Responding to a spate of scams, the Financial Industry Regulatory Authority has issued an investor alert regarding "green energy" investments.
"We have seen a lot of e-mail, 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 advisers and investors low-priced stocks to invest in green energy technology."
The industry's self-regulatory body, in a warning issued last week, said that such e-mail pitches promise large gains from investments in companies that are developing or producing alternative, renewable or waste-energy products.
The alert, titled "Save Your Greenbacks — Don't Fall for Green Energy Scams," explains how these energy schemes typically work. In some scams, the alert says, investors received everything from tweets and text messages to Web seminars and faxes trying to create belief in "very aggressive, optimistic and potentially false and misleading statements that create unwarranted demand for shares of a small, thinly traded company."
Gannon called this a classic "pump and dump" fraud in which the con artists behind the scheme sell their shares once demand has been created. Investors are eventually left with worthless stock.
Internal sources at FINRA began to identify many of these scams, Gannon said, and wanted to alert advisers and investors alike. Last year FINRA alerted investors about a similar scam urging people to invest in China stocks, he said.
So-called green investments performed in line with the market in 2009. Michael Herbst, an analyst covering green funds for Morningstar Inc., noted that the sector has garnered a lot of media attention but "that interest and optimism doesn't always generate attractive investments."
"At the risk of sounding too simplistic, if an investment sounds too good to be true, it often is," he said. "Investors need to keep a longer-term horizon. The idea of immediate gain shouldn't prompt investments. Anytime someone tells me I have to act fast, I usually pass."
The FINRA warning should prompt 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, he said, because funds have portfolio managers who are able to provide oversight and protection. "Green investing is an area where political promise hasn't resulted in good investments in the past," he said. "Because of that uncertainty, sometimes it is just safer to have that level of protection of using a portfolio manager."