FINRA Offers Tips for Avoiding Pump-and-Dump Schemes

FINRA provided five tips to investors on how to avoid becoming the victims of "Pump-and-Dump" scams. In an investor education podcast, FINRA reviewed a case in which the SEC brought charges against a coffee company that allegedly perpetrated a $78 million pump-and-dump fraud.

"If you've ever pumped a few squirts of vanilla hazelnut syrup into your latte," FINRA Director of Investor Education Pete Chandler remarked, "you know there's nothing wrong with that. But if you pump up a coffee stock with hype and false statements, well, that's illegal."

FINRA offered the following tips:

• Consider the Source. Be skeptical of press releases, spam and promotional materials such as newsletters and blogs from unknown senders. Those materials are often sent by paid company insiders and promoters.

• Do Some Sleuthing. Find out who runs a company before investing in it. A basic internet search should bring up any indictments or convictions of company officials, as well as any news reports that raise red flags.

• Check for Reverse-Merger Activity. Reverse-merger transactions allow private companies in or outside the United States to access domestic investors and markets by merging with existing U.S. public-shell companies, which can create targets for pump-and-dump schemes.

• Know Where the Stock Trades. Most pump-and-dump schemes involve low-priced, thinly traded stocks that tend to be quoted on an over-the-counter ("OTC") platform, such as the OTC Bulletin Board or OTC Link Alternative Trading System, rather than registered national exchanges.

• Read the Company's SEC Filings. Check the SEC's EDGAR database to see whether a company has filed any reports and if the information they contain matches up to the company's promotional information. Many of the stocks traded in the OTC market are in companies that are not required to file financial reports with the SEC because they are too small or have too few shareholders.