Promissory Notes Risky, Officials Warn

Some interest-hungry investors are turning to so-called promissory notes that purport to pay double-digit returns.

Bad idea, state securities regulators say.

Promissory notes--written commitments to repay a specific amount of money by a specific date --often are sold by life insurance agents who may not know much about the investment promoters other than that the agents themselves will receive high commissions for sales, regulators say.

Some notes are fake, having been issued on behalf of nonexistent companies. Others are just very risky, regulators say.

Federal authorities have filed several cases alleging the sale of fake notes, and regulators from 35 states have reported complaints or brought cases involving such notes.

In one case, the president of Medco Inc. was sentenced to 51 months in prison for selling $16 million in fraudulent promissory notes.

According to suits brought by the U.S. attorney’s office and the Securities and Exchange Commission, Medco, which promised up to 16% annual returns, was basically a Ponzi scheme. In such a scheme, existing investors are paid from the funds of new investors rather than returns on investments.

Fred Sturdevant, Indiana’s chief securities investigator, said some savers are being lured into promissory notes because they “don’t want exposure to the risk of the general securities market and are turned off by traditional insurance products.”

“They’re attracted to this type of investment that has an aura of safety with a higher-than-market rate of return,” Sturdevant said.

Bradley Skolnik, president-elect of the North American Securities Administrators Assn., said he has seen “a large number of insurance agents peddling these notes. Some insurance agents have been misled into believing they are legitimate products, and others may not be quite so innocent.”