Securities Regulators Warn of Increasing Promissory Note Scams

Promissory notes among top worries for state investment regulators: Internet Scambusters #809

Investors are still chasing dubious high interest rate deals like promissory notes, real estate schemes, Ponzi schemes, and oil/gas investments.

That’s the warning from state securities regulators in a recent survey. And there are more investment scams to come from cryptocurrencies and ID theft, they say.

In this week’s issue, we’ll give you all the details, pinpointing some of the red flags you should be on the lookout for.

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Now, here we go…


Securities Regulators Warn of Increasing Promissory Note Scams


The search for high investment returns, especially in this era of historically low (but now rising) interest rates, continues to lure savers and investors into dubious financial schemes.

Top of the list for scams in the U.S. are short-term promissory notes, a sort of loan investors can make to businesses.

A recent survey of U.S. state securities regulators found these types of investments to be the most likely to give rise to complaints.

In a statement, the North American Securities Administrators Association (NASAA) said nearly three quarters of regulators nationwide said promissory notes were among their leading sources of complaints and investigations.

“In today’s ongoing environment of low interest rates, the lure of high-interest-bearing promissory notes continues to tempt investors, especially seniors and others living on a fixed income,” says NASAA President, Joseph P. Borg.

One of the tactics scammers use is to issue notes of less than nine months’ duration. The attraction to the crooks is that, in some circumstances, short-term financial instruments of this type don’t have to be registered with financial authorities.

Usually, the buyers of these notes are sophisticated corporate investors who would quickly spot a scam. But where they’re offered to the general public, NASAA urges caution. These have been the source of most fraudulent activity reported by members.

The scam is quite simple: you’re tricked into buying a promissory note and either lose all your money or don’t earn the interest rates you’re promised because of all sorts of “expenses” that you were never told about.

The financial portal finweb.com lists the following four signs of a promissory note scam:

  1. You receive an unsolicited telesales offer. Investors who want promissory notes usually initiate the purchase themselves after doing research and working with a broker.
  2. The note is not registered with either the Securities and Exchange Commission (SEC) or your state securities register. This doesn’t guarantee it’s a scam but should make you highly skeptical.
  3. The person or organization offering the notes is not licensed to sell securities. If the seller can’t prove they’re licensed, don’t deal with them.
  4. They use terms like “risk free.” Like most investments, promissory notes are not risk-free.

The SEC also has a page devoted to promissory note fraud.

The NASAA survey also pinpoints five other common areas for fraud and other complaints from investors.

These are:

  1. Real estate investments often “sold” through investment seminars claiming they’re a sound alternative to equities and bonds.
  2. Ponzi schemes and multi-level marketing (MLM) programs. Victims are lured in by promises of high returns, often with what seems to be proof, backed by testimonials. This usually turns out to be the track record of a few lucky investors who got in at the beginning and were paid their high returns with other people’s money.
  3. Oil and gas investments, mainly due to misrepresentation of prospects for a specific well-drilling operation.
  4. Affinity fraud, in which scammers exploit friendships and social groups (like churchgoers) with whom they’ve built up trust.
  5. Variable annuity sales. Oftentimes, these are legitimate products sold to people for whom they’re really unsuitable or for which there are high commissions and surrender fees.

Equally importantly, the Association has also raised the alarm over what it sees as emerging threats for investors in the coming months.

“Technology, and in some instances the criminal misuse of technology, is at the heart of each of the emerging threats investors are likely to face in the coming year,” says Keith Woodwell, the organization’s Enforcement Section chair.

Chief among these are scams relating to cryptocurrencies — digital money which has no centralized control.

The best-known cryptocurrency is Bitcoin, but there are now hundreds more, some of which have turned out to be scams costing investors millions through phony initial coin offerings (ICOs) or complex transactions called contracts for difference (CFDs).

CFDs are actually illegal in the United States and are sold through online services, many of which are fraudulent.

We’ll be taking a closer look at cryptocurrency scams in a future issue.

In addition, NASAA says it’s concerned about the continuing rise in identity theft with the specific aim of draining investors’ accounts.

Says NASAA’s Borg: “All investments involve a degree of risk. Investors can help protect themselves by taking time to research both the investment product and the person selling it. It’s best to learn before you get burned.”

To which we’d add that you should also consult a financial advisor you know and trust (or one recommended by friends or family) before making any significant investment, especially in non-mainstream areas other than stocks and bonds.

Alert of the Week

Beware of a new imposter scam exploiting the 9/11 tragedy.

Crooks posing as fundraisers for the September 11th Victim Compensation Fund (VCF) are making random calls to people in various parts of the U.S. telling them they’re entitled to money from the fund.

It’s mainly a phishing scam because victims are asked for their Social Security number (SSN) and bank account details.

The VCF is a legitimate organization but it doesn’t ask for full SSNs. Hang up. Or, if you think the call may be real, still hang up and contact VCF on 1-855-885-1555.

That’s it for today — we hope you enjoy your week!