Pump and dump scams are a type of securities fraud where the criminals artificially inflate the price of a company’s stock through false and misleading statements and actions in order to sell their own cheaply purchased stock at a much higher price. Once the fraudsters dump the stock, it is a short amount of time before the price of the overvalued stock plummets and suckered investors lose their money. Pump and dump cannabis scams are nothing new in the industry. In fact, they used to be somewhat of the norm for cannabis penny stocks. So much so that the Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy issued an investor warning back in 2014 and 2018 (partly focused on these kinds of micro-cap frauds).

Turns out old habits die hard as we’re still seeing cannabis pump and dump scams in 2023. The cases of Cannabiz Mobile, GRN Funds, and American Premium Water Corp. come to mind this year. If you’re a cannabis investor have faith in that cannabis scams are as easy to spot as any other pump and dump. Just look for small-cap or micro-cap stocks and OTC companies that have very little information about historical operations. Then look for the unending froth and high pressure pitches of all types–advertisements, tweets, online chatrooms, etc. claiming that the stock (or industry) is hot and an unbelievable opportunity to get rich. If you cannot verify the claims being made (in addition to being unable to find any financial or operational information about the company), just run the other way.

Depending on the legal theories to which you subscribe, intoxicating hemp-derived cannabinoids (IHDC) may or may not be controversial placement on this list. I recently attended (as an observer) a committee meeting of the National Academies of Sciences, Engineering, and Medicine (NASEM) about “Public Health Consequences of Changes in the Cannabis Policy Landscape.” The agenda covered a lot, but one of the most interesting things I heard that day was from a regulatory out of Maryland. He said that IHDCs are a “public health nightmare.” And that’s because IHDCs represent a loophole of sorts in the 2018 Farm Bill pursuant to which IHDCs technically don’t violate federal law (namely because of the definition of industrial hemp and corresponding testing requirements that allow these IHDCs to come through). On top of that, states aren’t really regulating IHDCs in products either, allowing companies to sell these intoxicating products without having to go through the onerous steps of cannabis licensing. While some states actually embrace these IHDCs (like Minnesota), other states have tried to ban them in products (with very little success; see Virginia, Arkansas, Texas, and Maryland). The state-licensed cannabis industry has also taken some steps to try to stamp out these IHDC products.

In addition, the Food and Drug Administration (FDA), as of May 2022, issued warning letters to five companies “illegally selling CBD and Delta-8 THC products.” In July of this year, both the FDA and the Federal Trade Commission issued cease and desist letters to “Companies Selling Edible Products Containing Delta-8 THC in Packaging Nearly Identical to Food Children Eat” (and the FDA now has a consumer warning page about Delta-8 THC) that, among other problems, these IHDC products can violate the Food, Drug & Cosmetic Act. For what it’s worth, the Drug Enforcement Administration (as of February of this year) also isn’t a fan and it wants Congress to address it. This is all to say that consumers, companies, and investors need to be very careful around IHDC products as this is an unsettled, very gray area of the law and you don’t want to be on the wrong side of the aisle.

Another area that is still rife with bad actors is the cannabis “financial services” industry. My take is that the only legitimate way for a cannabis company to secure a bank account during federal prohibition is to seek out a financial institution following the 2014 FinCEN Guidelines. Anything else is suspect at best when it comes to depository accounts. Still, some cannabis companies don’t want to be put through the “know your customer” paces that the FinCEN Guidelines require, so they resort to foolish moves such as using management companies to act as the cannabis company’s piggy bank, utilizing third party individuals to secure bank accounts, and/or just lying to financial institutions about trafficking in cannabis. You’ll also still occasionally find fraudsters that set up fake banks and/or fake accounts to make off with your funds. A notorious case around a fake cannabis financial institution actually occurred in 2023. I’ve even witnessed legitimate shareholders of banks offer to provide personal financial services to cannabis companies where that shareholder opens accounts in their own name for the cannabis company. This is obviously a massive no-no. The last color of scheme in this area revolves around credit card and bank fraud (like bust-out scams) and using phony merchants and fake merchants accounts in the payment processing network in order to cover up drug trafficking. See here for a good example.

Cannabis and crypto are not popular with cannabis regulators. Mainly because crypto is seen as a way to circumvent transparency and financial reporting requirements. And I will say that I’ve seen it used in a fair number of cannabis ponzi schemes. At its core, a ponzi scheme is an investment scam that pays existing investors with funds derived from new investors (Bernie Madoff is the poster child for ponzi schemes). WeedGenics is the most recent cannabis ponzi to go down in flames, but it certainly won’t be the last.

I don’t have a good example here yet, but I can guarantee that it’s only a matter of time. AI is producing all kinds of innovation, but it’s also breeding its fair share of nefarious conduct. Cloned voices, deepfakes, and personalized phishing are already out there and I believe it’ll only be a matter of time before we see a cannabis-oriented AI scam, and that’s mainly because cannabis is federally illegal and still attracts a certain snake oil element as a result. State regulators (and attorneys general) would be wise to be on the look out for these kinds of frauds in the future.

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