Medical Marijuana Spawning Pump-and-Dump Scams: Finra

August 21, 2013 Leave a comment

Medical Marijuana Spawning Pump-and-Dump Scams: Finra

Con artists are taking advantage of the legalization of medical marijuana to lure investors into buying stock in weed-related companies, regulators said.

The scammers may be promoting the shares, then selling them to gullible investors in what’s called a “pump-and-dump” scheme, the Financial Industry Regulatory Authority said today in an e-mailed statement. The companies are touting their growth potential as more states allow pot for medical or recreational use, Wall Street’s self-funded regulator said.

“We’ve seen a rise over the last couple of months in marijuana-related potential stock scams,” Gerri Walsh, Finra’s senior vice president for investor education, said in a phone interview. “We often see with these stock-fraud scams that the next big thing, the cons tend to circle around.”Walsh said that she couldn’t say which companies attracted her suspicion because Finra has a policy of not discussing potential cases it refers to other regulators. Investors should compare the contents of press releases and promotional e-mails to the companies’ financial statements, she said.

Washington and Colorado legalized the drug for recreational use in November. Eighteen states and Washington, D.C., allow the medical use of marijuana and 11 permit sales through dispensaries, according to the Denver-based National Conference of State Legislatures. National legalization has the potential to start a $35 billion to $45 billion a year industry, according to Bloomberg Industries.

‘Absurd’ Criticism

Investors should be wary of companies whose executives have been jailed, according to Finra’s alert, which gives the example of an unnamed chief executive officer who spent nine years in prison for running one of the largest drug-smuggling operations in history. Bruce Perlowin, CEO of Las Vegas-based Hemp Inc. (HEMP), said he thinks the regulator is talking about him and that it’s “absurd” to criticize him for his experience dealing marijuana.

“That’s not a negative, nor is it something I’ve ever hidden,” Perlowin said in a phone interview. “It means I know marijuana, I know logistics. I ran one of the largest marijuana smuggling operations in the history of the U.S.”

Stock in Perlowin’s company, which sells hemp vitamins, candles and sexual enhancers, jumped to 10 cents a share in February and traded for 1.5 cents at 2:30 p.m., giving it a market value of $17.3 million. The company had $426,000 in revenue in the first quarter, according to OTC Markets Group Inc. (OTCM), owner of the marketplace where the stock trades.

Pot Kiosks

“These are real products,” Perlowin said. “I’m the biggest investor in hemp out of my own pocket.”

Medbox Inc. (MDBX), which sells secure kiosks that can dispense marijuana, dropped 17 percent to $31.05 as of 2:30 p.m. in New York following Finra’s alert. After the stock spiked as high as $215 a share in November, the company put out a statement warning investors that the price might not be justified.

Bruce Bedrick, CEO of the West Hollywood, California-based firm, said today in a press release that he approves of Finra’s warning.

“There are companies and individuals that prey on investors looking to enter this fast-growing market,” Bedrick said. “We want these fly-by-night operations out of our industry, and support any regulatory authority in calling attention to the problem.”

Medbox generated $3.53 million of revenue last year.

To contact the reporter on this story: Zeke Faux in New York at zfaux@bloomberg.net

Filed under Health, Investing Process, Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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