The Ohio Department of Commerce’s Division of Securities is warning investors about promissory notes, often sold by insurance agents, that promise high interest rates, but are in fact very risky and often fraudulent.

Securities regulators in more than 35 states have reported complaints or brought enforcement actions involving promissory notes. The increase in the sale of these "notes" has prompted Ohio to join 18 other states in creating a promissory note task force. Led by the Florida Comptroller’s Office, the task force will work with state and local law enforcement agencies and other organizations such as the National White Collar Crime Center. The North American Securities Administrators Association (NASAA), which represents state regulators, included promissory notes on a recent list of "Top Ten Investment Scams."

"Interest rates are lower than they’ve been in a generation. While that’s been great for the economy, it’s been hard on people who depend on interest income such as senior citizens. This makes them tempting targets for crooks," says Ohio Securities Commissioner Thomas E. Geyer.

As part of a nationwide trend, promissory notes are frequently being sold by life insurance agents -- lured by high commissions -- who may know nothing about the promoters of the investments beyond what they’re told. The agents also may not realize that they must be licensed as securities salespersons with state securities regulators to sell promissory notes. Some notes are issued on behalf of companies that don’t even exist.

Regulators say a promissory note scam can work like this. A life insurance agent who sold you a policy calls with an intriguing investment opportunity. A "well-established" company is looking to expand its business and needs to raise capital. Instead of borrowing money from a traditional lender, such as a bank, it is offering investors an opportunity to purchase "promissory notes." The notes are being advertised as maturing in nine months and as having an annual interest rate of 10% or more. Agents are pressuring clients to "cash-in" their life insurance policies and "roll" them into these notes.

"These investments are likely to be obligations of fraudulent institutions that either abscond with the clients’ money when the notes mature or use a "Ponzi scheme" to pay Peter with new money from Paul," Commissioner Geyer said.

In Ohio, the Division of Securities issued a cease and desist order on May 10, 1999 against First Lenders Indemnity Corporation (FLIC) of Orlando, Florida. From April 1996 through February 1997, FLIC sold more than 77 promissory notes totalling approximately $4.135 million to approximately 71 Ohio investors. The company, which was offering a 10% annual percentage rate on nine-month promissory notes, was found to be selling unregistered securities and engaging in fraud by omitting material facts.

Cease and desist orders were also issued against FLIC Chairman Shirley A. Farino and the following individuals who violated Ohio securities laws by selling FLIC promissory notes to Ohioans: John Glenn Bobb of Uniontown, Ohio; Frank D. Brown of Masury, Ohio; Eugene A. Eusanio of Lancaster, Ohio; and James Minter Turner of Hamilton, Ohio.

In other action, the Division found that Paul C. Jared of West Chester, Ohio had violated securities laws in soliciting Ohioans to invest in Alumalex, Inc. of Ocala, Florida. His license was suspended for 10 days upon his re-licensure with the Division.

Bret Lee Sander of West Chester, Ohio received a cease and desist order for securities law violations in selling promissory notes in Ameritech Petroleum, Inc. of Abilene, Texas and World Vision Entertainment of Winter City, Florida.

In addition, the Division of Securities is investigating the sales of promissory notes made by the following companies:

What’s the attraction of promissory notes? According to Commissioner Geyer, some investors "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 high-than-market rate of return." Investors often get "real" promissory note certificates complete with official legal-sounding language and gold embossed seals.

Unlike traditional boiler-room cold callers, who solicit clients by telephone and usually have no prior relationship with them, insurance agents (some of whom are unlicensed) know their customers well.

Before investing in any promissory note, Commissioner Geyer encourages Ohioans to call the Ohio Division of Securities Investor Protection Hotline at 1-800-788-1194. When calling:

# # #