Promises, promises: Investors warned about risky, fraudulent promissory notes

Con artists target elderly, even pray with victims to gain their trust

Washington, D.C. (July 19, 1999) — State securities regulators are warning investors about promissory notes, often sold by insurance agents, that promise high interest rates but are in fact very risky and often fraudulent. Many victims are elderly, like an Indiana woman in her late 80s who invested $324,000, all her retirement savings, in bogus promissory notes. Con artists work hard to gain the trust of unsuspecting investors, in several cases even getting on their knees and praying with their victims.

Securities cops in over 35 states have reported complaints or brought enforcement actions involving promissory notes. The increase in the sale of these “notes” has prompted 20¹ states to create a promissory note task force. Led by the Florida Comptroller’s Office in Tampa, the task force will work with state and local law enforcement agencies and other organizations such as the National White Collar Crime Center. The North American Securities Administrators Association (NASAA), which represents state regulators, included promissory notes on a recent list of “Top Ten Investment Scams.”

“Interest rates are lower than they’ve been in a generation. While that’s been great for the economy, it’s been hard on people dependent on interest income–and desperate people make tempting targets for crooks,” says Bradley Skolnik, Indiana Securities Commissioner and president-elect of NASAA.

These promissory notes are often sold by life insurance agents–lured by high commissions–who may know nothing about the promoters of the investments beyond what they’re told. The agents also may not realize that they must be licensed as securities brokers with state securities regulators to sell securities. Some notes are issued on behalf of companies that don’t even exist.

Regulators say a promissory note scam can work like this. A life insurance agent who sold you a policy calls with an intriguing investment opportunity. A “well-established” company is looking to expand its business and needs to raise capital. Instead of borrowing money from a traditional lender such as a bank it is offering investors an opportunity to purchase “promissory notes,” typically with a maturity of nine months and an annual interest rate between 12% – 18%, far more than an investor could get elsewhere. Agents pressure clients to “cash-in” their life insurance policies and “roll” them into these notes.

The investments, regulators warn, are likely to be obligations of fraudulent institutions that either abscond with the clients’ money when the notes mature or use a “Ponzi scheme” to pay Peter with new money from Paul.

On Friday (July 16), Indiana regulators announced the filing of a 78-count criminal action against three individuals, including an insurance agent and an investment adviser. They were accused of bilking 19 elderly investors out of $1.4 million through the fraudulent sale of worthless promissory notes issued by two Indiana companies, Real Finders, Inc. and Great Midwest Technologies, Inc. Prosecutors say the money raised was stashed in offshore bank accounts or spent on houses, expensive cars or overseas trips. Victims ranged from a 57-year old woman who invested all her inheritance to a 92-year old widow. One female victim, in her late 80s, invested $324,000, all her retirement money. Marion County prosecutor Scott Newman said the accused con men went to great lengths to win investors’ trust, “often getting on their knees and praying with their victims.”

In Maine, seven individuals were sentenced in June in connection with an $8 million promissory note scam involving over 100 investors. One person received a 15-year sentence, another got 14 years. Both were ordered to pay restitution to their victims, many of whom had been talked into cashing in their annuities to buy the notes.

In California, regulators in May filed criminal charges against an unregistered broker-dealer for selling unqualified promissory notes for a purportedly fraudulent medical leasing company, Medco, Inc. The notes, sold to 87 investors, raised some $3.8 million. They promised interest rates of 12% to 16% and were supposedly secured by medical equipment. Medco, in fact, was operating a Ponzi scheme.

In Florida, state securities regulators are investigating Lifeblood Biomedical, Inc. of Orlando. Lifeblood’s “marketing agents,” allegedly sold fraudulent nine-month promissory notes through a network of investment advisers and insurance agents. So far $9 million dollars has been collected from at least 200 investors nationwide. The Lifeblood promissory notes, in amounts of $25,000 or more, were purportedly guaranteed by a series of offshore bonding companies (Tangent Insurance, Threshold Insurance, Caribbean Insurance), not registered with U.S. authorities. Each bonding company has refused to pay any claims. The agents told investors the bond guaranteed no risk of loss and the investment was sold compared to the safety of a certificate of deposit, according to the Florida Comptroller ‘s Senior Financial Investigator Laura Royal.

In Maryland, regulators issued a cease-and-desist order against the Hudson Bay Trading Co., LLC, a Texas company that issued one-year “Gold Revenue Investment Bonds” promising 36% annual interest. The “bonds” were not registered with state or federal regulators. Hudson Bay apparently sold over $700,000 of these “bonds” to at least 23 Maryland investors.

What’s the attraction of promissory notes? According to Fred Sturdevant, Indiana’s chief securities investigator, some investors “don’t want exposure to the risk of the general securities market and are turned off by traditional insurance products. They’re attracted to this type of investment that has an aura of safety with a higher-than-market rate of return.” Investors often get “real” promissory note certificates complete with official legal-sounding language and gold embossed seals.

Unlike traditional boiler-room cold callers, who solicit clients by telephone and usually have no prior relationship with them, insurance agents (some of whom are unlicensed) know their customers well. Many of the victims are elderly. Duane Fry, Georgia’s director of securities enforcement, noted that “commissions are high, and money is easy to get.”

Besides life insurance agents, promissory notes are also sold by out-of-state investment advisers; some are promoted over the Internet.

Here are some tips to protect yourself and your money:
Before investing in any promissory note, investors should always check with their state securities regulator to confirm that the notes are properly registered or legally exempt from registration. If you can’t verify that the notes are registered or exempt from registration, hold onto your money. Do research to ascertain the legitimacy of the company whose notes are being offered. [Florida regulator Laura Royal says any investment “guaranteed” by a bond from an offshore bonding company should be thoroughly investigated by the selling agent. Your state insurance department can verify if the bonding company is registered to do business in the U.S.]

Agents selling these “notes” are usually required to be licensed by both the state and the National Association of Securities Dealers. To find out if the agents are registered or have a disciplinary history, contact your state securities regulator ( or call the NASD Public Disclosure Hotline at 800-289-9999.

Be suspicious if the notes have an above-market rate with a maturity of less than a year. With 30-year Treasury bonds yielding around 6% and the national average for a one-year FDIC-insured bank certificate of deposit just below 5%, you should be very skeptical when someone offers you a nine-month “note” from an obscure firm promising 12%.

¹ 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

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1999 Headlines, Newsroom, Senior News & Alerts