State and federal regulators are cracking down on con artists and unwitting insurance agents selling fraudulent promissory notes. Such fraud has spread quickly across the country, most notably in Connecticut and California.
And what's worse, this fraud is often directed towards the elderly, who participate in these schemes with their life savings.
Promissory notes are short-term debt instruments, issued by companies for quick cash. These notes are essentially IOUs. Because they are often for a time period of 9 months or less, federal law allows these notes to be exempt from securities registration.
It is this registration loophole that con artists use to their advantage.
A con artist starts by establishing a marketing company. These flimsy marketing firms promise to help small companies in need of emergency cash by issuing promissory notes on their behalf. The marketing firms then sell the fraudulent notes, usually through a network of insurance agents.
Each note usually comes with a guarantee from an imaginary foreign insurance company. The marketing company then splits the proceeds raised from the fraudulent sales, and pays a commission to the agents that sold the notes.
Insurance agents and investment advisors recommend the notes because of high commissions, promised from the marketing company. And clients are lured by the high rates of return.
These unsecured notes usually carry a 12-20% "guaranteed" interest rate. And with a repayment guarantee from the fake foreign insurer, many unknowing agents are going so far as "guaranteeing" the notes to their very best clients.
What's important to realize is that these notes are often issued to prop up troubled companies, looking for quick cash. When the company and the foreign insurer suddenly go belly-up, purchasers are left holding worthless paper.
The Securities and Exchange Commission, the government agency that overseas securities, is not taking this lightly. The agency has already issued several hundred cease and desist orders. SEC officials, fearing that this epidemic will continue to grow, are working closely to educate the public about the fraudulent practices.
Another problem has been a lack of education among insurance agents about these scams. Many insurance associations and commissioners are just now learning about the widespread problem. However, agents that have not heard about the alarm are still promoting these worthless notes.
Many of the companies that need the cash are legitimate endeavors. However, when forced to pay 9-14% in annual interest, as well as a hefty 20% commission to the marketing companies, these cash-starved companies often fold under pressure.
In several extreme cases, even the companies backing the notes are nonexistent. According to USA TODAY, California regulators recently shut down a company called Hapjack Marketing, alleging that the firm had issued over $20 million in promissory notes on behalf of three different companies.
Here's the kicker: each one of those companies operated out of Hapjack's address.
Regulators estimate that promissory note fraud has cost Americans over $300 million. And they expect that figure to rise, as con artists become more creative with their pitch.
Officials from state and federal agencies are promising to crackdown. Since these scams often target the elderly, the American Association of Retired Persons (AARP) has also stepped up to the plate, alerting its large membership about the pitfalls.
In the meantime, here
are some ways to avoid becoming the next victim of promissory note fraud.
Following these steps, as well as your own common sense, will help you avoid the many pitfalls that con artists have laid out.
Learn more about saving for retirement, and visit our Retirement Center today!
Securities regulators from 38 states are cracking down on promissory note fraud.
These states include:
No endorsement of or by these sites is intended. Each website will open in a new window.