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Online Promoters Manipulated Pot Penny Stocks, SEC Says

Four stock promoters made $2.5 million manipulating the share price of companies including two they claimed were capitalizing on growth in the medical marijuana industry, the U.S. Securities and Exchange Commission said.

Mikhail Galas, 25, Alexander Hawatmeh, 24, and Chris Mrowca, 25, and a fourth man bought stock in companies including Growlife Inc. and Hemp Inc., promoted them online, then dumped the shares once they rose, the SEC said in a lawsuit filed today in federal court in Tacoma, Washington. Galas, Hawatmeh and Mrowca also face related criminal charges, the Justice Department said in a separate statement.

As more states have legalized the drug, at least 130 penny-stock companies that claim to be in the pot business have emerged with a market capitalization of more than $7 billion as of May, according to data compiled by Bloomberg. The SEC warned investors that month that the industry was vulnerable to fraud. Last year, it formed a task force dedicated to cleaning up the market for penny stocks.

Growlife, which operated seven marijuana supply stores in five states and was losing money as of June, is still worth about $65 million on paper even after trading in its shares was temporarily suspended by the SEC, Bloomberg data show.

The Justice Department said the three are all in custody. The SEC said the individuals have no known defense counsel.

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