The Sole Objective of Promissory Note Schemes is to Defraud Investors

*Update: FINRA is reissuing this alert on the heels of its disciplinary action related to the fraudulent sale of promissory notes to NFL and NBA players.

In June 2014, a FINRA hearing panel expelled Washington, D.C.-based Success Trade Securities, Inc. and barred its CEO and President for the fraudulent sale of more than $19 million in promissory notes. The alert details the risks associated with promissory notes and the continued threat of promissory note schemes whose sole objective is to defraud investors.Scams involving promissory notes rob investors of tens of millions of dollars. The promise of high guaranteed rates of interest (some as high as 26 percent) make these come-ons particularly attractive in today’s low-interest rate environment.

Promissory Note Schemes are Hard to Detect – If You’re at all Suspicious Call Us for Help

Investors who consider buying promissory notes need to check them out thoroughly. Unlike many investments today, promissory notes sound simple and safe, and appear to be an attractive alternative to stocks and bonds. While they can be legitimate investments, some promissory notes sold widely to individual investors are fraudulent. Recent fraudulent schemes include promissory notes purported to be secured by investments in real estate, US Treasuries, brokerage firms and a variety of businesses including one that produced personal finance-related radio programming. Investors need to understand the investment they are considering, and be aware of warning signs that may signal a scam.

Don’t Trust the Promise of Interest Returns on Unregistered Investments

A promissory note is a form of debt that companies sometimes use, like loans, to raise money. The company, through the notes, promises to return the buyer’s funds (principal), and to make fixed interest payments to the buyer in exchange for borrowing the money. Promissory notes have set terms, or repayment periods, ranging from a few months to several years.
Problems with promissory notes fall into three main categories: fraud and deception of investors, unregistered securities and unregistered sellers.

Don’t Trust the Promise of Suspiciously High Returns

Fraudulent promissory note programs are often characterized by deceptive statements such as: 1) investors will receive very high, double digit returns; 2) returns are guaranteed; and 3) the notes are backed by collateral to guarantee them. Often, promissory note schemes target the elderly and their retirement savings.

All Securities Must be Registered with the SEC or They Are Not Permissible

Often, these promissory notes are securities and must be registered with the SEC or the state they are sold in. If you are buying through a broker, ask if the note is being sold through the broker’s firm. If not, it is being “sold away,” and you will miss important investor protections that flow from the broker’s and the firm’s regulatory obligations. Be alert to red flags that your broker may be operating outside the oversight of the firm. These may include the use of a personal email address instead of one associated with the brokerage firm, statements about your investment that do not bear the firm’s letterhead or appear to originate from a new entity not related to the brokerage firm or printouts that look like they came from a home computer.

Have You Lose Money because of Promissory Notes? Recover your Losses!

Know that financial advisors and brokers should not guarantee a particular return. Even if the note has a fixed interest return, the investment may not pay that amount—or return your principal—to you. Moreover, the seller may say the notes are insured, but not mention that the insurer may not be legitimate or creditworthy.

*Excerpts taken from