermore, where a stock trades can indicate the legitimacy of a stock—over-the-counter trading platforms do not typically enforce minimum standards on company shares. Additionally, who sells a stock can also reveal a scam; a legitimate broker for a stock must be properly licensed, and is usually part of a firm that must be registered with FINRA, the SEC, and state regulators. Before relying on any sales pitch for a marijuana stock, investors should take advantage of BrokerCheck. Finally, in addition to reading and verifying the information found in any marijuana-related company’s SEC filings, investors should raise an eyebrow at any company that has changed its name or its business focus.