Promissory Notes are Risky Investments – Find Out Why

Although it may sound like the perfect way to earn a solid profit, any investment fraud lawyer will tell you it pays to be skeptical when it comes to promissory notes. In the last few years, there has been a steep increase in the incidence of promissory note fraud. A promissory note is essentially a loan, like an IOU, from an investor to a company. Some promissory notes are secured by collateral; however, a high return rate is commonly offered instead. These unsecured promissory notes are very risky because it is nearly impossible to recover your money from the person making the “promise” if something goes wrong.

How Does Promissory Note Fraud Work?

In one example, fraudsters set up a marketing firm front catering to small businesses that are new and/or struggling. They then entice independent insurance agents to sell the notes. These insurance agents, although not licensed to sell securities, are dazzled by the high commissions and may entirely rely on the information the scam artist feeds them. The scam artist will assure the agent that there is no risk, and "guarantee" a high return. Because promissory notes are generally set to mature quickly, and because the promised returns are so high, investors may be encouraged to roll their entire retirement savings into promissory notes to gain a quick interest boost.

Where Does the Money Go?

The scam artist may use some of the cash to pay off the struggling businesses in order to keep up the appearance of legitimacy. Some of the cash is used to pay commissions to the agents pushing the notes, and the fraudster pockets the rest. Oftentimes, this comes in the form of a Ponzi scheme, wherein the scam artist uses money gained from new note sales to pay previous investors.

Left Holding Worthless Paper

Although some struggling businesses may actually be legitimate and need cash to stay afloat during a hard time, they may have also been taken in by the fraudster’s false promises. They end up in trouble because the scam artist's marketing company charges such high commissions and interest rates that any money they receive is cancelled out. The company is eventually forced out of business or goes bankrupt. Once the business has folded, the promissory notes are worthless, and investors are unable to collect.

What Can I Do if I've Been the Victim of Promissory Note Fraud?

If you have been the victim of investment fraud in any of its forms, please click here so we can better evaluate your case. We are securities fraud attorneys representing investors nationwide in securities arbitration and litigation. At the law firm of Meyer Wilson, we believe education is prevention; however, if you have already been the victim of investment fraud, it may save your case to read our FREE book, Five Signs of Investment Fraud… And What to Do if It’s Happened to You.

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