Tips to Avoid Viral Disease Stock Scams
The Financial Industry Regulatory Authority (FINRA) released a new alert for investors warning of potential new stock scams that may arise due to viral disease outbreaks. The alert details the history of stock scammers trying to capitalize on the fears of potential investors of viral outbreaks. This has been a trend noticed by the United States Securities and Exchange Commission (SEC) regarding an increase in stock scammers and promotions related to the Zika virus.
FINRA warns investors not to fall for the scams and be wary of companies, brokers, or promoters using viruses or other harmful diseases for aggressive stock tactics. This may be a potential sign of fraud. Oftentimes, these promotions may come in the form of a press release, email, and other material that hype a company and its products associated with the viral disease.
These types of schemes often employ a “pump-and-dump” method in which they induce investors to create a demand for the company’s stocks through aggressive and optimistic statements. This increases the price and volume of the stock, which is when the scammers will sell their shares for a profit. Once the scammers have profited, the stock price tumbles resulting in a loss for the investors.
In the alert, FINRA provides investors with five tips to help detect these potential scams. Our securities fraud lawyers help break them down:
- Use due diligence with promotional material. Be sure to check the source material such as emails, press releases, and other unsolicited materials that come from unknown senders and detail the benefits of a company and the products they offer. These are often exaggerated claims about the products and stock promises. If you start to receive a number of these types of source materials, this could be a sign of a scam. You may also be able to determine the context of the statements on the information material, as well as possible information regarding large sums of money to induce optimism in the stock.
- Do your research on the company. You can check to see if a company is registered and where the stocks are traded. Start by searching online to see if there are any news reports, indictments, complaints, or any other red flags. You can try to contact the company directly to see if the number on the promotion is bogus or if it is a fake address. If you want to check where the stocks are traded, know that most pump-and-dump schemes involving viral disease stocks will not be traded on the New York Stock Exchange, NASDAQ, or any other registered national securities exchange. These often use over-the-counter quotation platforms.
- Check to see if the company files with the SEC. The SEC’s EDGAR database will help you determine if the company files with the agency. Most public companies do file reports with the SEC so you can verify that the information in the promotional material is legitimate. You can also check to see if the products promoted in the material is on the market or still in the development phase. If they are still being developed, this is a red flag. Be wary, though, as some companies may file their reports or register their securities with the SEC, but it does not mean the agency has approved the company or assessed the investment.
- Determine if the company has changed names or focus. A company that changes names often can be a red flag. This is a potential sign that past fraud has been alleged or that they have engaged in fraudulent behavior in the past. You can use an internet search or check the SEC’s EDGAR database based on periodic reports. If the company has also changed their business focus, it can be an indicator of a potential scam, especially if they are promoting new products for viral diseases after news reports.
- Be wary of mentions of relationships. Just because a company claims to be registered with a government agency doesn’t mean it is true. Make sure you do your due diligence to see if the claims are true. You can confirm the authenticity of the claim by contacting the agencies directly. Be wary of accolades that the company mentions as well. Some companies may be able to pay annual fees to promote accolades or stay prominent on a “recommended products” list.
If you suspect that you are receiving material promoting a potential fraudulent scheme, contact FINRA or another government agency. By reporting these potential scams, you can help protect yourself and others from this type of scheme.