Wednesday, December 30, 2009

FINRA: Beware of Green Investments

With all the attention green investing has received in the media lately, I thought I would pass along portions of the following article written by Matt Ackermann of Financial Planning Magazine:

The Financial Industry Regulatory Authority issued an investor alert warning investors to be wary of green energy investments, but analysts warn that people shouldn't abandon the sector completely.

“We have seen a lot of email, spam and investment pitches that involved various forms of green energy and alternative energies,” John Gannon, a FINRA senior vice president for investor education, said in an interview. “People are promising advisors and investors low-priced stocks to invest in green energy technology.”

The regulator in a warning issued Tuesday, said that such email pitches promise large gains from investing in companies involved in developing or producing alternative, renewable or waste energy products.

The investor alert, which is titled “Save Your Greenbacks—Don't Fall for Green Energy Scams,” explains how these green energy scams typically work. In some schemes, the alerts says, investors received everything from tweets and text messages to webinars and faxes trying to lure them into “very aggressive, optimistic and potentially false and misleading statements that create unwarranted demand for shares of a small, thinly traded company.”

Gannon said that this is a classic ‘pump and dump’ fraud, in which con artists behind the scheme sell off their shares once demand is built up. Eventually investors are left with worthless stock.

Gannon said that internal sources at FINRA began to identify many of these scams and wanted to alert advisors and investors alike. Last year, FINRA alerted investors about a similar scam that urged people to invest in Chinese stocks, he said.

“It is a pretty straightforward scam,” Gannon said. “These con artists take whatever is hot in the news and use that to lure people. They try to engage attention and then push people to invest in certain stocks. These con artists are trying to pump the price and then they sell and the price drops.”

He said fraudsters are also using green investing as a hook for Ponzi schemes, where a scammer uses incoming funds from new investors to pay purported returns to earlier stage investors.

The alert warns investors to ignore unsolicited investment recommendations and to question the source of investment information. Investors should also be wary of investments that claim to be the next big thing and promise exponential returns.

Despite such legal actions and the warning from FINRA, investors shouldn’t be dissuaded from green investing completely, said Michael Herbst, an analyst covering green funds at Morningstar.

Green investments have performed in line with the market in 2009. Herbst noted that the sector has garnered a lot of media attention and “that interest and optimism doesn’t always generate attractive investments.”

“At the risk of sound too simplistic, if an investment sounds too good to be true, it often is,” Herbst said. “Investors need to keep a longer-term horizon. The idea of immediate gain shouldn’t prompt investments. Any time someone tells me I have to act fast, I usually pass.”

The FINRA warning should prompt a desire for smarter investing, Herbst said. Since the sector is still relatively new, investors may be safer putting money into a green mutual fund rather than a specific green stock because funds have portfolio managers that can provide a level of oversight and protection, he said.

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