Promissory note scams
Fraudsters have recently started using promissory notes as vehicles to defraud investors out of billions of dollars. Most promissory note scams share common characteristics (see “Red flags for promissory note scams” below) and follow similar and 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, the fraudsters use the funds to exploit large Ponzi schemes in which the money raised from new investors is used to pay for the “returns” of previous investors. Ultimately, these scams fall apart when fraudsters are unable to raise additional funds from new investors to pay previous investors’ returns.
While promissory notes can be legitimate investments, those marketed and sold on a large scale to individual investors often turn out to be scams. The United States Securities and Exchange Commission (SEC) has stepped up its efforts to root out and stop promissory note fraud. Whistleblowers can help the SEC in these efforts and earn rewards under the SEC Dodd-Frank Act Whistleblower Program. Since 2012, the SEC has issued more than $1.2 billion in whistleblower rewards whose tips resulted in more than $4.8 billion in financial damages.
SEC Whistleblower Award for Reporting Promissory Note Scams
Under the SEC’s Whistleblower Program, whistleblowers may be eligible for monetary rewards when they voluntarily provide the SEC with original information about violations of federal securities laws – such as report promissory note fraud – which leads to a successful enforcement action resulting in monetary penalties of over $1 million. A whistleblower can receive a reward of between 10% and 30% of the financial penalties collected as part of the successful enforcement action.
The SEC Whistleblower Program allows whistleblowers to submit tips anonymously to the SEC if they are represented by an attorney as part of their tip. Experimented SEC Whistleblower Lawyers can skillfully guide whistleblowers through the processby maximizing the likelihood that they not only obtain, but maximize their potential rewards and protect their identity.
Since the start of the program, the largest SEC Whistleblower Award are $114 million, $110 million, and $50 million. See some of the SEC whistleblower case which resulted in great rewards.
Red flags for promissory note scams
According to a SEC Investor AlertInvestors should be on the lookout for the following red flags regarding promissory note scams:
- The promissory note is marketed to the general public. Promissory notes are marketed almost exclusively to sophisticated and corporate investors. If you are marketed a promissory note as a member of the general public, it could be a scam.
- There is a promise of above market returns. Many promissory note frauds offer a high return at a fixed rate (up to 15 or 20%) with a very low level of risk. If the investment sounds too good to be true, it probably is.
- The promissory note is short-term. Promissory note scams often offer above-market returns on short-term notes.
- The seller claims that the promissory note is “risk-free”, “secured” or “insured”. All investments carry some level of risk, and investments with higher returns have higher risk. Fraudsters often claim that promissory notes are risk-free, guaranteed or insured.
- The promissory note is not registered. Promissory notes with a term greater than nine months must be registered with the SEC and the states in which they are sold.
- Seller is not properly authorized. Insurance agents and brokers must have a securities license to sell promissory notes. You can To look for if the seller is properly licensed with the SEC.
As detailed below, these red flags are consistently present in SEC enforcement actions brought against promissory note fraud. For more information on promissory note scams, see FINRA’s Investor Alert titled Promissory notes may be less than promised.
SEC Enforcement Actions Filed Against Promissory Note Scams
SEC vs. 1 Global Capital LLC and Carl Ruderman
On August 29, 2018, the SEC filed charges against 1 Global Capital LLC and its former CEO, Carl Ruderman, for allegedly defrauding 3,400 retail investors in a $322 million promissory note fraud. According to the SEC complaint, 1 Global promised investors a “high return, low risk investment” in which 1 Global would use investors’ money to make short-term loans to small and medium-sized businesses, called Merchant Cash Advances. Instead of using investors’ money as marketed, 1 Global made Ponzi-like payments to early investors from the sale of the promissory notes and Ruderman embezzled millions of dollars for his own uses.
SEC vs. Gina Champion-Cain and ANI Development, LLC
On August 29, 2019, the SEC filed charges against ANI Development, LLC and its principal Gina Champion-Cain for operating a multi-year business $300 million promissory note fraud. According to the SEC complaint, Champion-Cain claimed to offer investors the ability to provide short-term, high-interest loans (between 15% and 25%) to individuals and entities seeking liquor licenses in California. . In truth, this investment opportunity was a sham and Champion-Cain used investors’ money to fund his failing business ventures. On March 31, 2021, Champion-Cain was sentenced in federal court to 15 years in prison for having orchestrated the huge, for years Ponzi scheme and obstructing justice by hiding and destroying evidence from federal investigators.
SEC vs. Philip E. Riehl
On January 31, 2020, the SEC accused Philip E. Riehl of operating a $60 million promissory note scam that targeted the Amish and Mennonite communities by making false claims about the use of their funds and guaranteed returns. According to the SEC complaint, the defendant raised funds by selling promissory notes to members of the community, which he claimed would be used to make loans to other members of the community who wanted to borrow money, usually to finance the businesses of borrowers or real estate purchases. The Defendant failed to disclose certain known risks associated with the Notes to investors. In addition, the defendant embezzled funds from investors. As a result, the defendant was unable to repay the investors, despite his personal guarantee to repay their notes.
SEC vs. Clarence Dean Alford
On July 30, 2020, the SEC accused former Georgia state legislator Clarence Dean Alford of defrauding at least 100 investors in a $23 million promissory note program. According to the SEC complaint, the defendant raised funds by selling high-yield promissory notes (ranging from 12% to 34% annual rate of return) allegedly issued by his energy development company, Allied Energy Services LLC. The defendant claimed that the funds would be used to finance energy projects. Instead, the defendant used most of the funds to operate a Ponzi scheme, paying interest to previous investors from new investor funds, and for personal expenses. In 2019, the defendant’s alleged scheme collapsed when he failed to make promised interest payments to several investors and then failed to repay the investors’ principal.
SEC vs. MJ Capital Funding, LLC, MJ Taxes and More Inc and Johanna M. Garcia
On August 13, 2021, the SEC filed an emergency action to stop an alleged Ponzi scheme that broke out between $70.9 million and $128.8 million from over 2,150 investors through promissory note fraud. According to the SEC complaint, MJ Capital told investors their money would be used to fund small business loans called “merchant cash advances” and promised investors annual returns of 120% to 180%. In fact, MJ Capital has only issued $2.9 million in merchant cash advance loans and generated very little revenue. In order to keep the fraud from collapsing, the defendants used at least $20 million in new investor funds to pay alleged “returns” to existing investors in a conventional setting. Ponzi scheme fashion. In addition, the defendants misappropriated an additional $27.4 million in investor funds by making payments to various other entities, a substantial portion of which represented payments to sales agents for the promotion of those investments.
How to Report Promissory Note Scams and Win an SEC Whistleblower Award
For report promissory note scams and qualify for an award under the SEC Whistleblower Program, the SEC requires whistleblowers or their attorneys to report the report online through the SEC Tips, Complaints, or References Portal or mail/fax a TCR form to the SEC whistleblower’s office. Before submitting a report, whistleblowers should consult a SEC Whistleblower Lawyer and review the SEC Whistleblower Rules to, among other things, understand eligibility rules and consider factors that can significantly increase or decrease the size of a future whistleblower award.
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