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Wall Street regulator warns of marijuana stock scams

August 20, 2013|By Andrew Tangel | This post has been updated. See the note below for details.
  • Medical marijuana flourishes inside a grow house in Long Beach in February 2012.
Medical marijuana flourishes inside a grow house in Long Beach in February… (Genaro Molina / Los Angeles…)

NEW YORK -- Scammers may be jumping into the weed business, Wall Street's regulator warns.

The Financial Industry Regulatory Authority, or Finra, issued an investor alert Tuesday cautioning  investors that some marijuana stock pitches bear the hallmarks of classic Wall Street "pump and dump" schemes.

The investment pitches can come via email, Twitter, webinars or fax, the alert said. In such scams, promoters of thinly traded, low-price shares (or penny stocks) fuel investor demand by hyping the stocks' growth potential. Then they dump the stock, saddling investors with worthless shares.

One marijuana-focused company, unnamed in Finra's alert, issued 30 news releases in the first half of this year. Promos exclaimed the stock "could double its price SOON" and was  "poised to light up the charts," even though the company reported only losses and noted it had yet to formulate a business plan.

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[Updated 10:32 a.m. PDT, Aug. 20: The regulator stopped short of publicly identifying any particular frauds. But Finra has seen an uptick in spam email and Internet promotions of marijuana-focused penny stocks with questionable financial pictures, said Gerri Walsh, Finra’s senior vice president for investor education.  “Whenever there’s a next big thing, we see fraudsters swimming like sharks trying to get in on the action,” Walsh said. “And that appears to be what’s happening here.”

Finra, which is the financial industry's own regulatory body, urged investors to question why promoters might be targeting them for such investments. The regulator also suggested investigating where the stock trades and to seek out any regulatory filings with the U.S. Securities and Exchange Commission.]

Investors should also research company executives and brokers pitching the stocks, Finra said. Leaders of two pot-focused companies have criminal histories, Finra's alert noted: one spent nine years in prison for his role in a drug-smuggling operation and another was indicted in a Ponzi scheme. The alert did not name any names.

Upstart cannabis-focused companies looking to raise capital have tried to tap the stock and bond markets, as the Los Angeles Times reported earlier this year. Those companies generally focus on legal accouterments for growing marijuana, such as hydroponic equipment.

Investing directly in marijuana production itself brings its own legal minefield. Only about 20 states have legalized pot for medical use, and only two for recreational use. The federal government, meanwhile, still classifies it as a dangerous, illegal drug.

Some industry executives have expressed exasperation with the checkered pasts of others involved in the burgeoning marijuana field, complaining it makes it harder for their companies to gain legitimacy.

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