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Be Wary of "Prime Bank" and Promissory Note Schemes
Investment scams come and go. Currently, two popular scams are those involving "Prime Bank" programs and fraudulent promissory notes. As detailed on their websites, the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) are increasing their efforts to warn investors and to crack down on promoters and others who are responsible (see www.sec.gov/divisions/enforce/primebank/howtheywork.shtml and www.nasdr.com/rca_winter00_reg.htm). Let's examine each of these "investments".
Promissory Notes
Many promissory notes are a legitimate way for companies to raise capital. Notes are a form of debt similar to a loan. However, in recent years securities regulators have uncovered many promissory notes that are not legitimate. In June, 2000, for example, the SEC and state regulators conducted a joint enforcement sweep, later bringing actions against hundreds of individuals and entities involved in selling fraudulent notes to thousands of investors. These investors had invested over $300 million in the schemes.
According to the NASD, promoters and sales persons commonly represent to investors that: (1) they will receive high returns (often double digit returns) with low risk; (2) the returns are guaranteed; and (3) collateral exists to back the guarantee. Also common is the fact that sales persons fail to conduct any due diligence, on the promoters or the promissory notes, choosing instead to receive exorbitant commissions for their sales efforts.
Prime Bank Programs
A similar investment scheme involves the sale of purportedly exclusive, international investment programs through banking institutions. These programs are referred to as "Prime Bank" or "Prime" or "High Yield Investment". Promoters typically target individuals as well as municipalities, charitable associations and other nonprofit organizations.
According to the SEC, investors must be alert for these signs of banking - related investment fraud:
Excessive Guaranteed Returns: Typically investors are told that they will receive monthly returns of anywhere between 20% to 200%, absolutely risk free
Fictitious Financial Instrument: The supposedly credible financial instruments do not exist. The instruments may be called such names as Standby Letters of Credit, Bank Guarantees, offshore trading programs and bank-issued debentures. Promoters frequently claim that these financial instruments are issued, traded, guaranteed, or endorsed by such entities as the World Bank, the International Monetary Fund (IMF) and the Federal Reserve.
Extreme Secrecy: All parties must maintain strict confidentiality, promoters claim, thus making client references unavailable. Investors may even be asked to sign non-disclosure agreements.
Exclusive Opportunity: Promoters often claim that this opportunity historically is reserved only for the very wealthy. However, it now is available by invitation to a handful of special customers.
Claims of Inordinate Complexity: Questions such as, "Who is involved?" and, "Where is the money going?" are too difficult to answer. Those not expert in complex financial instruments will find them to be too complex or technical. Frequently, in fact, promoters distribute documents that appear complex, sophisticated and official, but are just fraudulent.
Investors who are solicited to purchase these promissory notes and prime bank instruments should alert securities regulators immediately. Note that the Internet is fertile ground for perpetrating these frauds. Investors unfortunate to have invested should seek legal counsel immediately.
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Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
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