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FINRA to investors: Chill to avoid marijuana stock scams

Caveat emptor. Let the buyer beware.

The first known use of this Latin term, according to the Merriam-Webster dictionary, goes back to 1523. The exact context isn't clear, but it seems plausible to think it was first uttered by an attorney.

In law, the dictionary says, the principle being conveyed by the phrase is that a buyer bears the risk if something is purchased without adequate warranty. Recently, the Financial Industry Regulatory Authority issued just such a warning in the context of what seems to be a burgeoning market in marijuana company stocks.

Trading in a number of marijuana-related company stocks took volatile turns lately as recreational marijuana use became legal in two states.

The concern in FINRA's view is that there has been a rash of trading in a few companies listed on over-the-counter markets. Officials note that there isn't a lot of trustworthy information about some of the companies and that where such a lack exists there is a high risk of stock fraud.

The Sacramento Bee, picking up on the announcement, turned to the California Department of Business Oversight for comment. A spokesman told the paper that state regulators haven't seen any of the issues FINRA is concerned about. But he supports advice that people should learn all they can about companies before investing in thinly regulated "hot" stocks.

Among the scams FINRA says to watch out for are so-called "pump-and-dump" schemes, in which promoters use bad information to inflate stock prices and then dump shares. The promoters make money, but the stock may become worthless.

FINRA suggests exercising healthy skepticism about the sources of unsolicited investment pitches. Another possible warning sign of trouble might be if a company's history reflects frequent shifts in its name, business focus or its founders.

Anyone who suspects they have been the victim of financial fraud should contact an experienced attorney.

Source: The Sacramento Bee, "Investors get warnings about marijuana stock scams," Claudia Buck, Jan. 12, 2014

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