Promissory Notes

Promissory notes are a written promise to pay money, basically “I owe yous” (IOU). Legitimate promissory notes are debt instruments used when companies need to raise money. There were 82 schemes based on promissory notes. They are securities that must be registered with the SEC and can be verified through the SEC-EDGAR database. If the seller is legitimate, he or she is licensed to sell securities. Promissory notes specify that the borrower is borrowing a certain amount of money and the terms of that borrowing, such as maturity date, and the interest that is to be paid. Promissory notes include the place that they are issued, as well as the names and signatures of the parties. The transaction becomes illegal when the borrower has no intention, or has no ability to pay back the funds that were borrowed. In many cases the schemes were intentional frauds from the onset, meaning there was never any intention of paying back the principal investment/loan.

• • Robert Narvett’s promissory notes specified his company “Shield” as the borrower and his investor-victims as the lender. The notes specified that the principal amount would be paid back at an annual interest rate of 20 percent. Narvett tried not to provide specifics but, when pressed, told investor-victims that the notes would be used as working capital to build Shield. Shield was said to be a recruiting agency. All of the funds raised went toward Narvett’s personal expenses and Ponzi payments, in a classic, intentional scheme (SEC, 2013, August 16).
• • Algird Norkus’ scheme convinced victims to invest in promissory notes designated to his business entity. His business was alleged to insure people who had been refused insurance from other insurance companies. Higher-risk insurance companies charge higher fees, and would therefore bring in higher revenues from premiums. In this case, the promissory notes were scheduled to be repaid in five years’ time. The business entity Financial Update Inc. was an intentional Ponzi scheme; the funds were never used in an insurance capacity, nor were there insured clients (SEC, 2010, October 14).

Unregistered promissory notes are generally those that have a term shorter than nine months that may qualify as exempt from registering with the SEC. If they are not registered, they are not under the monitoring of the SEC, and there may not have had formal due diligence carried out. In other words, they are risky and may be a fraud. Legitimate promissory notes must be registered with the SEC and the state of which they are issued, and the seller must have the appropriate license to sell them.

Medical Equipment, Medical Billing, and Pharmaceuticals and Research

The medical Ponzi frauds came in three basic versions, for the most part, one of which purports to be investing in medical equipment; a second is said to be investing in medical receivables, a third is investing in research and development of treatments, equipment, or pharmaceuticals. In truth, there was never any investing or research and development going on in any of the medical cases. There were 18 schemes based on medical/ pharmaceutical terminology. The following are a few classic examples:

• • Edwin Fujinaga’s scheme told investor-victims their funds would be used to buy accounts receivable from medical providers, factoring. The investors were also Japanese, as was Fujinaga, making this also an affinity-fraud scheme. Fujinaga also established Sterling Escrow that was supposed to safeguard investor funds. Instead it was an account that received funds and paid out the Ponzi payments (USA v. Edwin Fujinaga, 2015, July 8).
• • Robert Hurd and his company, Your Best Memories, was stated to be promoting Alzheimer’s treatments that included DVDs of patient’s photographs and coconut oil. Hurd had told investors that his company had received approval from the US Food and Drug Administration (FDA), another fraudulent claim. The entire scheme comprised several frauds, including unregistered securities. There was only one actual sale of the product. Hurd and partner Gross sold shares of the companies, promising that 60 percent of funds would be used for working capital, to produce the products. Only 17 percent was used; the rest went for salaries and Ponzi payments (SEC, 2014, June 11, l.r.).
• • Christopher Pedras ran a New Zealand-based scheme that told victim-investors that they were investing in kidney dialysis machines, and dialysis clinics in New Zealand. Pedras also had a bank trading company as part of his fraud. Pedras lived in California and New Zealand; his victims were primarily in the United States (SEC, 2013, November 5, l.r.)

Insurance Frauds

Ponzi scheme insurance frauds are carried out in many forms. Insurance fraud in general is one of the largest areas of fraud. There were 22 insurance-based Ponzi schemes. In some cases, the perpetrators were licensed insurance agents; in others the perpetrators falsely presented themselves as being licensed agents. The victim-investors are told they are investing in insurance companies in some cases, and in other cases they are investing in insurance products, such as viaticals. Insurance companies must make a profit in order to function as a business. They make profits from investing the funds and by collecting premiums where the insured do not make claims. When the insured never make claims, the insurance company keeps the money that has been paid into the company as premiums. Some schemes were properly functioning insurance businesses that failed, becoming business-failure schemes.

