A U.S. Senate Special Committee on Aging staff report “conservatively estimated that more than 10,000 Americans have been victimized through [precious metals] schemes, with losses around $300 million”
Author: Dorothy Kosich
Posted: Thursday , 01 May 2014
RENO (MINEWEB) –
Precious metals fraud remains the sixth-most significant form of financial fraud in the United States, says the Enforcement Section Committee of the North American Securities Administrators Association (NAASA).
During a hearing of the Senate Special Committee on Aging Wednesday, ranking committee member U.S. Sen. Susan Collins, R-Maine, said, “It is indeed a sad commentary on human nature that the cruelty of the scammers who target our nation’s elderly seems limited only by their creativity – and never by their conscience.”
“Today’s hearing focuses on a particularly appalling scam – the so-called ‘sale’ of precious metals to seniors, who are eager to avoid the dangers of the stock market, trying to find a safe haven for their life savings, seeking to protect their financial independence, and wanting to pass some portion of their nest egg along to their children and grandchildren,” Collins observed. “I say so-called ‘sale’ because, as we have discovered in our investigation, a key feature of this scam is to get the customer to pay real money for a fiction – gold, silver, platinum, or palladium – that the scammer never delivers, and often doesn’t even own.”
Committee Chairman Sen. Bill Nelson, D-Florida, observed, “We’re here to spotlight the worst practices in an industry that has run amok and largely remain in the shadows. …Clearly, whenever there’s money to be made, you can bet unscrupulous individuals will soon follow. And that’s what happened in this industry.”
The committee staff report, Exploring the Perils of the Precious Metals Market, estimated that “more than 10,000 Americans have been victimized through these schemes with losses around $300 million”.
An example of a typical leverage transaction is contained in the report: A customer buys $10,000 worth of gold through a leveraged transaction. He covers 20% of the cost, by putting down $2,000. The retaining precious metals company finances the remaining $8.000, charging the customer 9.5% interest, or $760 annually.
The firm also charges the customer a 15% commission, totaling $1,500 in addition to $200 in other fees. “Interest payments aside, the customer is already out $3,700 from the start. If the value of the gold drops below the value of the loan plus interest ($8,760), the metal is automatically liquidated and the customer loses that $3,700 with no gold to show for it,” says the report.
Former IBM physicist Joe Melomo told the Senate Committee, “I consider myself a savvy businessman and investor, and yet I sit here today having lost more than $170,000 investing in what I know now was a precious metals scam.”
Although he was on the federal Do Not Call registry, Melomo received a call from American Precious Metals. The company kept calling and urged him to invest more money than his original investment. “I paid American Precious Metals just under $170,000 and they charged me approximately $165,000 in administrative fees and $37,000 in interest charges,” he recalled. “With the help of an attorney, I was only able to get back $25,000.”
An 82-year-old retiree lost $52,000 when she invested in silver on leverage. She sold her personal effects and used $41,000 from her IRA annuity to buy 600 ounces of silver. Within two months, she was told she had to send in an additional $10,000 to cover the decline in value of silver. After she told the precious metals firm she didn’t have the money to invest any more in silver, her account was liquidated. Eventually, she was able to recover about $13,000 through a settlement agreement with the company, said the committee report.
The Federal Trade Commission has formally charged three precious metals firms, all based in Florida, with breaking the law. The three complaints filed by the agency claim a total of $56 million was lost by consumers. Two of these cases have been settled and the defendants were required to pay a combined total of $32.6 million.
The Commodity Futures Trading Commission (CFTC) has filed 22 complaints against individuals and companies that lost over $193 million of their customers’ money. Last year, the CFTC settled charges against Atlantic Bullion & Coin when at least 237 investors nationwide were led to believe that they had purchased silver bullion, but no silver bullion was purchased by the company. The defendants settled to pay $11.53 million in restitution and $23 million in civil penalties. The owner was sentenced to nearly 20 years in prison due to fraud.
Between 2009 and 2011, the clients and creditors of seven Florida-based precious metals businesses claimed losses of more than $54 million. Working with federal regulators, the Florida Office of Financial Regulation helped recoup more than $10.3 million for the victims.
Minnesota, Texas and North Carolina have gotten stricter on retail precious metals companies, says the report.
Local officials in Santa Monica, California, “have pursued several coin dealers for deceiving or buying their customers, including Goldline International, Superior Gold Group, and Merit Financial,” says the report. “The companies were either forced to shut down or change their business practices.”
One North Carolina scam artist used Craigslist to steal thousands of dollars from people interested in buying gold despite the seller being served with a cease-and-desist order from the state.
The CFTC had found that an overwhelming number of victims of precious metals fraud are seniors. Potential customers skew toward older Americans who are more likely to have a greater amount of equity built up in their retirement and savings accounts than younger Americans.
“These precious metals dealers thrived on the haze that clouds the industry in secrecy,” says the report. Some reforms, such as the Dodd-Frank Act have led to “greater oversight and insight into this ever-evolving industry. Still, more may be need to be done to reduce gaps in oversight and improve consumer protection.”
“Above all, consumers should be wary of any offer requiring them to ‘act fast’,” the report concludes.