Nutraceutical Stock Scams—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 Adviser 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

 

 

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Last Updated: 5/16/2012