FINRA Cautions Investors on Viral Disease Stock Scams

FINRA recently issued an Investor Alert, “Viral Disease Stock Scams: Don’t Let Them Infect Your Portfolio.” In the Alert, FINRA warns that dramatic news stories viral outbreaks, such as Ebola and Middle Eastern Respiratory Syndrome (“MERS”), historically give rise to scammers seeking to capitalize on fears of a potential pandemic. In fact, FINRA stated it is aware of potential investment scams involving companies that claim to be involved in the development of products that will prevent the spread of viral diseases. Thus, FINRA issued the Investor Alert to remind investors to be wary of stock promotions, particularly those employing aggressive tactics, which claim to protect against the spread of viruses or other harmful diseases.

Signs of a Potential Investment Scam

FINRA warned that stock scams frequently use a “pump and dump” scheme. The scheme begins with “the pump,” in which the promoters aggressively market the business using optimistic statements, press releases, emails and other public relations tactics to create demand for stock shares. As soon as the share price and volume spikes, the promoters sell of their shares at a profit, and leave investors with worthless, or almost worthless, stock – “the dump.”

FINRA warned investors that stocks of small companies often are targeted for pump and dump schemes. Promoters of these schemes frequently are paid by company insiders or other promoters who will benefit from the selling their shares at an inflated price.

FINRA invited investors to contact it if an investor is suspicious about an offer or believes claims may be exaggerated or misleading. In addition, if an investor has been taken in by a scam, the investor should send a tip to FINRA or file a complaint.

Tips to Avoid a Scam

FINRA also offered the following tips to avoid a potential stock scam:

• Consider the source. Be skeptical of press releases, emails and promotional materials from unknown senders hyping a company and its products. Companies and their promoters often make exaggerated claims about lucrative contracts or acquisitions, patent-pending technology, potential revenues, profits or future stock price. Be wary if you are flooded with information over a short period of time, especially if the communications only focus on a stock’s upside with no mention of risk. Dozens of press releases issued over a short period of time and containing essentially the same news can be a serious red flag.

• Do some sleuthing.Find out who is at the controls of a company before you invest. A basic Internet search is a good place to start. Proceed with caution if you turn up indictments or convictions of company officials, or news reports that raise red flags. Likewise, try to contact the company and its personnel. Non-working phone numbers and bogus business addresses often can be revealed through a simple phone call or Internet search.

• Know where the stock trades. Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges. Instead, these stocks tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Bulletin Board (OTCBB) or the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group, Inc. Companies that list their stocks on exchanges must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies quoted on the OTCBB or OTC Link generally do not have to meet any minimum standards (although companies quoted on the OTCBB, OTC Link’s OTCQX and OTCQB marketplaces are subject to some initial and ongoing requirements).

• Read a company’s SEC filings.Most public companies file reports with the Securities and Exchange Commission (SEC). Check the SEC’s EDGAR database to find out whether the company files with the SEC. Verify these reports against promotional information the company or its promoters have sent you and exercise caution if they don’t align. Also, be suspicious of solicitations to invest when products are in still the development stage, but no actual products are on the market, or if the company’s balance sheets only show losses.

  Remember that just because a company has registered its securities or has filed reports with the SEC does not mean it has been approved by the SEC or that the merits of an investment in the company have been assessed.

• Be wary of frequent changes to a company’s name or business focus.Frequent name changes may be a sign that a company is engaged in a potential fraud. Name changes can turn up in company press releases, Internet searches and, if the company files periodic reports, in the SEC’s EDGAR database. Changes to a company’s business focus also may be an indication of a potential scam. Watch out for companies that change their names or tout new disease-prevention product lines following extensive media coverage about a potential viral disease outbreak.

• Read the fine print.Pay attention to statements that accompany unsolicited information you read about a company. They may provide context so you can properly evaluate the information. Disclosure statements in promotional materials may reveal that the senders have been paid large sums of money to provide optimistic coverage of the stock.

• Don’t fall for name dropping.Citing a relationship with a government agency, prominent company or academic institution may be a ploy to create legitimacy for a company that does not deserve it. Be skeptical about these claims and try to confirm their authenticity. Also be wary if a company claims that it has received a “seal of approval” or similar distinction for its products. In some cases, companies pay an annual fee for these accolades or to remain on an organization’s “recommended products” list.

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