FINRA Smoking Out Marijuana Stock Scams
Just say no—that’s what the Financial Industry Regulatory Authority (FINRA) is advising potential investors in a new alert warning about a medical marijuana stock scam.
“We are concerned that some of these touts promise high returns and potential growth for companies that appear to have very little business prospects,” Gerri Walsh, FINRA vice president for investor education, told CorpCounsel.com.
High returns? Is that a pun?
“We take fraud in any form very seriously,” Walsh replied sternly, then added with a chuckle: “But some of the reporters are having fun with this.” (Really? Shame on them . . .)
FINRA, as the largest independent regulator for all securities firms doing business in the United States, uses scams like this one to alert investors about stock fraud in general.
“What we do is warn of troubling trends or new products that might be confusing to investors,” Walsh explained.
The alert states that medical marijuana is legal in 20 states, while recreational use is legal in two (Colorado and Washington). As a result “the cannabis business has been getting a lot of attention—including the attention of scammers,” it adds.
Walsh said FINRA’s fraud detectors monitor faxes, emails, test messages, webinars, infomercials, tweets, blogs, and other promotions for too-good-to-be-true promises of returns. One such promotion claimed the stock “could double its price SOON.”
But this particular company's financial records showed only losses, and it was just beginning to formulate a business plan, the agency said.
The FINRA alert explains that con artists are really promoting “pump and dump” stock schemes. That’s where they sell off their own shares, taking the profits and allowing the investors’ stock value to go up in smoke. (Oops. Sorry.)
The alert also contains several tips to help investors spot and avoid potential scams.
One is looking at a company’s financial disclosures filed with the Securities and Exchange Commission “to see if their balance sheets align with their touts—especially with smaller, newer companies,” Walsh explained.
“The most important thing for investors to do is to step back from any hype they hear and do their own research,” Walsh said.