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Promissory Note Investments

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How Risky 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 canceled 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: Promissory note investments can be Ponzi schemes. 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 investors in stockbroker mediation, arbitration, and litigation claims.

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