The NASD has issued a regulatory alert to broker-dealers regarding the significant number of fraudulent promissory note schemes that have been offered to investors and to remind members and registered persons of the regulatory obligations that apply to the sale of promissory notes. While the release was intended for brokers, the information contained in the release is of interest to investors. Portions of the release follow. The entire release is available at http://www.nasdr.com/rca_winter00_reg.htm#promissory.
What Promissory Notes Are: Generally, promissory notes are a form of debt similar to a loan. Companies issue these notes to finance a wide variety of endeavors. Bona fide promissory notes are an important means by which companies raise capital. However, not all promissory notes are legitimate and investors must be mindful of potentially deceptive sales practices.
Promissory Notes Often Are Securities: In many instances, these investments are promoted as not involving the sale of securities, either by the issuers of the notes or by salespersons. The Securities Act of 1933 and the Securities Exchange Act of 1934, however, include “any note” in the definition of a security. From these definitions, a legal presumption has been developed that a promissory note is considered to be a security, although this presumption may be overcome if, based on all facts and circumstances, the instrument is deemed to be a commercial-type loan. In many cases, promissory notes are construed to be securities.
Fraudulent Note Programs: In recent years, securities regulators have uncovered a number of fraudulent schemes involving promissory notes. Increasingly, these investments are one of the vehicles of choice when unscrupulous promoters go after investors’ funds. In June 2000, the Securities and Exchange Commission (SEC) conducted a joint enforcement sweep in conjunction with securities regulators from 28 states. This sweep targeted fraudulent note programs. The regulators brought actions against hundreds of individuals and entities involved in selling fraudulent promissory notes to thousands of investors. In the SEC cases alone, over $300 million had been raised from unsuspecting investors. The fraudulent statements used to sell these notes were numerous and varied. There were several types of fraudulent statements, however, that were common to most of the programs, including: (1) investors would receive high returns (often double digit returns) with low risk, (2) returns were guaranteed, and (3) collateral existed to back the guarantees. (View SEC press release for more information.) Often the persons selling the notes were offered exorbitant commissions. Due to their desire to take advantage of the high commissions, salespersons often unreasonably relied on information provided to them by the issuers or promoters and failed to investigate or adequately confirm the facts.
Once again, investors beware. For more information on promissory note schemes, or if you believe that you have been a victim of such a scheme, email firstname.lastname@example.org.
December 10, 2007
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
Copyright 2010. VGIS Communications LLC. All Rights Reserved. VGIS Communications, LLC – 41 Watchung Plaza, Suite 249, Montclair, New Jersey 07042 – 973-559-5566. Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial adviser before acting upon the information contained in this article. For additional information, contact Mark J. Astarita, Esq., a partner in the law firm of Beam & Astarita, LLC, who represents clients in a wide variety of finance related matters. Mr. Astarita can be contacted by email at email@example.com.