Investors losing millions on promissory notes

Md. among states warning of schemes


June 01, 2000|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Attorneys general across the country today are warning against certain promissory notes investments that have become the most prevalent type of securities fraud in many states, including Maryland.

Often investors are told that the nine-month notes are guaranteed investments with rates of return of 10 percent to 14 percent. But, in fact, the notes are high-risk and often fraudulent, Maryland regulators said.

"We brought more cases dealing with promissory note investments in the past year and a half or two years than any kind of investment," said Maryland Securities Commissioner Melanie Senter Lubin, whose office has handled 16 promissory note cases in that time. Maryland investors have lost at least $10 million on the notes.

The notes frequently are sold through independent insurance agents, who are attracted by the high commissions but might not know the investments' risks or that the agents themselves must be licensed as securities brokers to sell the notes, regulators said.

Among those who have lost money is retired Baltimore County businessman Robert Gulas.

In fall 1997, Gulas said he was approached by a longtime friend and insurance agent to invest $10,000 in a promissory note issued by South Mountain Resort & Spa Inc. of North Carolina and guaranteed by a Mexican company.

The company was to use the money to expand its resort, and for his part, Gulas would receive his principal plus a 10.9 percent return on his money in nine months.

But when the time was up, Gulas didn't get any money. The company told him it was having financial problems and later filed for bankruptcy, he said.

"It was a guaranteed thing. It was supposed to be backed by another company," said the 70-year-old, who doesn't expect to see his $10,000 again.

"I really don't know who to blame. I think it was sold to me in good faith from my agent," he said.

Gulas' story is all too familiar to regulators, who are launching the nationwide crackdown on sellers of these promissory notes.

Typically, the nine-month notes are sold to support a project or financial transaction. Investors are told the notes are bonded or guaranteed by another company, often a foreign insurer, regulators said.

"These are investments in risky enterprises. It's a roll of the dice if they make money or not," Lubin said. In some cases, the notes are issued on behalf of companies that don't exist, regulators said.

Many of the investors are retirees, who invest in the notes because they appear safe and offer an attractive return.

That's the case with Ursula Linke of Silver Spring who, with her husband, invested a total of about $474,000 in two notes from Ameri-Tech Petroleum and World Vision Entertainment Inc. State officials were able to recoup about $442,000 on the note from Ameri-Tech, now out of business, but Linke is doubtful that she'll see the rest.

"This is a terrible thing. Too many sleepless nights for us," said Linke, 62. "We are supposed to have peace and quiet and tranquility at our age and then you had to worry about ... your life savings in jeopardy."

The Maryland securities division is working with the Maryland Insurance Administration to draft a letter to insurance agents about promissory notes and who can legally sell them in the state.

State regulators also advise investors to be wary of short-term promissory notes from obscure firms offering above-market interest rates.

Before investing in any type of promissory note, investors should also check with the Maryland securities division to confirm that the notes are registered or legally exempt from registration, regulators said.

To find out if an agent is licensed to sell the notes in Maryland, call the securities division at 410-576-6494.

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