FINRA warns that scammers are cashing in on fear of Ebola and MERS. (Photo: AP)

The Financial Industry Regulatory Authority is warning investors about potential investment scams involving companies that claim to be involved in the development of products that will prevent the spread of viral diseases like Ebola and Middle East Respiratory Syndrome (MERS).

FINRA says that it is “aware” of several potential scams in which fraudsters appear to employ a typical “pump and dump” scheme, luring investors with aggressive and optimistic statements about the business through press releases, emails and other promotions intended to create demand for the companies’ stock shares (the pump).

“Once the share price and volume spike, the cons behind the scam sell off their shares at a profit, leaving investors with worthless, or near-worthless, stock (the dump),” FINRA states in the alert.

Stocks of small companies in weak financial condition are often pump-and-dump targets, the alert says, with the frauds perpetrated by paid promoters or company insiders who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy.

“If history is a guide, dramatic news coverage of viral outbreaks, including Ebola and Middle East Respiratory Syndrome, will likely catch the interest of stock scammers looking to capitalize on fears of a potential pandemic,” FINRA says.

Investors should be wary of promotions touting stocks that claim to protect against the spread of viruses or other harmful diseases.

“Aggressive” stock promotional tactics may signal a potentially fraudulent scheme, the alert says, and offers the following seven tips to avoid a potential stock scam:

  • Consider the source. Be skeptical of press releases, emails and promotional materials from unknown senders hyping a company and its products. Companies and their promoters often make exaggerated claims about lucrative contracts or acquisitions, patent-pending technology, potential revenues, 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.

  • Know where the stock trades. Most stock pump-and-dump schemes involve stocks that do not trade on the Nasdaq, 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 exchanges must meet minimum listing standards. 

  • Read a company’s SEC filings. Most public companies file reports with the Securities and Exchange Commission. Check the SEC’s EDGAR database to find out whether the company files with the SEC. Remember that just because a company has registered its securities or has filed reports with the SEC does not mean it has been approved by the SEC or that the merits of an investment in the company have been assessed.

  • Be wary of frequent changes to a company’s name or business focus. Frequent name changes may be a sign that a company is engaged in a potential fraud. Name changes can turn up in company press releases, Internet searches and, if the company files periodic reports, in the SEC’s EDGAR database.

  • Read the fine print. Pay attention to statements that accompany unsolicited information you read about a company. They may provide context so you can properly evaluate the information. 

  • Don’t fall for name dropping. Citing a relationship with a government agency, prominent company or academic institution may be a ploy to create legitimacy for a company that does not deserve it. Be skeptical about these claims and try to confirm their authenticity.

Check out SEC Charges Firm With Fraud Over Undisclosed Mutual Fund Deal on ThinkAdvisor.