Investors Beware of Promissory Note Scams

by InvestorLawyers on November 10, 2011

in SEC,Securities Fraud,Unregistered Securities

One of the most prominent ways fraudsters are currently targeting investors is through promissory note scams. According to Pat Huddleston, former Security and Exchange Commission enforcer and author of the book “The Vigilant Investor,” promissory note scams are “exploding” — in no small part due to the nature of the scam, which appears to be a reasonable business investment opportunity.

Investors Beware of Promissory Note Scams

What makes promissory note scams so tricky is that investors assume the contract is legally binding. In addition, the fact that the promissory notes promise a return of your investment within nine months, plus interest, promotes the investment as safe. According to Huddleston, “It’s usually a one-page, simple contract that says, ‘I promise to pay the investor this amount of money with these amount of gains at this interest rate by this date.’”

To make the scam seem more reputable, the scammers frequently quote part of the Securities Act which appears to say that the note doesn’t have to be registered with the Securities and Exchange Commission provided its duration is nine months or less. While this is an actual section of the Securities Act, what most investors don’t know is that the exception only applies to the kinds of things that major corporations exchange, like high-grade commercial paper. This section of the act does not apply to the types of notes the average investor can invest in.

According to Huddleston, the best way to avoid a promissory note scam is to be sure everyone and everything you invest with is registered with the SEC.

“If you’re buying a promissory note and it’s not registered, you need to call the SEC or call your state securities commissioner right away, because the chances that it’s a scam are way up there,” he notes.

The main goal of investor education is to help investors avoid being victims of potentially devastating stock broker fraud. But if you believe you’ve already been victim to a promissory note scam, contact an investment attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

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