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FINRA Warns of Nutraceutical Stock Scams

By Joanna Cosgrove, Online Editor | June 11, 2012

Agency issues tips on how to recognize red warning flags and weed out unscrupulous frauds.

Dietary supplements can be a risky commodity to invest in if you’re not careful, according to a recent Investor Alert from The Financial Industry Regulatory Authority (FINRA). While many of the companies producing dietary supplements product are legitimate, others could be bogus operations with the potential to harm unsuspecting investors, with scams related to everything from fortified foods and energy drinks to "natural" medicines, FINRA said.
FINRA’s Alert, called “Nutraceutical Stock Scams—Don’t Supplement Your Portfolio With These Companies,” said like many investment scams, pitches for nutraceutical stocks may arrive in a variety of ways--from cold calls to email, tweets, webinars, blogs or message board posts. Con artists could try to lure in investors with “optimistic and potentially false and misleading information that in turn creates unwarranted demand for shares of small, thinly-traded companies that often have little or no history of financial success. The con artists behind these ‘pump and dump’ scams can then sell off their shares, leaving investors with worthless stock,” FINRA said.
The agency cited one example in which a company claimed to have acquired rights to "all-natural" medicines that treat maladies ranging from the common cold to kidney disease. The company claimed it had "the potential to capture 3% of the US market within a three year period" and "potentially generate $100,000,000 in revenues." Investors who took a look at the company's unaudited financials would have found a firm with almost no cash on hand and no track record of sales.
“While nutraceuticals claim to help people become healthy, investing in some of the companies associated with these products can make investorss portfolios sick,” said Gerri Walsh, FINRA’s vice president for Investor Education. "The best way investors can inoculate themselves against investment scams is to ask and check. Find out whether the promoter is licensed using FINRA BrokerCheck, and check out the investment using the Securities and Exchange Commission's EDGAR database of company filings.”
The Alert warned investors to ignore unsolicited investment recommendations and to question the source of investment information. Investors should also be wary of investments that promise fantastic growth and check out the person promoting the stock or investment.
The Red Flags of Fraud

In addition to the warning, FINRA’s Investor Alert also included practical details to help investors spot potential scams and distinguish frauds from legitimate investment opportunities: 
  • Price targets or predications of swift and exponential growth. One promotional mailer from a thinly-traded nutraceutical manufacturing company stated in bold typeface the company could produce "813% Short Term Gains."
  • Unsolicited communications promoting the opportunity. These can include phone calls, faxes, emails, text messages, tweets and strategically placed "opinions" in blogs and message boards, usually related to a very low-priced stock. One health supplement company was the subject of over 50 email investor "alerts" put out by promotional entities in a 12-day period.
  • References to well-known companies to justify growth projections. Promoters of one nutraceuticals company claim the company’s brand can "compete with the likes of Gatorade and grab mega talent like NIKE!" Another company compared investing in its stock to investing "in Pfizer in its beginning phases…"
To steer clear of potential scams, FINRA suggested the follow tips:
  • Consider the source. Never rely solely on information received in an unsolicited phone call, fax, email, text message or tweet—or in a blog post or online thread. It's easy for companies or their promoters to make glorified, unsubstantiated claims about new products, lucrative contracts, or the company's revenue, profits or future stock price.
  • Always ask: "Why me?" Another tip-off that you're potentially being scammed is that the message is unsolicited, which raises the obvious question: Why would a total stranger tell you about a really great investment opportunity? The answer is that there is no such opportunity. In many scams, those who promote the stock are corporate insiders, paid promoters or substantial shareholders who profit handsomely if the company's stock price goes up.
  • Exercise some skepticism. Scammers are adept at making pitches appear real, including the use of slick videos and websites. Be wary of any pitch that suggests immediate pay-offs, especially if the investment involves a start-up company or a product or service that is still in development. Even technologies that show promise might be years or decades away from coming to market—let alone turning a profit.
  • Find out where the stock trades. Most unsolicited spam recommendations involve stocks that do not trade on The NASDAQ Stock Market (NASDAQ OMX), the New York Stock Exchange (NYSE Euronext) or other registered national securities exchanges. Instead, these stocks may be quoted on an over-the-counter (OTC) quote platform like the FINRA-operated Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group, Inc., formerly known as the Pink Sheets.
             Generally, there are no minimum quantitative standards that a company must meet to have its securities quoted in the OTC market.  

             Many of the securities quoted in the OTC market do not have a liquid market. They are infrequently traded and can move up or down in price quickly. This may make it difficult to sell your security at a later date.
  • Read a company's SEC filings, if available. 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. Read the reports and verify any information you have heard about the company. But remember that just because a company has registered its securities or has filed reports with the SEC does not mean that it will be a good investment. Also be aware that not all financial information filed with the SEC, or published elsewhere, is independently audited. Unaudited financials are just that—not reviewed by an independent third party.
  • Be wary of changes to a company’s name or business focus. Stock promoters often change a company's name, trading symbol and even line of business in an attempt to align it more closely with a current event or issue—an identifiable trick that will be obvious by looking into SEC reports as described above.
             One corporation that purported to focus on "nutraceutical, physical performance   enhancement and wellness products" was originally incorporated to "provide mailing & shipping services."

             Another company that claimed to distribute "specialty drugs and over-the-counter branded multivitamins" only a few months earlier stated in SEC filings that it was "a natural resource exploration and production company engaged in the exploration, acquisition, and development of oil and gas properties in the United States."

  • Check out the person promoting the stock or investment. A legitimate investment salesperson must be properly licensed, and his or her firm must be registered with the Financial Industry Regulatory Authority (FINRA), the SEC and a state securities regulator—depending on the type of business the firm conducts. To check the background of a broker and his or her firm, use FINRA’s BrokerCheck. For an investment adviser, use the Investment Adviser Public Disclosure website. Also, be sure to call your state securities regulator. That number can be found in the government section of the phone book, or by contacting the North American Securities Administrators Association (NASAA).
If you believe you have been defrauded or treated unfairly by a securities professional or firm please contact FINRA to file a complaint or send a tip.

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