Burned! Avoiding Environmentally Focused Investment Scams

Now that Internet stocks have boomed and busted, wonder how to get in early on the next big thing? Investors aren’t the only ones looking for the next darlings of Wall Street—stock market con artists are also busy inventing the next hot stock. How can you tell the difference between a scam and a good investment, particularly in the wake of the recent corporate scandals?

As the shock began to wear off from the tragedies of September 11, new investment opportunities appeared across the Internet for companies with solutions for anthrax, nuclear radiation and other terrorist threats. Within two months, the U.S. Securities and Exchange Commission (SEC) sanctioned five of these companies for making false anthrax-related claims.

Elizabeth Prager

Red Flags

Suspect companies share several common warning signs. The first is an enthusiasm for press releases. Old school stock promoters were famous for telephone cold-calling, colorfully portrayed in the Hollywood film Boiler Room (2000). The new breed are masters of the Internet, relying heavily on spamming and posting press releases to financial and other websites. One of their favorite announcements is that a very large amount of money is expected in the future. For example, 2DoTrade, one of the SEC-sanctioned companies, announced last July that it agreed to supply West African tropical hardwoods to various furniture manufacturers, the beginnings of $625 million worth of business over the next five to six years. To appeal to green investors, 2DoTrade also claimed that it was a member of the Forest Stewardship Council and that it was supporting the Friends of the Mountain Gorilla Society.

A second red flag is dramatic change in business strategy. All five of the companies sanctioned by the SEC for bogus anthrax claims were new to the business. Disease Sciences specialized in mad cow remedies prior to September 11; four months before that its name was www.AuctionAnything.com; before 1999 it sold printing services and copy machines. The Classica Group previously distributed specialty cheeses and meats.

R-Tec Technologies had made paints for detecting gas leaks. 2DoTrade reinvented itself as a web-based marketplace after it abandoned its plans to become an Italian restaurant chain. Spectrum Brands was previously NetWeb Communications; before the Internet was hot its principal product was the "WonderStick" golf training aid.

A third clue is that these stocks typically trade on the OTC Bulletin Board or Pink Sheets, where standards for companies are laxer than on stock exchanges or Nasdaq. A fourth dead give-away is how the companies "go public." The stock of the real next Microsoft will start trading after an initial public offering (IPO) through a recognized investment bank, and the company gets capital for growth. A fishy stock starts trading rather mysteriously. Any money goes to people who previously bought the stock for pennies; the company doesn’t get a dime.

All of this information is readily available online. Financial websites such as www.finance.yahoo.com and www.bloomberg.com contain company press releases and indicate where a stock is traded. The company’s history can usually be found in its SEC filings, which are now electronically available through the SEC’s EDGAR database.

Beware of Pirates

Now that the securities regulators have cracked down on September 11 profiteering, is it safe to get back in the water? Fishy stocks may change their stripes, but still have that same characteristic smell. Recently an OTC Bulletin Board-traded company called Nuclear Solutions began posting multiple press releases on www.sustainablebusiness.com. Nuclear Solutions says it is developing technology to safely dispose of nuclear waste. Before September 2001 the name of the company was Stock Watch Man, formed in 1997 to run a financial website. According to the company’s financial statements, its nuclear remediation technology is worth $87,000, which pales in comparison to the $643,000 value provided by its stock promoters. The company website says its technology was invented by its now deceased president, Paul Brown. The website states that Brown, like many famous inventors, did not hold a conventional Ph.D., and that most nuclear scientists would agree he didn’t need one. You be the judge.

LAURA A. VOSSMAN, a chartered financial analyst and former SEC regulator, writes about sustainable development issues.