In Fraud Daylight: Promissory note scams strike hard in Utah 

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This week’s City Weekly cover feature focuses on aspiring Utah investors who got mixed up in a real estate investment plan promising high returns with little risk involved. The prevalence of these too-good-to-be true schemes foisted on so many unsuspecting Utahns has led to the state’s dubious distinction as one of the worst for mortgage fraud in the nation, if not the worst.

 

But why is that? And what can be done to stop these kinds of Faustian bargains from trapping more unwitting folks into financial ruin?

 

The schemes rely on a company issuing a promissory note of a payoff to an investor that never materializes. “It’s a viral problem we have in Utah,” says Michael Hines, Director of Enforcement for the Utah Division of Securities. A promissory note, he says, should send up a red flag to an investor. “They are nothing more than a piece of paper promising to pay a certain amount,” Hines says. Essentially, a promissory note has the legal standing of an I.O.U. Promissory notes are an issue when a consumer accepts them with no collateral backing, often from a newly formed “limited liability corporation.” With insufficient or no assets to back up the notes, they are worthless.

 

Issuance of these notes is completely legal. They are the preferred weapon of choice for fraudsters because ultimately people are persuaded that the strength of the investment contract is person-to-person, and thus, a simple promissory note will seal the deal. “It’s amazing to think that people would take their retirement or equity out of their house and invest it in a piece of paper backed by nothing, from an LLC with no assets,” Hines says. “It makes no sense to me.”

 

Cynics often point to members of the predominant faith in Utah as being especially vulnerable to certain types of financial fraud, but reality suggests that there’s nothing unique to the LDS church that leaves its worshippers open to fraud.

 

Research conducted in the fall of 2007 by the Fraud Busters group, a coalition of regulators from state agencies that includes Workforce Services, the Securities Division and the Department of Transportation. The regulators gathered national survey information regarding promissory note fraud to try and chart the general root causes of the problem. Their research indicates the number one cause of promissory note fraud—with 30 percent responding “affirmative”—is “affinity” relation.

 

In other words, people who build relationships in churches, communities and the like come to trust that affinity with one another. The research also revealed that among affinity groups, religion had the highest identification—13 percent. This is not to say that religious individuals per se are more gullible, but that a common faith may come with a greater trust in the promises of individuals who share that faith, or claim to.

 

Hines says that when talking to securities regulators from Alabama to Chicago the story remains the same: people worry that the trust shared among a large, common faith helps allow fraudsters to sell them on investments that depend on weak promissory notes. “The truth is a person’s religion in any circumstance can be used to disarm them,” Hines says.

 

The problem might not be that you shouldn’t trust your neighbor. It’s just that individuals ought to do the homework on a deal, regardless of who’s making it. Utah Securities Division regulators recommend calling them at 801-530-6600 to check up on a deal before investing any money. Hines acknowledges that after somebody makes an investment, then loses it, it’s difficult for regulators to help them recover their money.

 

A private research firm in Utah, Attorney’s Investigative Services, is taking free screenings of individuals who may have been burned by promissory note fraud. The group is investigating creative measures to recoup losses for victims and can be reached at 801-803-3289, or online at AISOneCall.us.

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