As more states - nearly 20 -- allow the use of medical marijuana, a securities regulator is warning about marijuana stock scams. The Financial Industry Regulatory Authority said con artists are touting investments in marijuana businesses through emails, text messages, infomercials, tweets and blog posts.
According to FINRA, these are thinly traded companies with little or no financial success. As investors buy the stock and push up the price, con artists then sell their shares and reap a profit. The stock falls, and the remaining investors are left holding worthless shares. This is called a "pump and dump" scheme.
"One company, for example, promoted its move into the medical cannabis space by issuing more than 30 press releases during the first half of 2013. These releases publicized rosy financial prospects and the growth potential of the medical marijuana market," FINRA said in a statement. "Yet the company's balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan."
FINRA offers some investment tips. But the interesting one is to check the federal prison database to see if the person pitching the investment has done time.
I've never heard of this tip before, and found it fascinating. Bernard Madoff is set to be released Nov. 14, 2139 while Enron's Andrew Fastow got out in 2011. These days, this is a must-save link for every financial writer.