New warnings for investors about "viral stocks"
The Financial Industry Regulatory Authority (FINRA) issued an alert warning investors about stock scams tied to news coverage of such diseases as Ebola and Middle East Respiratory Syndrome (MERS).
The scams typically involve the con artist trying to convince potential investors to put money into the stock of a company that supposedly will profit greatly from the outbreak, offering a cure or treatment that will be in demand, for example. The crooks typically plan to pump up the price of the stock and then sell it while the value is artificially propped up by the investment activity. This type of scam is typically called "pump and dump."
"News coverage of Ebola and Middle East Respiratory Syndrome (MERS) is likely to catch the interest of 'pump and dump' scammers looking to capitalize on fears of a potential pandemic," FINRA Senior Vice President Gerri Walsh said in a statement. "Investors should be very cautious of any company that claims it is poised for dramatic growth as a result of a purported cure or treatment for high-profile viral diseases."
To be sure, there are often stocks of legitimate pharmaceutical and biotech companies that will rise on news of an outbreak. For example, shares of Tekmira Pharmaceuticals (TKMR), which is working on an Ebola treatment have soared on investor hopes that its drug would be approved.
FINRA, an independent regulator of securities firms, reported hearing about several scams making the rounds. FINRA urges investors to be particularly wary of any aggressive promotion of a stock.
Here are some other tips from the group to help guard against being victimized by such scams:
- Don't buy into a stock just because of press releases and other promotional material that you might see or be shown. Do some research.
- Find out who is in charge of the company before you invest in it.
- Watch out for frequent name changes. That could indicate a company is involved in fraud.
- Name-dropping doesn't make a stock legitimate. Citing a relationship with a government agency, prominent company or academic institution could be a ploy.
- Find out where the stock trades. These scams usually involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other official national exchanges.
- Check out the Securities and Exchange Commission filings that most public companies must file. They can typically be found in the SEC's EDGAR database.
If you believe you are the victim of a stock scam, you can file a complaint with FINRA.
