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Investor Alert: Marijuana Stock Scams

The Financial Industry Regulatory Authority (“FINRA”) has issued an investor alert regarding scams pitching investments in marijuana-related stocks.

Currently, medical marijuana is legal in 20 states and the District of Columbia. Recreational marijuana is legal in Colorado and Washington state. With all the press surrounding the legalization of marijuana, FINRA has already seen scams involving investments in marijuana-related companies. According to FINRA, the scams it has seen are classic “pump and dump” schemes.

The fraudsters “pump” up the price of a small, thinly traded company, with little or no history of financial success, by making overly optimistic, oftentimes false and misleading, statements concerning the financial prospects and growth potential of the company. FINRA cites an example of a company that issued over 30 press releases in a short period of time indicating the stock could soon double its price. When the price of the shares reaches its peak, the scammers then “dump” all of their shares at a profit and leave the legitimate investors holding worthless stock.

The alert offers some ways to help avoid becoming the victim of investment fraud:

  • Unsolicited Investment Opportunities. Exercise extreme caution when you receive any unsolicited pitch from someone you do not know regarding an investment opportunity.
  • Know the common warning signs. If an investment sounds “too good to be true,” promises “guaranteed” returns, or is promoted as a “once-in-a-lifetime” opportunity, you should be very wary.
  • Be aware of “affinity fraud.” Affinity fraud refers to scams that prey upon members of identifiable groups such as religious, ethnic or professional organizations. You should never make an investment solely based upon the recommendation of a member of a group you belong to without thoroughly investigating the investment. Even if the individual recommending the investment is known to you and seems trustworthy, remember that the individual may have been tricked in to believing the investment is legitimate when it is not.
  • Do Your Homework. You should research every investment opportunity before handing over your hard earned money. You should never rely on a “testimonial” or take the investment promoter’s word at face value, no matter how sincere or trustworthy he or she seems. You can check out the legitimacy of many investments through your state’s securities division or the SEC’s online database that can be found here.
  • A copy of the FINRA Investor Alert: “Marijuana Stock Scams” can be found here.

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