As movement toward green energy grows, so does the risk for getting duped

The movement toward investing in green energy sources has been picking up steam, helped by a big push from the White House to "make America energy-independent." But the movement also has brought out scam artists attempting to ride on its popularity and rip off unsuspecting investors.Not every alternative-energy investment is a rip-off, of course, but investors have to be able to tell the difference.

"As the legitimate deals grow in volume, we will start to see more fraudulent deals," said Texas Securities Commissioner Denise Voigt Crawford. "The scam artists will start parroting what the legitimate business folks are saying, and that way they can dupe people into investing in those deals."

Steve Korotash, associate regional director for enforcement at the Securities and Exchange Commission's Fort Worth office, said people need to proceed with utmost caution.

"People set out to defraud folks, and they will lie, they will talk about technologies that don't make scientific sense," he said. "It's absolutely an area that's fraught with peril for investors."

Recently, the SEC took several enforcement actions against scammers offering energy and environment-related investments.

Korotash said the scams are often Ponzi or "pump-and-dump" schemes.

In a Ponzi scheme, a scammer typically promises high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors with money from new investors. The scheme usually collapses when new investors dry up.

In a pump-and-dump, the scammer uses false information to artificially drive up a company's stock price. Once the stock rises high enough, the scammer sells, or dumps, his shares and pockets a large profit.

Here are the questions you need to ask to keep from being burned:

What's the track record of the company's management team?

"What is important is to look at the experience of the management team," said Jack Uldrich, author of Green Investing. "Does the management team have a proven track record?"

Green investment companies will hit an early stage of tough development and then will have to mature quickly, he said.

"They're going to have to move out of the stage where they're relying on research and development dollars, venture capital or angel investor funds and start commercializing, bringing in revenue and then making a profit," said Uldrich.

What you want is management that has taken an alternative energy company from the fledgling stage to the point where it's selling its technology and making money.

Similarly, if you're considering a green investing mutual fund, what's the experience of the portfolio manager overseeing it?

"The whole field of green energy is moving so fast," Uldrich said. "Unless you really have the time to immerse yourself in this, one of the best strategies in this is to find a well-managed fund that understands this."

Green energy funds will "find the best solar companies, the best wind companies," he said.

It helps if the fund manager has a scientific background because then he or she can understand a technology intuitively, as opposed to taking the word of a scientist at the company.

Having a fund manager with scientific expertise, as well as the financial acumen, should give you more confidence that the manager will be able to pick the best investments in the green energy area.

If you're considering a specific green energy company, do you understand its technology?

"You need to understand how it's making money," said John M. Gannon, senior vice president for investor education at the Financial Industry Regulatory Authority.

A corollary question is does the technology make sense financially?

"Can its product or technology be mass-produced quickly, cheaply and reliably?" Uldrich said.

At what stage of development is the product?

"Is it in the concept, preproduction or postproduction stage?" Uldrich said.

"If it hasn't matured to the point where it is past the concept and an actual prototype has been developed, it is too early for most investors."

Do the company's investment claims make sense?

In one scam, a solar panel stock was touted as "set for a 200 percent gain," said FINRA.

"Most investments don't have that type of return," Gannon said. "Two hundred percent within a short period of time is not likely for most investments."

In another case, a stock in a China-based wind-power company was touted as a "one in a million" opportunity that could quickly climb to "51 times its current level," FINRA said.

Get real.

It's easy to see how such claims can entice investors, especially those looking to get in at an early stage.

The attitude among eager investors, Korotash said, is: "It's my chance. I might have missed Microsoft, I might have missed Apple, but I'm not going to miss the wind farm."

Another appeal of green investing is the "feel good" factor.

"You're helping the environment, you're doing a good thing, so the story line really resonates," Korotash said.

But all that matters little if you fall prey to a scammer, so exercise the highest level of skepticism.

"It is easy for an average person to get sucked into some of these scams because people can really put promising strategies around any of these technologies," Uldrich said.

"What people don't hear is how competitive it is, and in the marketplace, only a few of them are going to win."