One particularly egregious form of insurance frauds make use of viaticals. Viatical settlements offer legitimate insurance clients who have terminal illness the opportunity to sell the death benefit policy to someone who will collect upon their death, providing a source of income in the late stage of life. Three Ponzi schemes purported to be investing in viaticals, stating that all investors would receive a portion of the death benefits when the policy holder died.

• • Frederick Brandau, with 11 other offenders, perpetrated one of the more egregious types of schemes: viaticals. Brandau’s scheme took place in the late 1990s. The victim-investors were investing in a company that purported to buy viaticals; it was just a Ponzi scheme (SEC, 2002, July 8). The fraudulent documents used to perpetrate the scheme were falsified insurance policies. During the 1990s there were several of these types of schemes that preyed on the elderly and those dying with AIDS.
• • James Griffin’s scheme invited investors to invest in an insurance company that was allegedly selling insurance to the disabled. These schemes also told victim-investors that a percentage of their returns on their investments would be going to a charity of their choice (SEC, 2015, July 30). Griffin told investor-victims that the charitable gift annuities were backed by a major insurance company (DOJ, 2016, December 13).
• • Donald Neuhaus and Kimberly Snowden told investors that their funds would be used to pay premiums on life insurance policies that were being sold. In this case, investor funds were being used to pay on life insurance premiums. Part of the process includes actuarial calculations of life expectancies. This determines how much money should be set aside for an insured individual. If this is not done correctly the premiums are not enough and the fund runs short. In addition, instead of putting the received premiums into investments, Neuhaus and Snowden used the money paid in premiums for themselves. When the money was depleted, they began to pay out as a Ponzi scheme (SEC, 2007, August 23).
• • Bart Posey et al., ran several unlicensed and/or unauthorized health insurance companies beginning in 2005, in Tennessee and Arkansas, North Carolina, Indiana, Delaware, New Jersey, New York, New Hampshire, with an entity in Pakistan. The Pakistan entity, Beema, was the underwriter for the insurance being sold by Posey et ah, and was a shell company. Posey paid health insurance claims with the premiums paid by new insurance clients. There were legitimate healthcare claims that were denied payment (USA v. Bart Posey, 2013, June 26).

Annuities

Annuities are a financial product generally purchased through insurance companies. There are times when an individual receives a large amount of money, such as from an inheritance, being paid a lump-sum on from a job retirement account, or sometimes a settlement in the case of an accident or a law suit; the recipients may choose to put the money into an annuity. Some annuities are paid in a series of payments. The primary purpose of an annuity is long-term funding, such as income in retirement. Generally, the payout is in regular installments but can also be in one lump-sum. Legitimate annuities are purchased through a reputable insurance provider. It is important to understand what annuities are, to recognize when the term is being used as a ruse for a fraud.

• • Rosi Ray, also known as Gloria Lujan in court records, told her investor-victims that their investments were going to purchase the annuity settlements of accident victims. These were to be purchased at a discount, meaning there would be a profit for the investors. However, there were never any settlement annuities purchased. All funds that came in were used for Ponzi payments and to Ray and her employees (USA v. Rosi Ray, 2010, December 1).
• • Joyce Allen became the primary of Benchmark Capital upon the suicide of its founder Charles Candler. Allen was an independent insurance agent when Candler hired her to sell annuities (USA v. Joyce E. Allen, 2015/2017). When the SEC began investigating Benchmark and Candler, he killed himself. Allen and Candler sold investor-victims fraudulent securities in the form of annuities, annuities that were completely non-existent. Their victims were told their funds were going into annuity accounts. Instead the funds went into Joyce Allen’s account. The funds were paid out into Ponzi payments to the other annuity investors and to Allen and her employees for personal use (USA v. Joyce Allen et al., 2012, July 17, indictment). The annuities were never invested in anything to earn interest as promised, or as would be expected if they had been purchased through an insurance company. The victims thought their money was going into an annuity account.