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Beware of Investor Scams Puffing Up Marijuana Stocks

So-called 'pump and dump' schemes are luring people eager to make a quick buck from the growing legalization of cannabis

September 18, 2013

This article originally appeared on Finra.org.

The Financial Industry Regulatory Authority, or FINRA, recently issued a new Investor Alert called "Marijuana Stock Scams" to warn investors about potential schemes associated with marijuana-related stocks.

Medical marijuana is legal in almost 20 states, and recreational use of the drug was recently legalized in two states. As a result, the cannabis business has been getting a lot of attention — including the attention of scammers.

(MORE: How to Steer Clear of Investment Scams)

Like many investment scams, pitches for marijuana stocks may arrive in a variety of ways: from faxes to email or text message invitations, to webinars, infomercials, tweets or blog posts.

How Marijuana Stock Scams Work

The con artists behind marijuana stock scams may try to entice investors with optimistic and potentially false and misleading information that, in turn, creates unwarranted demand for shares of small, thinly traded companies that often have little or no history of financial success and causes their prices to rise.

The scammers behind these "pump and dump" scams can then sell off their shares after the values have increased, rake in money and leave investors with worthless stock (the dump).

One company highlighted in "Marijuana Stock Scams" was touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock "could double its price SOON" and another asserting the stock was “poised to light up the charts!” Yet the company's balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.

"Investors considering investing in a heavily touted, thinly traded company should question why a total stranger would tell them about a really great investment opportunity,” said Gerri Walsh, senior vice president for investor education at FINRA, the largest non-governmental regulator for all securities firms doing business in the United States. “In reality, there is likely no true opportunity.”

(MORE: When Is Stock Hype Fraud?)

How Investors Can Avoid Becoming Victims

Walsh recommended that investors find out whether the promoter is licensed, using FINRA BrokerCheck, a free online tool to research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers, as well as investment adviser firms and representatives.

Search the names of key corporate officials and major stakeholders, as well as the company itself. Proceed with caution if you turn up recent indictments or convictions, investigative articles, corporate name changes or any other information that raises red flags.

For example, the chief executive 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.

(MORE: The Growing Danger of Penny Stocks)

Also, check out the investment using the Securities and Exchange Commission's EDGAR database of company filings, Walsh said.

Corporate Name Changes Can Be Red Flags

Be wary of frequent changes to a company’s name or business focus, too. Name changes and the potential for manipulation often go hand in hand, according to FINRA, which noted that one low-priced stock now claiming to be in the medical marijuana business has had four name changes in the past 10 years. Name changes can turn up in the SEC’s EDGAR database.

"Marijuana Stock Scams" has additional tips to help investors spot and avoid these potential scams.

If you believe you have been defrauded in a marijuana stock scam, file a complaint with FINRA.