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Think Twice Before Acting Upon This Investment "Advice"

In this space, I'm often quite critical of the mutual fund industry. And while I firmly believe that there's a great deal of room for improvement among many of the industry's participants, some of the players in the darker corners of the stock market make the fund industry look like saints.

Consider, for instance, a recent flyer that I came across from Andy Carpenter, author of The Carpenter Global Stock Advisory newsletter. In it, Carpenter urged his readers to consider an investment in Far East Wind Power (FEWP), a firm that he believes is poised to reap remarkable gains from the Chinese government's investment in wind power.

On the inside cover of the twelve-page document, Carpenter predicted that "FEWP is going to be a 2,700% winner!," and that he couldn't "remember the last time [he] encountered an investment opportunity with so much upside potential ... and so little downside risk."

Similar hyperbole follows, touting Carpenter's track record in picking winning stocks and describing why FEWP is such a worthy investment.

To buffer his credentials, Carpenter provides some seemingly positive press coverage he has received. For instance, he writes that the Wall Street Journal said he "Dig[s] up information on companies Wall Street can't be bothered with." It turns out that a February 2004 article in the Journal did say that about Carpenter, but was actually repeating what Carpenter told the reporter he does. The article, headlined "China '04 Feels Like Nasdaq '99," described Carpenter as a "journeyman newspaper reporter" who "hasn't visited China" and "has had only fleeting contact with any Chinese businessmen," who nonetheless transformed himself into a "China promoter" who doesn't let his "inexperience with the Middle Kingdom slow [him] down."

The USA Today article Carpenter quotes is even more interesting. Written in August 2004, the headline read "Newsletter's China Picks Looked Good ... On the Surface; Stocks would soar, but not for long." The article described Carpenter's concern that the newsletter, from which he had recently resigned as editor, "was contributing to a 'pump and dump' stock scheme orchestrated by company insiders and his partner, John Michael Casson, the newsletter's publisher." It goes on to describe the stock picks provided by Carpenter's then-newsletter as "dubious" and "fraught with peril for unsophisticated investors," nothing that "ten months after the China Dispatch [Carpenter's newsletter at the time] made its debut, most of its stock picks have swooned following initial gains."

For the uninitiated, the SEC defines a pump and dump scheme as follows:

"Pump and dump" schemes, also known as "hype and dump manipulation," involve the touting of a company's stock (typically microcap companies) through false and misleading statements to the marketplace. After pumping the stock, fraudsters make huge profits by selling their cheap stock into the market. ... Often the promoters will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is "pumped" up by the buying frenzy they create.
Armed with this information, it's interesting to consider the fine print in Carpenter's flyer touting FEWP in the "Important Notice and Disclaimer" section. There, the reader is told that "Andrew Carpenter ... received twelve thousand five hundred dollars [spelled out, curiously enough] from Paramount Presentation Corp., which it received from a shareholder(s) of Far East Wind Power, who may or will sell shares of [FEWP] at or about the time of this mailing." We're also informed that the payment Carpenter received was only a fraction of the $524,850 that a FEWP shareholder paid Paramount.

Interesting, no?

So finally, I took a look at FEWP's SEC filings. There I found, in a filing dated June 17, 2010, that three members of what Carpenter called FEWP's "dream team" of managers and engineers were recently granted nearly 1.5 million shares of FEWP stock.

So let's see. Three FEWP executives are given huge stock grants in mid-June. An unidentified FEWP shareholder pays a firm more than a half-million dollars to "build investor awareness" about FEWP, $12,500 of which trickled down to Andy Carpenter. In turn, Carpenter produced a flyer that I came across in mid-July predicting that an investment in FEWP could "be [his] next big winner," turning "$10,000 into $270,000."

How is this permitted? Well, because it's just an advertisement, of course. At the very end of the ad's fine print, we're informed that "This mailing piece is not intended to, nor should it be construed as ... a recommendation of the purchase of [FEWP's] securities."

See? It's all disclosed in clear size-eight type, right there on page 11. And that, apparently, is sufficient.

It's tempting to dismiss material like this as part of the worthless sea of junk mail we surf through every day. But doing so overlooks the fact that significant amounts of money are being paid to generate this material, which implies someone, somewhere is profiting from the fact that a segment of people who receive this are acting upon the "recommendations" these ads tout.

Who says you can't trust anyone on Wall Street?

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