Promissory note fraud
Fraudsters have recently begun to use promissory notes as vehicles to defraud investors out of billions of dollars. Most promissory note frauds share common characteristics (see “Red Flags for Promissory Note Fraud” below) and follow similar, predictable fact patterns. First, fraudsters raise money by selling promissory notes to investors that offer high, fixed-rate returns with very low levels of risk. Then, instead of using the investors’ money as advertised, fraudsters use the funds to operate large Ponzi schemes in which the money raised from new investors is used to pay the “returns” of earlier investors. Ultimately, promissory note frauds inevitably collapse when the fraudsters are unable to raise additional funds from new investors to pay the returns of earlier investors.
While promissory notes can be legitimate investments, those that are marketed and sold broadly to individual investors often turn out to be scams. The U.S. Securities and Exchange Commission (SEC) has recently increased its efforts to root out and halt promissory note frauds (see “Recent SEC Enforcement Actions Against Promissory Note Frauds” below). Whistleblowers can assist the SEC in these efforts and earn awards under the Dodd-Frank Act’s SEC Whistleblower Program. Since 2012, the SEC has issued nearly $1 billion in awards to whistleblowers whose tips have resulted in more than $3.5 billion in financial remedies.