New York Securities Lawyer Blog
Recently, both the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have investigated the electronic cigarette, vaporizer, or “vape” markets. Gerri Walsh, FINRA’s Senior Vice President for Investor Education, stated: “The popularity of e-cigarettes has grown rapidly over the last several years, and the e-cigarette and ‘vape’ markets have been the subject of considerable media attention. Investors interested in this market have to look beyond the hype and be watchful for pump-and-dump fraudsters who are eager to make their money disappear into thin air.”
On December 16, 2014, the SEC suspended trading of a Las Vegas, Nevada company called American Heritage International, Inc. (“American Heritage”), which is a publically traded company that manufactures and markets its brand of vape products. American Heritage stock trades over the counter on OTC Link, LLC under the symbol “AHII.” OTC Link, LLC is an electronic inter-dealer quotation system that displays quotes from broker-dealers for many over the counter securities. These over the counter securities can be thinly traded or closely held companies that often do not meet the minimum listing requirements for trading on a national securities exchange, such as the New York Stock Exchange. OTC Link, LLC is a FINRA member and registered with the SEC as an alternative trading system. In its “Order of Trading Suspension” the SEC cited a lack of current and accurate information regarding the stock and further concerns over potentially manipulative activity as its reasons to suspend trading.
American Heritage stated that it was cooperating with the SEC investigation. According to a release on the company’s website the SEC action was prompted by a series of unsolicited “Robo-calls” regarding the company’s common stock. A Robo-call is an automated phone message from a stockbroker or financial advisor that are commonly used to quickly get information out to clients in a time of crisis. Here, it appears that the Robo-calls were part of a pump-and-dump scheme regarding AHII stock.
In a pump-and-dump fraud, investors are lured with aggressive and potentially misleading statements about the business. This process is called the “pump” as fraudsters publish this information with the fraudulent intent to create demand for the company’s shares and inflate is price. With the company’s share price fraudulently inflated, the fraudsters behind the scam “dump” their shares, or sell them off at a profit. After they lock in their profit, the fraudsters stop promoting the stock, causing the price to fall and often leaving investors with significant losses.
Moreover, on December 23, 2014, FINRA published an “Investor Alert” titled E-Cigarette Stock Scams: New Smoking Technology Could Light Up Pump-and-Dump Fraud. The Investor Alert warned investors of aggressive promotions touting stocks that claim to capitalize on the growing vape market. FINRA expressed concern that fraudsters may trick investors into purchasing stock through a variety of schemes involving aggressive stock promotion, name changes and reverse mergers. These actions may culminate in a classic “pump-and-dump” fraud.
To help the public protect themselves from E-cig stock scams, FINRA provided eight tips to investors:
- Consider the Source: Investors should be skeptical of social media, press releases, and spam emails marketing specific stocks. Often, the company or company insiders will be the source of these promotions. Investors should be wary of communications that exaggerate the upside of investing and make no mention of risks.
- Do Some Sleuthing: Investors should research the individuals controlling the company before they invest. Sometimes a google search will reveal key personnel with pending indictments or criminal convictions for fraud. Additionally, a simple phone call may reveal that a listed address or phone number company is false.
- Check for Reverse Merger Activity: In a reverse merger a private company purchases a publically traded “shell company” that is already registered with the SEC. In a recent investor bulletin, the SEC advised investors to be wary of fraud in relation to reverse mergers, noting that some companies fail to remain viable after a reverse merger.
- Don’t Fall for Name Dropping: One of the common exaggerations in a pump-and-dump scheme is that “Stock X is the next Apple.” Statements comparing a potential investment to an established and well performing stock should be viewed as a red-flag for investors.
- Know Where the Stock Trades: Most stocks involved in a pump-and-dump schemes are thinly traded “Pink Slips,” meaning they are not traded on a registered national securities exchange. These stocks do not need certain minimum listing standards designed to protect investors.
- Read the Company’s SEC Filings: Most publically traded companies file financial reports that are listed on the SEC’s EDGAR Investors should check these financial statements against any of statements made in the promotional material they receive for these investments.
- Be Wary of Frequent Changes to Companies Name or Business Focus: Frequent name changes are a red-flag for potential fraud. Investors should be concerned when they see that a company has frequently changed their name or their product line.
- Read the Fine Print: Pay attention to the disclosure statements in promotional materials as they may reveal the fact that the person making the statement was compensated by the company they promote.
The Attorneys at Lax & Neville LLP represent investors with sales practice disputes against their broker dealer or investment adviser, including when the investor is a victim of fraud. If you have any questions regarding an electronic cigarette investment, contact our office and schedule a consultation.