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Originally published Saturday, September 7, 2013 at 8:05 PM

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Beware of odd-smelling marijuana-stock schemes

The Financial Industry Regulatory Authority has issued a warning to investors about scams in the growing medical- and recreational-pot industries.

Detroit Free Press

Stock tips

Before investing in stocks, regulators suggest you:

• Read filings with the Securities and Exchange Commission at It’s also important to know that not all information that can be found is independently audited.

• Watch out for wild changes to a company’s name or business model. Going from the coffee business to medical-marijuana industries is not a good sign. The same’s true for four or five company name changes in a decade.

• Understand pump-and-dump schemes. Sometimes a stock manipulator buys low-priced shares. Then the con artist floods email baskets with hot tips about that same stock as a way to pump up the price. A few gullible investors buy the stock, and the price goes up quickly. The con artist then sells at the inflated price — and the everyday investors are left on the sidelines to watch the price tumble. Sometimes, insiders at the company are part of the scam.

Securities and Exchange Commission

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What’s that old saw about making sure something passes the smell test before putting your money on the line? So if you sense a little odd aroma around a text or email that touts the next hot stock, make sure to hold onto your checkbook.

That’s right: The Financial Industry Regulatory Authorityissued a general warning to investors about marijuana-stock scams.

“There are scammers out there that will change their pitches on a dime to cash in on new trends,” said Gerri Walsh, senior vice president for FINRA investor education in Washington, D.C. “The pitches change with the news cycle, honestly.”

With recent legal changes in place, everyday investors need to realize that the con artists are out there pitching potentially fraudulent marijuana-related companies, Walsh said. That’s likely because medical marijuana is legal in some states, and Washington and Colorado have legalized recreational marijuana.

FINRA, the largest nongovernmental regulator of securities firms, put out its alert after monitoring message boards and other places online for anyone hyping the next big thing for investors.

One company that moved into the medical-cannabis space, according to FINRA, issued more than 30 news releases just in the first half of 2013. And to no surprise, the releases put a rose-colored high on all sorts of financial prospects.

But the company’s balance sheet showed only losses, and the company stated elsewhere it was only beginning to formulate a business plan.

“Sometimes, the press releases don’t match up to the filing that are readily available through the Security and Exchange Commission’s EDGAR system,” Walsh said.

Here’s a thought: If a stock is really “poised to light up the charts,” why is somebody sending you an email to share this so-called discovery with you?

Many times these hot stock tips may involve a thinly traded stock held by someone else. If new investors buy the pitch and quickly drive up the price of that limited amount of stock, the scammers can make a quick profit by selling out at the peak of the frenzy.

Another issue: Is the CEO a convict or behind bars?

Did you ever think of trying to go online to check criminal records? FINRA’s alert noted it may be wise to check the Federal Bureau of Prisons Inmate Locator to figure out who is pitching this deal. The locator can determine whether the person sending the solicitation has served time in federal prison.

FINRA suggests searching names of key corporate officials or major stakeholders, as well as the company itself.

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, FINRA noted.

The former CEO of another similar company had been indicted in connection with his role in a multimillion-dollar mortgage-based Ponzi scheme.

“With fraud generally, we see people getting caught up in the moment,” Walsh said. “Fraudsters are elaborate experts when it comes to persuasion.”

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