Source:  San Diego Source, By GEORGE CHAMBERLIN, Executive Editor  May 23 2014

While the city of San Diego works to implement a controversial new ordinance to regulate and manage medical marijuana cooperatives, another area of concern is surfacing.

Government and industry regulators are aggressively warning investors to be cautious when investing in microcap stocks that claim their operations are related to the medical marijuana industry.

The Securities and Exchange Commission has reissued an alert to remind investors of possible scams with the promise of high returns. A similar warning was issued last August by the Financial Industry Regulatory Authority and also reissued last week.

“In early January 2014, new laws regarding the legalization of marijuana for medical and recreational purposes went into effect in a number of states. At the same time, media coverage of the issue increased, as did investor interest in shares of marijuana-related companies. In some cases, volumes for the stock of otherwise thinly traded companies increased dramatically and prices became quite volatile,” warns the FINRA report.

In response to the surge in activity, the SEC quickly stopped trading in several of microcap stocks to protect investors. The regulators’ efforts are part of the Microcap Fraud Task Force, which monitors the market to identify companies that disseminate information that appears to be inaccurate.

“Recent changes in state laws concerning medical and recreational marijuana have created new opportunities for penny stock fraud. Wherever we see incomplete or misleading disclosures, we act quickly to protect investors,” said Elisha Frank, co-chairwoman of the SEC’s Enforcement Division.

FusionPharm, a Denver-based company claiming to make a cultivation system, was a company that showed up on the SEC radar screens.

The regulators stopped trading in the stock in May “because of questions that have been raised about the accuracy of assertions” made by FusionPharm regarding assets, revenue, and financial conditions.

The stock, which traded for less than 50 cents throughout 2013, had spiked to $8.70 in March of this year. After trading was resumed, the shares fell to below $3 and continue to trade at that level.

FINRA suggests the attention to marijuana is just the latest version of classic pump-and-dump schemes.

“The con artists behind marijuana stock scams may be trying 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,” warns the FINRA alert.

Many companies are using social media to promote their shares. FINRA says they flood the market with news releases to publicize rosy financial prospects and the growth potential for the medical marijuana market. One company, in particular, issued 30 news releases in a six-month period through sponsored links suggesting the stock “could double in price soon.”

Yet the regulators determined the company’s balance sheet showed only losses.

To be sure, some companies in the marijuana industry are legitimate and have the potential for investor success.

However, the SEC says, “Always thoroughly research the company — and the person selling the investment — before making a decision.”

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