Why marijuana stocks might go up in smoke

Such behavior led the SEC to put temporary trading halts on five of the better-known marijuana stocks last year: Fusion Pharm (ticker: FSPM), Cannabusiness Group (ticker: CBGI), Advanced Cannabis Solutions (ticker: CANN), Petrotech Oil and Gas (ticker: PTOG), and GrowLife. The reasons included doubts about the accuracy of financial information, potentially illegal sales of securities, and market manipulation.

Another problem: Some of the people who run the companies have less than stellar backgrounds. Medical Marijuana in San Diego, for example, was founded by Bruce Perlowin, who spent nine years—from 1983 to 1991—in prison for smuggling marijuana into San Francisco from Colombia. And a board member at the company was arrested for possession in Alabama in 2013. Perlowin is now CEO of Hemp, based in Las Vegas, which would like to become a leader in the industrial hemp industry.

Another pot executive, Michael Llamas, the former president of Medical...

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