It takes a cold, cold heart to exploit a natural disaster as a hook to defraud stock market investors. But according to a recent FINRA Alert, that is exactly what is happening in the wake of the Japanese earthquake, tsunami, and nuclear meltdown.
FINRA reports that “con-artists” are engaging in “pump-and-dump” schemes to inflate the stock of companies that allegedly sell products that will be in high demand in the wake of the Japanese tragedy. These unscrupulous stock promoters obtain blocks of stock of small, thinly-traded companies and then wage fraudulent PR campaigns through press releases and the internet in order to convince unwitting investors to start buying shares. When the stock price rises, the insiders sell out. And when the stock price falls, as it will when the truth comes out, the investors are left with worthless stock. While pump-and-dump schemes are deplorable, they are just a subset of the types of fraudulent representations that can be used to generate sales of a particular company’s shares.
In its alert, FINRA offered several examples of what it called “suspicious claims” by companies whose stock was being promoted. These included representations that the companies had developed new kinds of radiation detectors, superior radiation clean-up technology, and earthquake-proof buildings. These claims were either untrue or highly exaggerated.
A spokesman for FINRA said, “Unfortunately, a nation’s tragedy is being used as just another pretext to part investors from their savings …. As we saw with Hurricane Katrina and the Gulf Oil Spill, disasters provide a perfect opportunity for the unscrupulous to steal money from the unwary.”
FINRA identified several useful “red flags” to help investors detect stock scams, including:
- Unsolicited phone calls, faxes, e-mails, text messages, tweets, and strategically placed “opinions” in blogs and message boards about low-priced stocks
- Price targets or predications of quick and explosive growth
- Mention of connections with governments that bolster a company’s products
- References of connections to well-known companies
- Claims that they’re the next “big thing”
- Products that are only in the developmental stages or ones that claim to be “working prototypes” but have no actual products on the market
- Pressure to invest immediately
FINRA also offered some good advice on how to avoid being conned by fraudulent stock tips. These include recognizing that people with genuine inside information are not going to offer it up for free to thousands of potential investors. If they really have a “hot tip” and they don’t want to be charged with insider trading, they will not trade on it. If they are willing to break the law, they would keep the information to themselves and trade anonymously. What this means is that you should simply assume that someone is lying if he urges you to buy stock on the basis of hot information that is not public.
If the allegedly hot news about the company is already public, it should be reflected in the company’s SEC filings. Here, FINRA recommends that you check the SEC’s EDGAR database to find out whether the company files with the SEC. If so, it suggests that you check the reports and verify any information you have heard about the company.
FINRA wisely advises that you make sure that whoever is trying to pursuade you to buy stock have the required licenses from the SEC, a state securities regulator, or FINRA. We would add that, while many unscrupulous and/or incompetent people have licenses, the lack of a license is a serious red flag. Brokers can be checked out online through FINRA’s BrokerCheck, which also contains some information about prior investor or regulatory complaints. Investment Advisors can be looked up through the SEC’s Investment Adviser Public Disclosure website.
There is more information about securities fraud on our website, as well as an outline of the FINRA arbitration process in which investors may be able to recover losses.
If you believe that you have been the victim of investment fraud, please contact Smiley Bishop & Porter LLP at (800) 697-4514 or (770) 829-3850.
