Investing is not as easy as buying low and selling high. Indeed, if investing were as easy as purchasing low-priced stocks and waiting for them to increase in value exponentially, then many more investors would be millionaires. In today’s investing environment, with a zero interest rate Fed policy and a seemingly bullish stock market, many investors are drawn to new and emerging markets, such as the e-cigarette market, with dreams of striking it rich.
Due to greed and negligence, even some financial professionals offering investment advice to clients fall in the same trap and may pitch their clients on the next best low-priced security that will make their client rich. Financial professionals who solicit investors to purchase stock in the new and emerging e-cigarette market risk facing claims for unsuitability. Typically, a claim for unsuitable investments is brought as a form of a negligence claim with the theory: the financial advisor had a duty to recommend suitable investments; the financial advisor breached the duty with unsuitable investments; and the financial advisors unsuitable investments caused the investor damages.
FINRA and the SEC are particularly worried about e-cigarette and vaporizer stocks because these entities are susceptible to fraud (both internal and external) in the form of “pump and dump” schemes. According to FINRA, pump and dump schemes occur when a company insider or outside shareholder buys shares of a very low-priced, thinly traded stock and then spreads false or misleading information to pump up the stock’s price. The “pumper” then dumps the shares, which causes the price of the stock to fall, thereby leaving investors with worthless shares of stock.
In particular, FINRA cautions that various fraudsters use aggressive and optimistic statements about the business through press releases, emails and other promotions intended to create demand for the company’s shares. Once the share price increases through demand based on fictitious information, then the fraudsters behind the scam sell off their shares at a profit and stop hyping the stock, causing the price to fall and leaving investors with worthless.
FINRA offers the following tips to financial professionals and investors who are interested in purchasing e-cigarette and vaporizer stocks:
- Consider the source of the information.
- Perform some research about the company.
- Check for reverse merger activity.
- Don’t fall for name dropping.
- Know which indices the stock trades.
- Read the company’s SEC filings.
- Be wary of frequent changes to a company's name or business focus.
- Read the fine print.
Lufrano Law, LLC is a national securities litigation firm and has experience representing investors who have investment disputes with brokers and broker-dealers. If you lost money investing in e-cigarette or vaporizer stocks through a financial professional, you may be able to recover your losses through FINRA arbitration. Our firm only receives a fee if you recover money. Please contact one of our attorneys at (800) 627-2179 to schedule a free consultation.