Buyer Beware: Has the SEC Uncovered a Green Con?

When UK-based CO2 Tech began trading in the public equity markets in 2007, they appeared to be an ambitious, forward-looking company poised to tackle global climate change head-on.  According to one of their early press releases, they referred to themselves as a provider of “cutting-edge, sophisticated anti-global warming technologies along with a full range of expert consulting, and environmental products and services to businesses, industries and governments.”  In another release, they touted proprietary “carbon absorption software” designed to streamline “pollution abatement technology in which pollutants are removed from air by physical adsorption onto activated carbon grains.”

These press releases often featured enthusiastic quotes from company CEO, Helga Schotten, who seemingly knew how to “talk the talk” when it came to credentialing CO2 Tech’s climate change expertise and boldly predicted that CO2 Tech would revolutionize the way the world does business when it came to reducing carbon emissions.  Investors took notice.

The company began trading on January 25th, 2007 at $2 per share, with light volume: only 1200 shares traded hands.  But the volume on the subsequent days spiked enormously -  particularly for a small, relatively unknown company - peaking at 12,204,795 shares on January 30th.   Curiously, despite this huge uptick in volume, the stock price quickly took a nose dive.  After peaking at $7 on the second day of trading, by February 2th 2007, CO2 Tech was trading at $1.17 per share.  By February 9th, 2007 it was down to $.40 per share.  By May 2007 the share price had fallen below $.10 per share, never again to recover.  It now trades at less than 1 penny per share.

So what exactly happened to the company that pioneered the “cost-effective heavy duty evaporator unit”?

According to a complaint filed by the Securities and Exchange Commission (SEC) on February 18th 2011, CO2 Tech was nothing more than a sham company run by swindlers capitalizing on the climate change craze, generating more than $7 million in illicit profits from unknowing investors.   The SEC claims CO2 Tech never had substantial operations, lied about their business relationships and expertise, and used off-shore entities to launder proceeds from the stock offering.  It was a classic pump and dump scheme – promoters artificially inflated the company’s share price through false press releases (the pump) and then sold these overpriced shares to public investors at a profit (the dump), leaving these unsuspecting investors holding the bag.

Pump and dump schemes are fairly common in the risky world of penny stocks, where smaller, often illiquid companies trade on the “Pink Sheets” – an electronic quotation system with minimal listing requirements.  However, what makes this case unusual is the company in question specifically and quite brazenly targeted the SRI market.  If the SEC charges are true, then the group behind this fraud used social responsibility as a means to attract and dupe investors.

What does this mean for the SRI investor?

Just because a company has issued shares and trades on an open market doesn’t necessarily make it a legitimate company with viable business prospects.  Given the rapid growthin profile of socially responsible investments in recent years, there will undoubtedly be those individuals and entities looking to exploit this trend. As an SRI investor, it’s important to be vigilant not just for greenwashing, but, as alleged in this case, outright fraud.  When it comes to investing in individual companies, particularly those that are smaller entities with limited financial filings available to the public, it is essential that proper due diligence is conducted before any money is invested.  If you feel that you can’t conduct the necessary due diligence on your own and are still interested in investing, contact a professional advisor to help you.

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