Avoiding Promissory Note Fraud

There is a new type of fraud sweeping the country that has cost investors hundreds of millions of dollars. Scam artists are conning legitimate independent insurance salespersons to sell fraudulent securities to their clientele. The unwitting independent insurance agent can lose his or her insurance licence, be fined $5,000 to 10,000 per violation by State Securities Agencies and face criminal indictment and civil lawsuits. The client may lose his life savings. The securities include promissory notes, viatical interests, pay phone leases, offshore/prime investments and currency trading products. This article will focus on promissory note fraud.

A Wide Spread Problem
There are at least thirty different types of promissory notes with a total value in excess of three hundred million dollars being sold by thousands of independent insurance agents across the country.

The con artists offering these notes to the insurance agents are either creating bogus companies or offering these notes on behalf of risky startup companies in need of capital but which have inexperienced management and little or no earnings.

How the Scheme Works
Often, the con artists consult marketing firms to develop flashy marketing programs to push the promissory notes. What they develop is a promissory note and financial guarantee bond. These investments look extremely safe on paper because of the guarantee. The con artists hold seminars to entice insurance agents to join their network of insurance agents who sell their promissory notes. Very high commissions provide ample incentive for the insurance agents. The con artists will use insurance agents because they have an idea of what their client's assets are as well as their client's trust. The insurance agents will usually contact their own clients to sell these notes and they may place advertisements in local newspapers offering safe high yielding guaranteed investment products. These look very attractive to potential investors because they offer nine month promissory notes that can earn twelve percent or higher interest income and are guaranteed by a bond company. At enticing lunch or dinner investment seminars, investors are told to redeem their bank certificates of deposit and treasury notes for these guaranteed safe promissory notes.

Looks Like a Fantastic Investment
At first, the purchase of these promissory notes seems fantastic. The investors begin to get their monthly high interest income checks as promised by the agent while the agent receives a high commission. Of course, at this point the nine month note has not come due. Everyone is happy and unaware of any problems. After the nine months are up, the agents are encouraged by the con artist to have their clients renew the promissory note for another nine months. Most investors do reinvest and may also purchase another promissory note because the first one has done so well. The insurance agents are happy because they can receive another high commission check. The problem is, like any ponzi scheme, investments from new clients are used to pay interest and commissions on the old promissory notes. As long as this ponzi scheme continues and agents lure more people into the trap, all goes well. However, eventually the scheme ends. The investors look for their initial investment, and it is gone. The company that offered the promissory notes has disappeared. The bonding company, if there ever was one, denies the bond because of fraud. In other situations the investor learns that the bonding company has no assets to pay the defrauded investors. The only recourse left for investors who have lost their life savings is to sue the insurance agents. Usually the agents have very limited assets and their disgruntled clients are unable to collect much.

Esther's Story
Esther came to me because she had purchased a wonderful investment offering high interest. Her only problem was that the company refused to return her initial investment. After I investigated the situation, we learned that the company had gone into bankruptcy and her promissory note had been discharged in bankruptcy. The interest income that she received would be the only monies she received from this investment. Esther lost most of her life savings from this fraud.

Avoid being Scammed
A. Richard Gerber, the Pennsylvania Securities Commissioner and I recently gave a presentation to the Pennsylvania Bar Association about consumer fraud. Commissioner Gerber stated that his Commission is doing everything possible to help defrauded investors. He told the Bar Association that the public generally spends more time investigating their auto mechanic or hairdresser before using them than they do investigating the people who they wish to handle their life savings.

Commissioner Gerber advises that if a salesperson comes to you to solicit your purchase of this type or any other type of investment, be careful. Before you invest with a particular agent, contact the Pennsylvania Securities Commission at (800) 600-0007 to see if the salesperson has been caught selling fraudulent promissory notes or other fraudulent securities, or has any disciplinary history . The best advise continues to be if an investment looks to good to be true, beware.

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