Source:  FINRA Press Release, Aug 19

The Securities and Exchange Commission (SEC) recently uncovered a den of stock promoters “pumping and dumping” small company stocks, including some that claimed to be in the medical marijuana business.

The SEC charged four promoters with manipulating marijuana-related stocks and the stocks of other tiny companies through a scheme the SEC described as “a carefully planned operation.” Prices of a number of penny stocks were manipulated using illegal trading methods combined with aggressive promotional campaigns designed to pump up the price of the stocks. When the stock prices rose, the promoters “dumped” their shares, leaving investors with shares of virtually worthless stock.

Smart Tips

Investors can do their part to identify potential marijuana stock scams. The Financial Industry Regulatory Authority (FINRA) issued an Investor Alert that contains a number of valuable tips:

1. Ask: “Why me?” Why would a total stranger tell you about a really great investment opportunity? The answer is there likely is no true opportunity. In many scams, those who promote the stock are corporate insiders, paid promoters or substantial shareholders who profit handsomely if the company’s stock price goes up.

2. Consider the source. It’s easy for companies or their promoters to make exaggerated claims about lucrative contracts, the company’s revenue, profits or future stock price. Be skeptical about companies that issue a barrage of press releases and promotions in a short period of time. The objective may be to pump up the stock price. Likewise, be wary of information that only focuses on a stock’s upside with no mention of risk.

3. Do your research. 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. Check the Federal Bureau of Prisons Inmate Locator to determine if a solicitation is coming from someone who has served time in a federal prison.

4. Know where the stock trades. Most unsolicited spam recommendations involve stocks that do not trade on NASDAQ or the New York Stock Exchange. Instead, these stocks may be quoted on an over-the-counter (OTC) quotation platform like the Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group, Inc.

5. Read a company’s SEC filings, if available. Most public companies file reports with the SEC. Check the SEC’s EDGAR database to find out whether the company files with the SEC. Read the reports and verify any information you have heard about the company. Just because a company has registered its securities or has filed reports with the SEC does not mean it will be a good investment. And not all financial information filed with the SEC, or published elsewhere, is independently audited. Unaudited financials are just that—not reviewed by an independent third party.

6. Be wary of frequent changes to a company’s name or business focus. Name changes and the potential for manipulation often go hand in hand. Name changes can turn up in company press releases, internet searches and, if the company files periodic reports, in the SEC’s EDGAR database.

7. Check out the person selling the stock or investment. A legitimate investment salesperson must be properly licensed, and his or her firm must be registered with FINRA, the SEC and a state securities regulator—depending on the type of business the firm conducts. To check the background of a broker or investment adviser, use FINRA’s BrokerCheck. You can also call your state securities regulator.

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