5 Tips for Avoiding Viral Disease Stock Scams
If history is a guide, dramatic news coverage of viral outbreaks often catch the interest of stock scammers looking to capitalize on fears of a potential pandemic. Most recently, the U.S. Securities and Exchange Commission (SEC) has noticed an increased number of stock promotions related to the Zika virus.
Don't fall for the hype. Investors should be wary of promotions touting stocks that claim to protect against the spread of viruses or other harmful diseases. Aggressive stock promotional tactics may signal a potentially fraudulent scheme.
The fraudsters appear to employ a typical "pump-and-dump" scheme. They lure investors with aggressive and optimistic statements about the business through press releases, emails and other promotions intended to create demand for the companies' stock shares (the pump). Once the share price and volume spike, the cons behind the scam sell off their shares at a profit, leaving investors with worthless, or near-worthless, stock (the dump).
Follow these 5 tips to avoid a potential stock scam.
1. Consider the source. Be skeptical of press releases, emails and other materials from unknown senders hyping a company and its products. Companies and their promoters often make exaggerated claims about lucrative contracts or acquisitions, patent-pending technology, potential revenues, profits or future stock price. Be wary if you're flooded with information over a short period of time, especially if the communications only focus on a stock's upside with no mention of risk. Dozens of press releases issued over a short period of time and containing essentially the same news can be a serious red flag.
Also pay attention to statements that accompany unsolicited information you read about a company. They may provide context so you can properly evaluate the information. Disclosure statements in promotional materials may reveal that the senders have been paid large sums of money to provide optimistic coverage of the stock.
2. Do some sleuthing. Find out who's at the controls of a company before you invest. A basic internet search is a good place to start. Proceed with caution if you turn up indictments or convictions of company officials, or news reports that raise red flags. Likewise, try to contact the company and its personnel. Non-working phone numbers and bogus business addresses often can be revealed through a simple phone call or Internet search.
You should also figure out where the stock trades. Most stock pump-and-dump schemes involve stocks that don't trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges. Instead, these stocks tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Bulletin Board (OTCBB) or the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group, Inc. Companies that list their stocks on exchanges must meet minimum listing standards.
3. Read a company's SEC filings. Most public companies file reports with the SEC. Check the SEC's EDGAR database to find out whether the company files with the SEC. Verify these reports against promotional information the company or its promoters have sent you and exercise caution if they don't align. Also, be suspicious of solicitations to invest when products are in still the development stage, but no actual products are on the market, or if the company's balance sheets only show losses. Remember that just because a company has registered its securities or has filed reports with the SEC does not mean it has been approved by the SEC or that the merits of an investment in the company have been assessed.
4. Be wary of frequent changes to a company's name or business focus. Frequent name changes may be a sign that a company is engaged in a potential fraud. Name changes can turn up in company press releases, internet searches and, if the company files periodic reports, in the SEC's EDGAR database. Changes to a company's business focus also may be an indication of a potential scam. Watch out for companies that change their names or tout new disease-prevention product lines following extensive media coverage about a potential viral disease outbreak.
5. Don't fall for name dropping. Citing a relationship with a government agency, prominent company or academic institution may be a ploy to create legitimacy for a company that does not deserve it. Be skeptical about these claims and try to confirm their authenticity. Also be wary if a company claims that it has received a "seal of approval" or similar distinction for its products. In some cases, companies pay an annual fee for these accolades or to remain on an organization's "recommended products" list.
If you're suspicious about an offer, or if you think claims about a product might be exaggerated or misleading, please contact FINRA. If you suspect that you or someone you know has been taken in by a scam, send a tip or file a complaint.
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