NataliePace.com Home Page Article
Nutraceutical
Stock Scams
by FINRA.org.
— Don’t
Supplement Your Portfolio With These Companies.
Want
to lose weight, get an energy boost, improve potency, live longer or fight the
common cold? Many of the products that claim to achieve these objectives
are called "nutraceuticals," a term used to describe dietary supplements and
food and drink products that contain additives purporting to provide health
benefits. The financial reality, however, is that some of the companies associated
with these products are likely to make your portfolio very unhealthy.
FINRA is issuing this alert
to warn investors about potential scams related to everything from fortified
foods and energy drinks to "natural" medicines. While some of the companies
producing these products are legitimate, others could be bogus operations with
the potential to harm unsuspecting investors.
Spotting
Potential Stock Scams
Like many investment
scams, those associated with nutraceutical products may arrive in a variety
of ways—from phone, fax, email or text messages to webinars, infomercials, tweets,
blogs or message board posts. Regardless of how you first hear about them, these
ploys typically contain classic red flags of fraud.
In particular, fraudsters
may try to lure you with very aggressive, optimistic and potentially false and
misleading statements or press releases that create unwarranted demand for shares
of some small, thinly-traded company that often has little or no history of
financial success. The con artists behind the scam can then sell off their shares,
leaving investors with worthless stock. This is what’s known as a "pump and
dump" fraud. For example, one company claimed to have acquired rights
to "all-natural" medicines that treat maladies ranging from the common cold
to kidney disease. While stating in a press release that the company "has the
potential to capture 3% of the US market within a 3 year period" and "potentially
generate "$100,000,000 in revenues," the company’s unaudited financials reveal
a firm with almost no cash on hand or track record of sales.
How do you spot potential
scams and distinguish frauds from legitimate investment opportunities? Scam
signals include:
- Price targets or
predications of swift and exponential growth. One promotional mailer
from a thinly traded nutraceutical manufacturing company stated in bold typeface
the company could produce "813% Short Term Gains."
- Unsolicited communications
promoting the opportunity. These can include phone calls, faxes, emails,
text messages, tweets and strategically placed "opinions" in blogs and message
boards, usually related to a very low-priced stock. One health supplement
company was the subject of over 50 email investor "alerts" put out by promotional
entities in a 12-day period.
- References to well-known
companies to justify growth projections. Promoters of one nutraceutical
company claim the company’s brand can "compete with the likes of Gatorade
and grab mega talent like NIKE!" Another company compared investing in its
stock to investing "in Pfizer in its beginning phases…"
To steer clear of potential
scams, follow these tips.
- Consider the source.
Never rely solely on information you receive in an unsolicited phone call,
fax, email, text message or tweet—or in a blog post or online thread. It's
easy for companies or their promoters to make glorified, unsubstantiated claims
about new products, lucrative contracts, or the company's revenue, profits
or future stock price.
- Always ask: "Why
me?" Another tip-off that you're potentially being scammed is that the
message is unsolicited, which raises the obvious question: Why would a total
stranger tell you about a really great investment opportunity? The answer
is that there is no such opportunity. In many scams, those who promote the
stock are corporate insiders, paid promoters or substantial shareholders who
profit handsomely if the company's stock price goes up.
- Exercise some skepticism.
Scammers are very adept at making their pitches appear real, including the
use of slick videos and websites. Be extremely wary of any pitch that suggests
immediate pay-offs, especially if the investment involves a start-up company
or a product or service that is still in development. Even technologies that
show promise might be years or decades away from coming to market—let alone
turning a profit.
- Find out where the
stock trades. Most unsolicited spam recommendations involve stocks that
do not trade on The NASDAQ Stock Market (NASDAQ OMX), the New York Stock Exchange
(NYSE Euronext) or other registered national securities exchanges. Instead,
these stocks may be quoted on an over-the-counter (OTC) quote platform like
the FINRA-operated Over-the-Counter Bulletin Board (OTCBB) and the platform
operated by OTC Markets Group, Inc., formerly known as the Pink Sheets.
- Generally, there are
no minimum quantitative standards that a company must meet to have its securities
quoted in the OTC market.
- Many of the securities
quoted in the OTC market do not have a liquid market. They are infrequently
traded and can move up or down in price quickly. This may make it difficult
to sell your security at a later date.
- Read a company's
SEC filings, if available. Most public companies file reports with the
Securities and Exchange Commission (SEC). Check the SEC's
EDGAR database to find out whether the company files with the
SEC. Read the reports and verify any information you have heard about the
company. But remember that just because a company has registered its securities
or has filed reports with the SEC does not mean that it will be a good investment.
Also be aware that not all financial information filed with the SEC, or published
elsewhere, is independently audited. Unaudited financials are just that—not
reviewed by an independent third party.
- Be wary of changes
to a company’s name or business focus. Stock promoters often change a
company's name, trading symbol and even line of business in an attempt to
align it more closely with a current event or issue—a trick you will be able
to identify by looking at the SEC reports described above.
- One corporation that
purports to focus on "nutraceutical, physical performance enhancement and
wellness products" was originally incorporated to "provide mailing &
shipping services."
- Another company claiming
to distribute "specialty drugs and over-the-counter branded multivitamins"
only a few months earlier stated in SEC filings that it was "a natural resource
exploration and production company engaged in the exploration, acquisition,
and development of oil and gas properties in the United States."
- Check out the person
promoting the stock or investment. A legitimate investment salesperson
must be properly licensed, and his or her firm must be registered with the
Financial Industry Regulatory Authority (FINRA), the SEC and a state
securities regulator—depending on the type of business the firm conducts.
To check the background of a broker and his or her firm, use FINRA’s BrokerCheck.
For an investment adviser, use the Investment
Advisor Public Disclosure website. Also, be sure to call your
state securities regulator. You can find that number in the government section
of your local phone book or by contacting the North American Securities Administrators
Association (NASAA).
If
a Problem Occurs
If you believe
you have been defrauded or treated unfairly by a securities professional or
firm, please send us a written complaint. And if you suspect that someone you
know has been taken in by a scam, be sure to give us that tip. Here's how:
Online
File
a Complaint (for you)
Send
a Tip
(for others)
Mail or Fax:
FINRA Complaints
and Tips
9509 Key West Avenue
Rockville, MD 20850
Fax: (866) 397-3290
Additional Resources
To receive FINRA’s latest
Investor Alerts and other important investor information, sign up for Investor
News.
About FINRA
The
Financial Industry Regulatory Authority (FINRA), is the largest independent
regulator for all securities firms doing business in the United States. All
told, FINRA oversees nearly 4,800 brokerage firms, about 170,400 branch
offices and approximately 643,000 registered securities representatives.
FINRA believes investor
protection begins with education. Using the Internet, the media and public forums,
we help investors build their financial knowledge and provide them with essential
tools to better understand the markets and basic principles of saving and investing.
