WASHINGTON -- State securities regulators are warning investors about promissory notes, investments promising high interest rates, that they say are risky and often fraudulent.
Scam artists selling bogus promissory notes work to gain investors' trust, in some cases getting down on their knees and praying with the people they are ripping off, the North American Securities Administrators Association said Monday. The elderly are especially targeted.Authorities in at least 35 states have received complaints or taken enforcement actions involving promissory notes, according to NASAA, which is comprised of securities regulators from the 50 states, the District of Columbia, Puerto Rico, Canada and Mexico.
In response, 20 states, including Utah, have set up a task force on promissory notes led by Florida.
The notes often are sold by life insurance agents, lured by high commissions, who may know nothing about the promoters of the investment or may not be aware that they must be licensed as securities brokers with the state to sell such investments, NASAA said. Some promissory notes have been issued on behalf of companies that don't exist.
While the record low interest rates now prevailing are great for the economy, "it's been hard on people dependent on interest income -- and desperate people make tempting targets for crooks," said Bradley Skolnik, Indiana's securities commissioner and NASAA president-elect.
A typical scam works this way:
A life insurance agent who previously sold you a policy phones you about an investment opportunity, saying a well-established company wants to expand its business and needs to raise capital. Instead of borrowing money from a bank, the agent tells you, the company is offering investors a chance to buy promissory notes -- typically with a nine-month maturity period and paying annual interest of 12 percent to 18 percent.
The agent pressures you to cash in your life insurance policy and "roll" it into the promissory notes.
The fraudulent companies that issue the notes either abscond with the investors' money when the notes mature or use a classic Ponzi scheme to pay earlier investors with money from newer ones until the scam collapses.
The state regulators offer these tips for investors:
Before investing in any promissory note, always check with your state securities regulator (information available at www.nasaa.org) to confirm that the note is properly registered or legally exempt from registration.
Look into the legitimacy of the company issuing the notes.
Agents selling the notes usually must be licensed by both the state they work in and the National Association of Securities Dealers. To find out if the agent is registered or if he or she has a disciplinary history, contact your state securities regulator or call NASD's public disclosure hotline at 1-800-289-9999.
Be suspicious if the notes have an above-market interest rate and a maturity of less than a year.
The 20 states forming the new task force are California, Colorado, Florida, Georgia, Indiana, Kentucky, Maryland, Mississippi, Nebraska, New York, North Carolina, North Dakota, Ohio, Pennsylvania, South Carolina, Texas, Utah, Virginia, Washington and Wisconsin.