Medical Marijuana Spawning Pump-and-Dump Scams: Finra

Photographer: Brent Lewin/Bloomberg

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. The companies are touting their growth potential as more states allow pot for medical or recreational use, Wall Street’s self-funded regulator said. Close

Scammers may be promoting the shares, then selling them to gullible investors in what’s... Read More

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Photographer: Brent Lewin/Bloomberg

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. The companies are touting their growth potential as more states allow pot for medical or recreational use, Wall Street’s self-funded regulator said.

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

To contact the editors responsible for this story: Christine Harper at charper@bloomberg.net; David Scheer at dscheer@bloomberg.net

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