A promissory note is a form of debt – similar to a loan or an IOU – that a company may issue to raise money. Typically, an investor agrees to loan money to the company for a set period of time. In exchange, the company promises to pay the investor a fixed return on his or her investment, typically principal plus annual interest.
Fraudsters across the nation have recently begun to use promissory notes as vehicles to defraud investors out of hundreds of millions of dollars. Most promissory note scams follow predictable, fraudulent fact patterns:
Investors purchase the promissory notes, enticed by the promise of a high, fixed-rate return – up to fifteen or twenty percent – with a very low level of risk. The promissory notes may appear all the more attractive because the seller falsely claims that they're "guaranteed" or insured. And few investors ask tough questions about these investments because they know and trust the sellers, insurance agents with whom they've done business in the past.
The fraudsters use a portion of the money they collect from investors to pay the sellers their commissions. But they typically abscond with the rest, squandering it on personal expenses or high-flying life styles. They may also use some of the proceeds to support an elaborate "Ponzi" scheme in which money coming in from the sale of new notes pays the interest on older notes. Some fraudsters try to avoid repaying investors' principal by convincing investors to "roll-over" their promissory notes upon maturity. These investors may, for at least a time, continue to receive interest payments – but they rarely get their principal back. Promissory note scams often target the elderly, bilking them of their retirement savings at a time when they can least afford to lose it. But no one is immune. Fraudsters rarely discriminate when it comes to separating investors from their money. And most investors don't even realize their investment dollars are at risk until it's far too late.