How to Avoid Green Investment Scams

FINRA, the big regulator of U.S. securities firms, describes itself as "a trusted advocate for investors." Here at The Motley Fool, we don't regulate much more than our own body temperatures and caloric intake, but we do share FINRA's mission of educating, and advocating for, everyday investors.

Like FINRA, we've warned about identity theft and phishing schemes, the risks of investing in bankrupt companies, and the ludicrous promises of energy stock scams. FINRA has recently addressed a new threat to your financial well-being, and it's one that I expect to become more prevalent in 2010: the green energy investment scam.

This is a twist on the traditional energy (i.e. oil and gas) scam. The "hook" is an undeniably compelling macrotheme: the rise of solar, wind, and other alternative or renewable energy sources. The promoter convinces you that some tiny stock has a game-changing technology, a huge untapped market, or a big government contract about to fall in its lap. The idea is to get enough people excited about the stock that they'll pile in and push up the price of the thinly traded issue. This gives the perpetrators of the fraud enough liquidity to exit their position at a big profit. Hence the term "pump and dump."

FINRA provides great tips about what to look for to spot such a scam, including:

  • Unsolicited communications (from snail mail to tweets, fraudsters have all media covered).
  • Predictions of swift and exponential growth (a surefire 367% gain in the next two weeks!).
  • No actual product on the market (but the prototype's almost ready to go).

To avoid getting duped, FINRA recommends looking at where a stock trades (i.e. a national exchange like NYSE, Nasdaq, or AMEX versus an over-the-counter market) and reading a company's financial filings. Another scam-sleuthing tool I would add to the list is Motley Fool CAPS.

On CAPS, we make calls on whether stocks will outperform or underperform the broader market. CAPS players have identified big winners like Tata Motors (NYSE: TTM  ) , Bruker (Nasdaq: BRKR  ) , and Wonder Auto Technology (Nasdaq: WATG  ) over the past year. They've also proven adept at sniffing out scams.

Some skeptics worth following include UltraLong, TSIF, and Tastylunch. A new account, TMFStockSpam, has been set up exclusively to track the performance of stock spam received by Fools. Yours truly, also known as TMFSmashy, has also been known to expose a whopper or two. (Anyone remember Pax Clean Energy?)

Other green energy names that I've given the big thumbs-down include PetroAlgae, which, despite its new partnership with Foster Wheeler (Nasdaq: FWLT  ) , can't possibly warrant a market capitalization of $2.4 billion, and JBI Inc., which is promoting a waste plastic-to-oil process that "produces oil at less than $10 per barrel." Now why didn't Chevron (NYSE: CVX  ) think of that?

As the government showers money on alternative energy projects, some half-baked schemes will suddenly seem plausible, even profitable. It's important to keep your wits about you, and your fellow Fools are here to help. Together, we can separate the scams from the future Googles (Nasdaq: GOOG  ) or Intels (Nasdaq: INTC  ) of green energy.

Intel is a Motley Fool Inside Value pick. Motley Fool Options has recommended buying calls of Intel. Google is a Rule Breakers recommendation. Check out any of our premium newsletters free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2010, at 12:30 PM, lemoneater wrote:

    Now if there only was a way to convert plastic shopping bags directly into automobile fuel. Sounds like alchemy.

  • Report this Comment On January 06, 2010, at 10:44 PM, Jafarnie wrote:

    For commodities the cure for high prices, is high prices. Gold is a commodity, that gets used for things, and as the price goes higher the demand will go down, and prices will soon follow. In 2008 conventional wisdom said oil was not going to stop rising, but as does everything, it can falling back down from the clouds

  • Report this Comment On January 07, 2010, at 12:53 AM, IIcx wrote:

    To any Fool who has the time, and I know most of us don't, please review the vids from this link before defining the global scam that's currently occurring.

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=322574&t=0...

    Best and Happy New Year to Fools with a "Brain"

  • Report this Comment On January 15, 2010, at 6:03 AM, tykundegex wrote:

    So you mean Compaq was a scam too.. promising a "portable computer"? Or NanoSolar promising "printable PV cells"?

    Toby, you need to do a little more research before you go making references to "smart" decisions to down-thumb some stocks you list here. If you thumb-down a stock because you think what they're proposing is not feasible, then I hope you did your own research to back up your claims.

    If you, like most fools (with a lower-case "f") on CAPS for example, just piggy-back on the comments/ratings of the .. ahem... "leaders", then you risk being shown to be very wrong... for all the wrong reasons!

    No names mentioned, but in Q2 I'll post back some results about at least 1 of the stocks you bagged-on here, and we'll see if it was a scam or not.

    Stu

  • Report this Comment On January 15, 2010, at 6:15 AM, tykundegex wrote:

    LLCX, I think "denialist" is a new word -- a term humanity has coined just for people as daft as you who claim that the world is not getting hotter and/or it's not our pollution that's doing it.

    Now if there were a company claiming to be able to stop ocean levels rising, I'd call THAT a scam, and I'd short the stock if I could. Please keep me posted if you come across one!

    Stu

  • Report this Comment On February 21, 2010, at 11:08 AM, zardiw wrote:

    It's all well and good to warn people of scams, but anybody that has done a minimum of research into JBII will realize that it falls into the legitimate company category. Yes they have disruptive technology. The prototype works NOW. Their first production machine is currently being validated by a state certified lab: IsleChem ( http://www.islechem.com/ ). And rollout is expected to happen soon ( by April 24 when the first shareholders meeting will be held )..

    The CEO ( http://JohnBordynuik.com ) is a very well respected scientist, who deals with the likes of NASA, MIT, United Nations, etc.

    Before you lump JBII in with those other scams, perhaps one should do a little reading on their corporate website: ( http://JBIGlobal.com ) ........z

    PS. JBII has been invited to uplist to NASDAQ by a managing director of NASDAQ (Jordan Saxe). The application was filed in January, and fees were wired. We are expecting to uplist shortly.

  • Report this Comment On June 22, 2010, at 2:23 PM, Smith568 wrote:

    Good call on naming JBII as a likely dud! So far, this company has failed to produce anything other than press releases, accounting irregularities, and serious questions as to whether or not they will ever begin production. The reality has not lived up to the hype. Maybe 2011 will be their year - but I won't be holding my breath...

  • Report this Comment On February 03, 2011, at 8:23 AM, Jahuel wrote:

    JBII will likely stop looking like a dud sometime in the near future.

    They did have far too large of a market cap for where they were when this article was written; but at this point, they're an undervalued gem.

    And also, why didn't Chevron think of P2O? That's an amazingly ignorant question.

  • Report this Comment On January 05, 2012, at 1:05 PM, Smith568 wrote:

    JBI Accounting irregularities may be catching up with them:

    "The Complaint alleges that JBI raised over $8.4 million for the company in these PIPES just before the company issued a public statement indicating its financial statements could no longer be relied upon, in part, due to the erroneous valuation of certain assets, known as media credits, on the balance sheet."

    http://www.sec.gov/litigation/litreleases/2012/lr22220.htm

    Yikes!

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