South Florida Arbitration & Litigation Lawyer Blog
South Florida Promissory Note Fraud, Misrepresentation, Unregistered Sale of Securities and Unsuitable Investment FINRA Arbitration and Litigation Attorney:
A Brief Description of a Promissory Note and How the Scam Works:
An investment scam that has been gaining in popularity among fraudsters is the sale of promissory notes, especially to seniors. Unlike many investments today, promissory notes sound simple and safe, and appear to be an attractive alternative to volatile stocks and bonds. However, while promissory notes can be legitimate investments, some promissory notes sold widely to individual investors are not. Investors need to be informed and understand the investment they are considering.
What is a Promissory Note?
A promissory note is a form of debt that companies sometimes use, like loans, to raise money. The company (the promissory notes can also be issued by an individual), through the notes, promises to return the buyer’s funds (principal), and to make fixed interest payments to the buyer in exchange for borrowing the money. Promissory notes have set terms, or repayment periods, ranging from a few months to several years.
Even legitimate promissory notes involve risks-the company issuing them may have problems, such as competition, bad management, or severe market conditions, that make it impossible for the company to carry out its promise to pay interest and principal to note buyers. Investors also need to know that bona fide notes are marketed almost exclusively to corporate and other sophisticated investors, who have the expertise and information to determine if the investment is a good one.
The Problems with Promissory Notes:
Problems with promissory notes fall into three main categories: deception of investors, unregistered securities, and unregistered sellers.
Deception of Investors
The promissory note programs that are scams are often sold with the following deceptive statements: 1) investors would receive very high, double digit returns, 2) returns were guaranteed, and 3) the notes were backed by collateral to guarantee them. Frequently, a fraudulent promoter will persuade an independent life insurance agent, by offering very large commissions, to sell the notes to the agent’s trusting customers. Often, promissory note schemes target the elderly and their retirement savings.
The representation that the note are backed by collateral to guarantee them is worth a little more explanation. In order to perfect a security interest in the alleged collateral, it is important to verify the existence of the collateral. If the collateral does exist and can be identified with a degree of certainty, further documentation is necessary in order to perfect the security interest in the collateral. At a minimum, a security agreement must be created identifying the collateral, executed and recorded. Secondly, Uniform Commercial Code (UCC) forms need to be filed in the state where the collateral is located and in the home state of the issuer. Finally, if the collateral does exist and you are getting ready to file the necessary UCC forms, you need to make sure that you have a first lien on the collateral. As these documents are “legal” documents, it is important that you have “your” lawyer involved in the process so that the perfection of your security interest is completed properly. Remember, when you are dealing with fraudsters, nothing is sacred.
Unregistered Securities
Although those selling them may not know or admit it, these promissory notes are usually securities and must be registered with the SEC or the State they are sold in-or they must have a specific exemption from registration under the law. If the note is not registered, it will not be subject to review by regulators before it is sold, and investors have to do their own investigation to confirm that the company can pay its debt. If the selling agent is a registered account executive with a brokerage firm or an insurance company, these entities might be liable for losses that you suffer as a result of your investment.
Unregistered Sellers
These promissory notes are usually securities, but those selling them often do not have the required securities sales license. If registered individual brokers are involved, they may be selling the notes without their firms’ approval.
How to Protect Yourself:
If you are thinking about investing in a promissory note, you should carefully consider the following:
Ask why the seller wants to sell to you.
Bona fide corporate promissory notes generally are sold to sophisticated buyers who can do their own research on the company issuing the notes to determine whether the notes are a good deal. The fact that promissory notes are being sold to individual investors is itself a danger signal.
Check Check Check Check
Check with the SEC’s EDGAR Database to see if the notes are registered. (Remember that most promissory notes are securities and have to be registered with the SEC and the state they are sold in, unless they are specifically exempt from registration under law.) Check with your state securities regulators whether the investment and the salesperson are in compliance with your state’s securities laws.
Visit FINRA BrokerCheck to see if your broker is registered or has a disciplinary history. Check with the Better Business Bureau where the company issuing the notes is located to find any complaints against the company.
Broker Role
If you are buying through a broker, ask if the note is being sold through the broker’s firm. If not, it is being “sold away” and you will miss important investor protections that flow from the broker’s and the firm’s regulatory obligations. Although, if the investment is being sold away from the firm, the firm may still be responsible for the broker’s actions.
Guaranteed Returns
Know that a salesperson cannot guarantee a particular return. Even if the note has a fixed interest return, the investment may not pay that amount-or return your principal-to you. Moreover, the seller may say the notes are insured, but not mention that the insurer may not be legitimate-and outside the US and beyond the reach of our laws.
High Returns
Recognize that these notes usually offer double-digit returns-those greater than 10%-while, at the current time, legitimate safe investments have a much lower return. Remember that the higher the return, the greater the risk.
Exorbitant Commissions
Ask specifically how much compensation the salesperson is getting. Normal commissions rarely exceed 5%; these notes offer much more, as high as 30% or even 50%.
Issuing Company
Ask how the company issuing the notes will generate the returns to pay you your interest. Find out what part of the money that the company will be getting will be used up by marketing and promoter’s costs, which may hurt the company’s chances of paying you back. Get as much documentation about the issuing company as you can. Then you have something concrete to attempt to verify what you have been told both verbally and in writing.
If you don’t get good answers to all of your inquiries, walk away from the offer and keep your money.
What do You do if You Have Already Invested?
If you think you are involved in a promissory note scam, act quickly, since the law limits the time for you to take legal action. Remember: regulators-or lawyers you hire and pay for-can sometimes help you get your money back from a problem deal, but the best way to keep your money is to not participate in the first place.
With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.
At the Boca Raton, Florida Law Office of Russell L. Forkey, we represent clients throughout South and Centeral Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.