Promissory-Note Fraud Poses New Threat

Yet another financial scam that targets older Americans is on the rise as government authorities work to stop it. Promissory-note fraud is estimated to be costing investors nationwide "several hundred millions of dollars," says Bradley Skolnik, Indiana securities commissioner and head of the North American Securities Administrators Association.

Here's how it works: A prospect gets a phone call from someone they've done business with before—often an insurance agent or investment adviser. The agent's offer: the chance to lend start-up cash to a new company, in exchange for a fixed, regular payment. The promissory notes will mature quickly (often in under a year) with 12 percent to 20 percent interest—"guaranteed," the agent says.

Only problem is, instead of making money, investors are losing their shirts in these scams. "Promissory-note frauds are probably the fastest-growing area of investment problems," says Skolnik, whose organization has teamed with the federal Securities and Exchange Commission to close down such schemes.

While high commissions lure sellers of the fraudulent notes, the promise of higher interest rates lures consumers. "Low interest rates are great for the economy, but they can be hard on people" who rely on fixed-income investments, Skolnik explains. Con artists play on the desire for higher returns.

Two insurance agents in New York are accused of scamming 69 people out of nearly $4 million; a Michigan company is charged with bilking investors of $82 million. In Indiana, Skolnik says, charges were filed against "individuals who actually got down on their knees and prayed with their victims," using religion to obtain investor trust.

"We have seen situations where people have lost their entire life savings as a result of these scams," he says, including those with a lot of investment savvy.

Contact your state securities commissioner to learn more about, or to report, promissory-note fraud.