What’s that old saw about making sure something passes the smell test before putting your money on the line? So if you sense a little odd aroma around a text or email that touts the next hot stock, make sure to hold onto your checkbook.
That’s right: The Financial Industry Regulatory Authority issued a warning to investors about marijuana stock scams.
I suppose if people think they can make fast cash on gold or oil wells or cybersecurity or clean energy or mineral exploration interests in Outer Mongolia, well, why shouldn’t folks smile at the idea of a making a quick buck by getting deep into weed?
“There are scammers out there that will change their pitches on a dime to cash in on new trends,” said Gerri Walsh, senior vice president for FINRA investor education in Washington, D.C. “The pitches change with the news cycle, honestly.”
General warning
FINRA issued a general warning but would not give specific company names or suspected scammers.
With recent legal changes in place, everyday investors need to realize that the con artists are out there pitching potentially fraudulent marijuana-related companies, Walsh said. That’s likely the case because medical marijuana is legal in many states, and we’re hearing more about such businesses in general.
FINRA, the largest non-governmental regulator of securities firms, put out its alert after monitoring message boards and other spots online for anyone hyping the next big thing to pop for investors.
One company that moved into the medical cannabis space, according to FINRA, issued more than 30 news releases just in the first half of 2013. And no surprise, the releases put a rose-colored high on all sorts of financial prospects.
But the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.
“Sometimes, the press releases don’t match up to the filing that are readily available through the Security and Exchange Commission’s EDGAR system,” Walsh said.
Here’s a thought: If a stock is really “poised to light up the charts,” why is somebody sending you an email to share this so-called discovery with you?
Many times these hot stock tips may involve a “thinly traded” stock that is held by someone else. If new investors buy the pitch and quickly drive up the price of that limited amount of stock, the scammers can make a quick profit by selling out at the peak of the frenzy.
Behind bars?
Another issue: Is the CEO a convict or behind bars?
Did you ever think of trying to go online to check criminal records? FINRA’s alert noted that it may be wise to check the Federal Bureau of Prisons Inmate Locator to figure out who is pitching this deal. The locator can determine whether the person sending the solicitation has served time in federal prison.
FINRA suggests searching names of key corporate officials or major stakeholders, as well as the company itself.
The CEO of one thinly traded, yet heavily touted company that purports to be in the medical marijuana business spent nine years in prison for operating one of the largest drug-smuggling operations in U.S. history, FINRA noted.
The former CEO of another similar company had been indicted for his role in a multimillion dollar mortgage-based Ponzi scheme.
“With fraud generally, we see people getting caught up in the moment,” Walsh said. “Fraudsters are elaborate experts when it comes to persuasion.”
Susan Tompor, the personal finance columnist for the Detroit Free Press, can be reached at stompor@freepress.com.