Don't Get Sucked In by Medical Marijuana Investment Scams

An Israeli woman weighs cannabis in the Tikkun Olam greenhouse, near the northern Israeli city of Safed, on November 1, 2012, where the company grows medical cannabis. Tikkun Olam has developed unique strains of the drug without psychoactive effects but with improved anti-inflammatory properties. AFP PHOTO/MENAHEM KAHANA         (Photo credit should read MENAHEM KAHANA/AFP/Getty Images)
Menahem Kahana, AFP/Getty Images

With medical marijuana now legal in 20 states and the District of Columbia, some investors are seeing their money go up in smoke from stock scams.

One bogus operation went on a promotional blitz, issuing more than 30 press releases during the first half of the year, according to the Financial Industry Regulatory Authority, which is trying to put a lid on the shake downs. The company also lit up the Internet with sponsored links, investment profiles and spam email, yet Finra reports the company's balance sheet showed only losses, and the company said that it was just beginning to formulate a business plan.

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Finra says con artists promoting medical cannabis stock scams will use the traditional "pump and dump" scheme to boost demand for shares in small, thinly traded companies that have little or no history of financial success. Once the price is fired up, the scammers cash in their chips, ditch the joint and sell their holdings for a primo profit.

"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," says Gerri Walsh, Finra's senior vice president for investor education. "In reality, there is likely no true opportunity. Investors should always find out whether the promoter is licensed using Finra's BrokerCheck, and check out the investment using the Securities and Exchange Commission's Edgar database of company filings."

  • Ask: "Why me?" Why would a total stranger tell you about a really great investment 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 hits new highs.

  • 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.

  • Do your research. Search the names of key corporate officials and major stakeholders, as well as the company itself. For example, 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 was recently indicted for his role in a multimillion dollar mortgage-based Ponzi scheme. 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. Many states also have similar prisoner locator systems.

  • Know where the stock trades. Most unsolicited spam recommendations involve stocks that don't trade on the Nasdaq, the New York Stock Exchange or other registered national securities exchanges. Instead, these stocks may be quoted on an over-the-counter, or OTC, platform. Generally, there are no minimum quantitative standards that a company must meet to have its securities quoted in the OTC market and many of these stocks don't have a liquid market.

  • Read a company's SEC filings, if available. Most public companies file reports with the Securities and Exchange Commission. A check of the SEC's Edgar database can confirm any filings, but just because a company has registered its securities or has filed reports with the SEC doesn't mean it will be a good investment.

  • 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. One low-priced stock now claiming to be in the medical marijuana business has had four name changes in the past 10 years. Another company switched from the coffee business to focus "on the rapidly emerging medical marijuana industries." Name changes can turn up in company press releases, Internet searches and, if the company files periodic reports, in the SEC's Edgar database.

  • 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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Originally published