Credit: Shutterstock photoHurricane Season officially starts next week. It may not be possible to predict when the next hurricane or other natural disaster will take place. But you can count on one thing: when it happens, scammers will try to take advantage of the situation. Our tips will help you protect against stock scams that tout the promise of huge gains in the wake of the next "big one."
Advance Forecast
In the aftermath of a big hurricane, you can expect unsolicited emails, text messages and other spam about investments that exploit a variety of hurricane-related opportunities. In years past, stock promotions have touted "massive run-ups" in a stock's price in the aftermath of a storm "as demand to repair homes skyrockets." Best bets for scams include stocks associated with clean-up or rebuilding, and those that purport to take advantage of refinery issues and the rising costs of oil and gas.
These actions may culminate in a classic "pump-and-dump" fraud. Investors are lured with aggressive and optimistic statements about the business through press releases, emails and other promotions intended to create demand for the company's shares (the pump). Once the share price and volume spike, 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, or near-worthless, stock (the dump).
While it is conceivable that some of the claims made these promoters may be true, many could turn out to be fraudulent hot air that, like a hurricane, can be very damaging-but , to your investment portfolio.
Spotting Potential Hurricane Investment Scams
Unsolicited text, email and other types of spam messages about investments that exploit a major disaster frequently include:
• price targets or predictions of swift and exponential growth;
• the use of facts from respected news sources to bolster claims of a price run-up; for example, some percentage of the billions of dollars it will take to rebuild after the hurricane will contribute directly to a company's bottom line;
• mention of contracts or affiliations with federal government agencies or large, well-known companies;
• standard corporate developments like contracting with a supplier, presented as major events;
• statements about how much easier it is for low-priced stocks to skyrocket in value in comparison to higher-priced stocks; and
• pressure to invest immediately, such as "You must act now!"
How to Avoid Getting Scammed
To avoid potential scams, make sure you get the information you need to make a wise investment choice.
Investigate before you invest. Never rely solely on information you receive in an unsolicited email, text message or other form of communication. It's easy for companies or their promoters to make glorified claims about new products, lucrative contracts or the company's revenue, profits or future stock price.
Do some sleuthing. Find out who is at the controls of a company before you invest. A basic internet search is a good place to start. Proceed with caution if you turn up indictments or convictions of company officials, or news reports that raise red flags. Likewise, try to contact the company and its personnel. Non-working phone numbers and bogus business addresses often can be revealed through a simple phone call or internet search.
Find out where the stock trades. Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges. Instead, these stocks tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Bulletin Board (OTCBB) or the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group, Inc. Companies that list their stocks on registered exchanges must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies quoted on the OTCBB or OTC Link generally do not have to meet any minimum listing standards (although companies quoted on the OTCBB, OTC Link's OTCQX and OTCQB marketplaces are subject to some initial and ongoing requirements).
Read a company's SEC filings. Most public companies file reports with the 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, just because a company has registered its securities or filed reports with the SEC doesn't necessarily mean that the company will be a good investment.
If you're suspicious about an offer or if you think the claims might be exaggerated or misleading, please contact FINRA. You can also send complaints about unsolicited emails, text messages and other communications to the Federal Communications Commission .
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Photo Credit: ©iStockphoto.com/Craig McCausland
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
