A Utah man and his company are accused of raising $100 million from investors for mortgage note investments and falsely promising 12 percent annual returns in what turned out to be a classic Ponzi scheme.
Charles Ponzi was an Italian immigrant who in the 1920s promised investors huge returns from an international postage stamp scheme.
But when Ponzi couldn’t deliver on his promises, he dreamed up an alternative plan to use money from new investors to pay earlier investors.
Ponzi’s scheme has been perpetrated by other criminals many times since, including Wayne L. Palmer, according a lawsuit filed in a federal court in Utah by the Securities and Exchange Commission.
The lawsuits says Palmer has been in the real estate financing business since 1976 and formed National Note of Utah LC in 1992.
National Note allegedly promised huge annual returns to potential investors who were willing to put up at least $25,000 for promissory notes. Prospective investors were advised that the company made money by acquiring mortgage notes and real estate assets or making new real estate loans.
“Palmer represents to investors in National Note that it purchases and sells collateralized loans such as mortgages, trust deed notes, options, leases and purchase contracts; underwrites and funds collateralized commercial and residential loans; and purchases, manages, and sells real property,” the complaint states. “Palmer tells investors that his and National Note’s expertise in this area allows it to generate returns of 15 to 20 percent annually, and that for this reason it is able to guarantee its investors a 12 percent return.”
National Note was promoted at seminars as a secure investment with consistent returns from a company that had never missed paying principal or interest on its promissory notes. More than 600 investors from across the country put up $100 million since 2004.
But the company was insolvent — generating only $25,000 in monthly revenues in 2010 while monthly investor expense was $1 million.
The difference was paid from the $25 million from incoming new investments received that year. In all, $14 million in incoming 2010 investor funds was used to make principal and interest payments to earlier investors.
“Contrary to Palmer’s claims, National Note used most of the money it took in from new investors to pay earlier investors, making it a classic Ponzi scheme,” the SEC alleges. “It said that since 2009, National Note would not have been able survive but for the influx of new investor funds, and that its payments to investors all but stopped in October 2011.”
National Note defaulted on interest payments in October 2011.
The SEC claims that despite its insolvency, National Note continues to solicit new investors. So the federal securities regulator has obtained a temporary restraining order and asset freeze against Palmer.
