Life Insurance Quotes

The Securities and Exchange Commission (SEC) and state securities regulators have cracked down on the fraudulent sale of promissory notes in 28 states.

Promissory notes are investments in which an investor loans a company money in return for 11 to 20 percent interest on the loan. The payments generally last for nine months, until the investor gets his money back. The North American Securities Administrators Association (NASAA) points out the most common sellers of promissory notes are independent life insurance agents, although financial planners and investment advisors also sell them.

The SEC issued 13 enforcement actions against 38 individuals and 22 distributors, accused of selling fraudulent promissory notes. The SEC has imposed a variety of penalties, including fines, license suspensions, cease and desist orders, and criminal charges for selling unregistered securities.

Brad Skolnik, a former-securities commissioner for the state of Indiana, says a group of state securities regulators formed a task force to study an increasing number of reported fraudulent sales involving promissory notes. The investigation involved the sale of promissory notes to 3,000 investors.

Investors left high and dry

NASAA warns about two kinds of promissory-note scams: The companies people invest in are bogus, or the companies are legitimate but the agent or distributor of the notes does not give the money from the loan to the company.

NASAA claims it's common for some investors to get interest payments for the first two or three months, and then find themselves abruptly cut off. When the investors then try calling their agents or distributors, they find the sellers have skipped town, and in some cases, have moved on to another state to perpetuate the scam. NASAA points out some insurance agents try to sweeten the deal by assuring the investment is protected by a bond company that, in many cases, doesn't exist.

Skolnik says not all promissory notes are fraudulent, but recommends investors stay away from them unless they have guidance from an attorney or an experienced financial planner. "Unfortunately, in any profession, there are a certain number of bottom feeders who will chase anything for a commission," he says. "And that's what you have here."

While investors of all ages can be susceptible to promissory-note scams, NASAA claims the elderly are particularly vulnerable targets. Older investors are generally less risk tolerant, and the idea of garnering a guaranteed investment is very attractive to them.