Beware of promissory note scams

[FaGal]

Beware of promissory note scams
www.azcentral.com - Craig Harris - The Arizona Republic - March 20, 2005


In layman's terms, they are called IOUs.

In investment terms, they are called promissory notes.

By either name, they can be extremely risky, according to state and federal securities regulators. advertisement

"It's a problem that never goes away. Every year, we have two to four cases on promissory notes," said Mark Dinell, assistant chief enforcement counsel for the Arizona Corporation Commission's securities division.

Companies use promissory notes to raise capital. Typically, under the terms of the note, an investor agrees to lend money to the company for a set time and the borrower promises to repay the money with interest.

The problem, according to regulators, is that promissory notes are only as good as the company backing them. If they are being sold to a broad audience by an unknown company and backed by a foreign insurance company, they typically are scams, according to the U.S. Securities and Exchange Commission.

In cases that come before regulators, the scam notes typically are worthless and can become part of a Ponzi scheme, where money coming in from the sale of new notes pays the interest on the older notes.

Regulators said investors should be skeptical of promissory notes that promise high rates of return, such as 10 percent or more. The elderly are prime targets for such a scam.

"If they are offering phenomenal interest rates, the question is why isn't everyone else jumping on the bandwagon?" said Phillip A. Hofling, securities division assistant director.

In the past two years, the commission has investigated and cracked down on individuals who sold nearly $17 million worth of promissory notes to 311 investors.

"There's not a shortage of people who are willing to part with their money," Hofling said. "It's amazing."

Dinell said it could be easy for investors to be duped because those who sell the promissory notes often already have relationships with investors.

"It's usually an acquaintance or an insurance agent you trust," Dinell said. "And that person (agent) has looked at the investment product. But the trust is misplaced."

Dinell said most of the cases the state handles involve independent insurance agents, who usually make commissions of 10 percent on the transactions. The SEC said some commissions could range up to 30 percent.

In late January, the commission issued a default order against 61-year-old Noel Cullison of Phoenix, who was accused of fraudulently raising more than $1.7 million from 16 investors, some of whom bought promissory notes from him.

The state ordered Cullison to pay more than $1.18 million in restitution and to pay a $50,000 fine. Cullison did not request a hearing or file a response to the state's investigation. He could not be reached.

Despite the order, it's questionable whether investors will get their money back.

Cullison and his wife, Barbara, filed for bankruptcy in March 2004 and most of their debts were discharged by U.S. Bankruptcy Judge George B. Nielsen Jr. on Jan. 21.

Starting in 1994, Cullison offered stocks, promissory notes and investment contracts to his insurance clients, most of whom were in Arizona, according to the state.

In one investment, Cullison promised investors an 8.8 percent return if they deposited money into his account, yet no such account existed, Arizona regulators said.


Reach the reporter at craig.harris@arizonarepublic.com or (602) 444-8995