The Financial Industry Regulatory Authority, a non-governmental body, said investors should be “wary of aggressive promotions touting stocks that claim to capitalize on various aspects of the e-cigarette” market.
“FINRA is concerned that enterprising fraudsters may attempt to entice investors into purchasing stock through a variety of activities including aggressive stock promotion, name changes and reverse mergers. These actions may culminate in a classic ‘pump and dump’ fraud,” it said.
“Investors are lured with aggressive and optimistic statements about the business through press releases, emails and other promotions intended to create demand for the company’s shares (the pump). Once the share price and volume spike, the fraudsters behind the scam sell off their shares at a profit and stop hyping the stock, causing the price to fall and leaving investors with worthless, or near-worthless, stock (the dump).”
As well as close scrutiny of companies’ claims, FINRA cautioned investors to watch out for reverse merger activity – where a company buys another, often in a completely different sector and little more than a shell, to benefit from its stock market listing without having to go through the listing procedure itself.
It also advised care with securities traded on the OTC markets, which are not as closely regulated as the major stock markets.
As an example of potential pitfalls in e-cig investments, FINRA cited the recent two-week suspension of trading in the stock of American Heritage International Inc. (AHII), ordered by the Securities and Exchange Commission (SEC) “because of concerns regarding potentially manipulative activity related to AHII common stock”.
What This Means: Much-talked-about and – to many people – slightly mysterious new technologies such as e-cigs are classic opportunities for investment frauds, and it would be no surprise if they are happening in this sector.
Fortunately they are usually rather easy to spot on the old principle that something sounding too good to be true very likely is, and by listening hard to any warning bells that ring when investigating a company before investing in it.
– Barnaby Page ECigIntelligence staff