Promissory notes are often used by companies to raise revenue. Investors loan money to the company in exchange for a promise to repay the principal, plus interest, on a specific date. While these forms of debt can sometimes be legitimate, there is a substantial enterprise of fraudulent notes being marketed to individual investors. With hundreds of millions of dollars in financial losses, the United States Securities and Exchange Commission (SEC), along with state security agencies, is working to combat this widespread problem.
Promissory note fraud schemes follow a pattern
Promissory note fraudsters target a wide range of victims, but reports show that the most targeted group is the elderly, with many of these vulnerable people losing their retirement savings in the process. As explained by the SEC, promissory note fraud generally follows this general pattern:
- Independent life insurance agents sell the notes. These individuals rarely have a legitimate license to sell securities. They are lured into the scheme with promises of a lucrative commission. Relying on the word of fraudsters, they go out and sell the notes to individuals.
- Innocent victims purchase the notes. These individuals are told that they will receive lucrative returns on their investments, sometimes at rates up to 20%. The agent may represent the promissory notes as “guaranteed” or “insured” to further entice the buyer.
- The agents are compensated. The fraudsters use part of the proceeds from the sale to pay the agent commissions, before absconding with the remainder of the money.
- Fraudsters maintain a “Ponzi” scheme. Under these scenarios, the fraudster is operating scam, which uses money from new sales to make “interest payments” on old note sales. This scheme keeps investors satisfied for a while, as they receive what they think are interest payments on their promissory note, but the principal is never recovered.
- Roll over into a new promissory note. As notes come due for payment, fraudsters often try to force investors into “rolling over” their existing promissory note into a new one. This way, the fraudster can avoid paying back the principal loan amount.
Take actions to protect yourself from this pervasive fraud
The best defense against securities fraud is to arm yourself with information and ask questions when approached with this type of investment opportunity. Legitimate promissory notes are rarely made available to the general public. These types of debts are generally reserved for private groups of sophisticated investors. So, beware of someone contacting you out of the blue offering a promissory note investment.
If you are considering the investment, check the legitimacy of two factors:
- Is the seller a registered insurance agent, properly licensed to sell securities? You can find that information here on the BrokerCheck® website.
- Is the investment properly registered with the SEC or the securities regulatory agency in your state? Call your state agency to inquire and/or access the SEC website here.
If you believe that you have been defrauded by a promissory note scam, the law only allows a certain window of time to take action. Therefore, it is very important to quickly contact an experienced investment lawyer who can walk you through the steps of the reporting process. Call us at 888.741.7503 or contact the Frankowski Firm today, and work with a securities fraud attorney who can help you protect your future.