FINRA recently issued an Investor Alert, “E-Cigarette Stock Scams: New Smoking Technology Could Light Up Pump-and-Dump Fraud.” In the Alert, FINRA warns investors of aggressive promotions advertising stocks that allegedly capitalize on the popularity of the e-cigarette and vaporizer market. FINRA’s Alert follows the Securities and Exchange Commission’s recent trading suspension for a company that purported to make disposable electronic cigarettes because of concerns about manipulative activity related to the company’s common stock. FINRA urges investors who receive an offer that contains exaggerated or misleading claims to contact FINRA
“The popularity of e-cigarettes has grown rapidly over the last several years, and the e-cigarette and “vape” markets have been the subject of considerable media attention. Investors interested in this market have to look beyond the hype and be watchful for pump-and-dump fraudsters who are eager to make their money disappear into thin air,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education in a FINRA statement.
FINRA is concerned that fraudsters may attempt to entice investors into purchasing stock through a variety of activities including aggressive stock promotion, name changes and reverse mergers, which often play into the classic “pump and dump” fraud. Aggressive, optimistic statements made in press releases, emails, and other promotions drive investor demand for a company’s shares (the pump), and when the share price and volume increase, the fraudsters sell their shares at a profit, cease promoting the stock, and leave investors holding worthless, or almost worthless, stock (the dump).
FINRA offered several tips to assist investors in avoiding possible stock scams:
- Consider the source. Be skeptical of press releases, “spam” emails, messages on social media sites and promotional materials such as newsletters and blogs from unknown senders.
- Do some sleuthing. Find out who is at the controls of a company before you invest. Proceed with caution if you turn up indictments or convictions of company officials, or news reports that raise red flags.
- Check for reverse merger activity. Some e-cigarette companies have come into existence through reverse mergers, which allow private companies, including those located outside the United States, to access U.S. investors and markets by merging with an existing U.S. public shell company.
- Don’t fall for name dropping. Claims of being the next Apple or Amazon of a new industry seem to be part of the pump-and-dump playbook
- Be wary of frequent changes to a company’s name or business focus. Such changes may be a sign that a company is engaged in a potential fraud.
Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies. To learn more, please call us at 844-689-5754 or complete our contact form.