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News Release: 99-11

GRAY DAVIS, Governor
Date: 07/19/99

WILLIAM KENEFICK, Acting Commissioner

The Department of Corporations Cracks Down On Firms Marketing Investments in Promissory Notes

 

Sacramento, July 19, 1999 — The Department of Corporations has joined securities regulators in over 35 states in a crackdown against firms marketing investments in illegal or fraudulent promissory notes that promise high interest rates but are in fact extremely risky.

"With interest rates at the lowest level in ten years, investments in illegal or fraudulent promissory notes can be a tempting but a risky alternative for those people dependent on interest income for survival," said William Kenefick, Acting Commissioner of the Department of Corporations.

The department is warning investors to always be suspicious if the notes have an above-market rate with a maturity of less than a year. Agents selling such "notes" are usually required to be licensed by both the state and the National Association of Securities Dealers. To find out if the agents are registered or have a disciplinary history, contact the Consumer Services Representative at the Department of Corporations at (213) 576-7643 or check the department’s Website at www.corp.ca.gov.

The department has taken recent enforcement action against the following companies:
Secure Capital (El Cajon, CA)
On May 19, 1999, the department issued a Desist and Refrain Order for unlicensed broker-dealer activity and making illegal offerings of promissory notes and stock in a holding company created to purchase emerging and start-up companies over the Internet.
Telephonic Yellow Pages, Inc. (Lakewood, CA)
On April 30, 1999, the department filed a civil action against eight defendants for fraud and illegally offering and selling limited partnership interests, stock, promissory notes, options and guarantees in a yellow pages venture that would be operated over the telephone. At least $2.1 million was raised.
Viatical Cases (Ontario,CA; Texas; Ohio)
On February 9, 1999, the department issued three Desist and Refrain Orders to one Ohio, one California and one Texas company offering and selling evidences of indebtedness, promissory notes and investment contracts in viatical investments. In addition, the department issued two subpoenas for the production of records to California companies allegedly selling similar investments.
Viatical companies allow people to invest in life insurance policies of terminally ill patients, primarily AIDS patients, who then receive a discounted percentage of the death benefit in cash. Investors then get a share of the death benefit when the insured dies.
Because of the uncertainty of predicting when a person is going to die, these investments are considered especially risky and speculative.
Westco Alliance Group (Bakersfield, CA)
On December 11, 1998, Don and Jeanna Muir pled guilty to one misdemeanor count of violating California securities law by illegally and fraudulently selling notes to religious affinity groups after the department had previously issued Desist and Refrain Orders against them.
The United Companies of America (Temecula, CA)
In late 1998, the Riverside District Attorney filed indictments on 197 counts against 13 defendants for securities law and grand theft violations for offering and selling promissory notes to elderly investors and misrepresenting the use of funds and the security for the investment.
The Kentfield Group, LLC (San Rafael, CA)
On May 4, 1999, the department issued a Desist and Refrain Order against 24 individuals and entities for illegally selling promissory notes supposedly secured by investments in start-up companies and guaranteed by insurance issued by Lloyds of London.
Medco, Inc. (Walnut Creek, CA)
On May 11, 1999, the Contra Costa County District Attorney’s Office filed a criminal complaint charging Joseph P. Tufo with two counts of illegally and fraudulently selling promissory notes and acting as an unlicensed broker-dealer. The notes were allegedly sold to 87 investors for $3.8 million and were to provide the investors with 12 to 16 percent returns from the lease of medical equipment. The medical equipment turned out to be non-existent.
Consolidated Benefits Association (Sacramento, CA)
On June 1, 1999, the department issued a Desist and Refrain Order to insurance agent David Pruett, Consolidated Benefits Association and Consolidated Companies, Inc., for illegally selling promissory notes in the FLIC Corporation, a company that ostensibly purchased auto loans from other lenders.
The Roderick Thomas Corporation (San Jose, CA)
On June 23, 1999, the department issued a Desist and Refrain Order to this company for illegally selling promissory notes for the ostensible business purpose of conducting a real estate and public relations firm.
Fresno Financial Group (Fresno, CA)
On June 25, 1999, the department issued a Desist and Refrain Order for the illegal and fraudulent sale of promissory notes of a petroleum company.
Primecore Funding Group, Inc. (Menlo Park, CA)
On March 17, 1999, the department issued a Desist and Refrain Order for the illegal offer and sale of in excess of $75 million in promissory notes secured by real estate. (The foregoing does not apply to Primecore Mortgage Trust, Inc., which has not been the subject of any disciplinary action by the Department of Corporations.)
"The lesson in all of these cases is that many people invest in promissory notes believing that they are a safe and secure investment, but they are only as good as the assets or property securing them," Kenefick stated. "In some of these cases, the assets or property that was supposed to be securing the investments didn’t exist, was overvalued, or wasn’t owned by the promoters. In other cases, aspects of the transaction were misrepresented."
The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.

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