The U.S. Securities and Exchange Commission has found yet another case of a fraudulent offering of promissory notes. Specifically, the SEC has settled fraud charges against Walter W. Knitter of Chicago and his company, Integrity Financial AZ, LLC. According to the SEC’s press release:
The Commission’s complaint alleged that Knitter, who is based in Chicago and who was working for Integrity Financial AZ, LLC, promoted an unregistered offering of securities in the form of promissory notes purportedly secured by real estate in Arizona. The complaint further alleged that Knitter and the other defendants made multiple fraudulent misrepresentations regarding the safety of the investment, including telling prospective investors that 100% of investor funds would be used to build houses in Tonopah, Arizona and that the investment was “FDIC insured.”
Do not invest in promissory notes. They are often at the center of investment frauds that rob investors of hundreds of millions of dollars every year. While not every promissory note is the vehicle for fraud, unless you get an independent investigation of the investment and the people behind it, your odds of losing your entire investment are frighteningly high.
Promissory notes lend themselves to scams for three primary reasons. First, Section 3(a)(10) of the Securities Act of 1933 provides an exemption from registration that, at first blush, appears to apply to promissory notes that mature within 9 months. But that exemption does not apply to the promissory notes you can buy. Anyone who tells you otherwise is trying to take your nest egg.
Second, promissory notes are contractual in nature. Our common knowledge of the law tells us that written agreements are binding. Prospective investors therefore tend to believe that promissory note investments are binding. Scam artists know this, and take full advantage.
Finally, promissory notes purport to pay interest. From the time we first learn about saving, we learn about interest. We tend to associate interest with passbook savings accounts, certificates of deposit, and savings bonds, all of which we associate with safety. Again, scam artists know how you think about interest, and they take full advantage of that by selling you promissory notes.
Please remember. Return of investment is as important as return on investment. Smart investors appreciate their vulnerability, and they take sensible precautions to protect their nest eggs. Short of a thorough professional investigation of a promissory note investment, the only sensible precaution is not to buy one.