Marijuana Stock Fans Fuming Mad at Feds for Trading Shutdown

NEW YORK (TheStreet) -- The Securities and Exchange Commission has suspended trading in six marijuana stocks since March, each for a period of about two weeks. The regulatory agency's actions have torpedoed prices for these stocks, catching investors by surprise.

As a result, shareholders have been unable to obtain a price quote, and in some cases unable to contact the company for which those shares were purchased.

Pot stock investors may be upset, but both FINRA, the Financial Industry Regulatory Authority, and the SEC warned investors that there might be problems with these stocks. FINRA issued an alert in August of 2013 and the SEC more recently recapped its trading suspensions as a heads-up about all the cannabis companies that have gone public in the past year.

TheStreet also highlighted companies that masqueraded as cannabis companies, when they really weren't.

>> Read More: FINRA Blows Smoke in Pot Warnings

Nonetheless, shareholder anger has been directed at the SEC, which has been silent on the suspensions.

"If the SEC says something, it could jeopardize an investigation," says Professor Jim Angel of Georgetown University. "But it's extraordinarily frustrating as an investor." The SEC says it does this to protect the public and is "mindful of the seriousness of suspensions" according to its Investor Bulletin on Trading Suspensions. The SEC declined to comment beyond a series of press releases and orders.

Pot stock investors, in a series of interviews, argued that industry regulators are targeting marijuana stocks because the federal government is opposed to idea of legalized marijuana.

Cromwell Coulson, CEO of OTC Markets Group (OTCM), which handles trades of over-the-counter stocks, countered that the government is taking reasonable actions to safeguard investors.

"The whole sector got really highly valued," Coulson said in a phone interview. "The SEC worried that with this speculative frenzy some people would get taken advantage of."

Angel agrees. "A frothy valuation is an open invitation to fraudsters," Angel said. "In the marijuana company cases, they say, let's call it a cannabis company, send out some press releases and make some money."

The Georgetown University professor added that the SEC isn't blindly going after these companies, but usually that the suspensions are the result a "bear raid." "There is someone who wants the stock to go down, like a short seller, and they call the SEC," he said.

>> Read More: Marijuana Stock Warning from the SEC

Take the case of Growlife (PHOT). CEO Sterling Scott sold over 5 million shares of the company's stock on April 9 for $0.50, a day before the SEC suspended trading of the company's shares. A class action lawsuit was then filed against the company by three different legal firms, and Scott was removed from his role as chief executive. The trading suspension was lifted on April 24, so investors can buy and trade the stock on platforms such as E-Trade, but the OTC has yet to agree to publish a quote for the stock. Not a good sign.

Importantly, the SEC stipulates that a broker-dealer must have confidence in the information a company presents in order to publish quotes. The OTC appears to have some doubt about Growlife's numbers. Even with the actual skull and crossbones warning from the OTC Market, the stock still trades at approximately $0.17 with an average daily volume of 23 million shares.

"I've actually been damaged by what the SEC has done rather than any company or suspicious pump and dump scheme, that I've never heard about or from an actual SEC Report," said one Growlife shareholder.

More recently, cannabis stock Fortitude (FRTD) was suspended on May 23 after the company told investors that it received an acquisition offer of $0.12 a share from an unnamed suitor on May 18. The stock was trading at one cent and predictably volume spiked on the acquisition news jumping to three cents. The stock is scheduled to resume trading on June 9 and usually when this happens, the stock price plunges. Investors may be vulnerable to losing money.

On the one hand, it's easy to feel sympathy for investors who lose their money. They read glowing "analyst reports" unaware that the reports come from paid promotional firms. They see what looks like legitimate earnings reports on file with the SEC signed by an accountant. Not knowing whether the accountant is reputable or even that if numbers are accurate.

Pot stock investors also believe the slew of press releases spewing from the company and the brokers that tout the huge increases in pot stock performance. Then from out of nowhere it seems, the SEC stops trading. Many of these cannabis companies don't even acknowledge the halt as their press release machine suddenly dries up. Some don't even answer their phones any more.

The investors, instead of recognizing that they purchased shares in speculative companies that the regulators have warned them about - attack the SEC instead, blaming them for their losses. The investors ignore the increase in short positions in these stocks that tend to coincidentally occur right before the trading suspensions. They ignore the issuance of millions of shares and ignore the sketchy balance sheets.

The Growlife shareholder continues to believe in the company saying, "I believe there has been an injustice handed to Growlife and it would be great to see this issue addressed, attacked and conquered. I believe that Growlife's current quarterly filing supports the companies legitimacy as a player in this industry." But that isn't how others see it.

"One thing to think about all these companies is that marijuana still has questionable legal status. These are people used to breaking the law and they have a low sense of respect for the government," said Angel. "One would expect them to play fast and loose with government requirements."

"I think the big story will be a year from now," said Coulson. The SEC doesn't usually suspend a company unless they have evidence or a case. When an SEC suspends a company, it's usually their last gasp."

--Written by Debra Borchardt in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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