Marijuana Stock Scams Prompt Regulatory Warning

(Credit: David McFadden/AP Photo)

With the changing legal landscape for pot at the state level, marijuana-related stock scams may be on the rise, according to the Financial Industry Regulatory Authority.

FINRA, the largest independent regulator of U.S. securities firms, first issued a warning to investors last month. Last year, the recreational use of marijuana was legalized in Colorado and Washington for those over 21. Medicinal use is permitted in about 20 states.

The U.S. federal government recently said it would not block state pot-legalization laws if states implement strict regulations.

Banking on the growing discussion of marijuana, FINRA warns investment scams may arrive via fax, email or text message with invitations to webinars, tweets or infomercials.

"Cons may use everything from tweets to infomercials in an attempt to convince investors that they can get in on the ground floor of a medical marijuana company poised for success," said FINRA's senior vice president for investor education Gerri Walsh. "But the information touted doesn't always align with reality."

Read More: Puerto Rico Debates Medical Use of Marijuana

Walsh urges investors to conduct a "reality check" and ask yourself: Why would someone you don't know offer you the deal of a lifetime? And look beyond the hype. Is the company portrayed one way in public promotions but another in SEC filings?

The organization says the schemes are almost always "pump and dump" scams.

"Generally speaking, pump and dump schemes seem so appealing because they're based on lies," she said. "Fraudsters lure investors with potentially false and misleading statements designed to create demand for shares of a small, thinly traded company with little or no history of financial success (the pump). Once share prices and volumes reach a peak, the cons behind the scam sell off their shares at a profit, leaving investors with worthless stock (the dump). Investing in marijuana is the latest hook for these scams."

For example, the agency notes that 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." The former CEO of a similar company, the agency said, was recently indicted for his role in a multi-million dollar mortgage-based Ponzi scheme.

Read More: Marijuana Use On the Rise, According to Survey

Investors should read SEC Filings, if available, though most unsolicited spam recommendations involve stocks that do not trade on registered national securities exchanges like The NASDAQ Stock Market (NASDAQ OMX) and the New York Stock Exchange (NYSE Euronext).

These scam marijuana stocks may be quoted on an over-the-counter (OTC) quotation platform, which does not require minimum quantitative standards, like the FINRA-operated Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group, Inc.

Many of the securities quoted in the OTC market don't have a liquid market, FINRA warns on its website.

"They're infrequently traded and can move up or down in price substantially from one trade to the next. This may make it difficult to sell your security at a later date," the organization says.

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