How Dangerous Are Promissory Note Investments?
Although it may sound like a great way to earn a solid profit, any 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 from
an investor to a company. Some are secured by collateral; however, a high
return rate is commonly offered. These unsecured promissory notes are
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. 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.
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.
Can Promissory Note Investments Be Ponzi Schemes?
Unfortunately, the answer is yes. The investment fraud attorneys at Meyer
Wilson have represented many clients who have lost money in promissory
note investment scams. When you invest in a promissory note, you are basically
providing a loan that you hope to have paid back according to its terms.
Often, promissory notes are unsecured and, thus, provide no collateral
for you to collect if there isn't enough money to pay you.
What's worse is that fraudsters often promise a high rate of return,
or high interest rate, on the promissory note. You might even receive
payments. However, if the investment is a scam then the money that you
receive is likely from other investors in what is known as a
Ponzi scheme. At some point, the fraudster will likely be unable to pay you and the
scam will be made public.
What Can I Do if I've Been the Victim of Promissory Note Fraud?
If this has happened to you, then it is important to contact an experienced
investment fraud lawyer as soon as possible to discuss your rights and
potential recovery. The investment fraud lawyers of Meyer Wilson have
successfully represented more than 800 clients and exclusively represent
stockbroker mediation, arbitration, and litigation claims.
Please contact us today for a