State Joins Effort to Oversee Promissory-Note Investment

Responding to a surge in shady investment schemes, California regulators have joined counterparts in 19 other states to form a promissory-note task force.

The move follows a July sweep in which federal and state agencies filed dozens of enforcement actions against companies for marketing fraudulent or misleading promissory-note investments.

Typically, investors are told notes will mature in a year or less and that they will receive annual interest of between 12% and 16%.

“But notes are only as good as the security for them,” said Bill McDonald, assistant commissioner for enforcement for the California Department of Corporations. “We’re seeing cases where the security either doesn’t exist, is overvalued, or is misrepresented.”

California filed 11 cases as part of last month’s crackdown, including one against a Northern California company that sold $3.8 million in notes, promising to pay returns from income generated by leasing medical equipment. No equipment existed, regulators claim.

Low interest rates from banks and on government bonds have made promissory-note offers especially attractive to investors. Often, they are directed at seniors, who depend on interest income and long for investments seemingly more secure than stocks, said Marc Beauchamp, spokesman for the North American Securities Administrators Assn.

“Like wide ties and narrow ties, short skirts and long skirts, financial schemes go in and out of fashion,” Beauchamp said. “Promissory notes have come back.”

Regulators offer several tips to help investors spot scams:

* Check with state securities regulators to confirm that promissory notes are properly registered or legally exempt from registration.

* Call the National Assn. of Securities Dealers’ public disclosure hotline, (800)-289-9999, or contact state securities regulators to determine if agents are registered. Agents selling notes are usually required to be licensed by the state and the NASD.

* Be suspicious if notes have an above-market rate with a maturity of less than a year. One-year bank certificates of deposit yield about 5% and 30-year Treasury bonds about 6%.

Most of all, investors need to accept the adage about offers that appear too good to be true.

“Much of this is a function of financial illiteracy,” Beauchamp said. “You cannot have both safety and high yields.”