The Neverending Story of Fraudulent Precious Metals Scams

For quite sometime, we have attempted to bring to the attention of the investing public, especially seniors, the pitfalls that an investor is exposed to when investing in precious metals of all kinds.  The primary area of abuse that retail investors is exposed relates to the sale and purchase of gold and silver bullion and coins.  This post relates to a case involving bullion.  On September 25, 2020, the Commodity Futures Trading Commission (CFTC) and 30 state regulators that are members of the North American Securities Administrators Association filed a joint civil enforcement action against two precious metals dealers and their companies for perpetrating an alleged $185 million fraudulent scheme.

The complaint charges TMTE, Inc., d/b/a Metals.com, Chase Metals, LLC., Chase Metals, Inc. (collectively Metals.com) Barrick Capital, Inc. and its principals, Lucas Asher a/k/a Lucas Thomas Erb a/k/a Luke Asher and Simon Batashvilli with an ongoing nationwide fraud.  According to the complaint, from at least September 1, 2017 to the date of the filing of the action, the defendants fraudulently solicited and received over $185 million in customer funds, including more than $140 million in retirement savings, from at least 1,600 persons throughout the United States for the purpose of purchasing precious metals bullion.

In our digital era, many tasks that used to require face-to-face interaction have moved online. Take banking. Driving to the bank and waiting in line to speak to a teller is no longer necessary for many transactions.

Online banking is the way of the future, and many senior citizens are following suit. However, our elderly loved ones face a higher risk of suffering online scams. If your mother, father or another relative who is a senior citizen has made the jump to online banking, this is how you can help them avoid fraud.

Why seniors are at risk

When your stockbroker takes your money to invest on your behalf, he or she must follow certain rules and regulations. Investments have regular ups and downs as the market fluctuates. Therefore, you may have to look very closely at your portfolio’s performance, along with charges and fees, to determine that your stockbroker has done anything wrong. The bottom line is that your broker owes you a fiduciary duty.

What is a fiduciary duty?

You may have heard the term fiduciary duty used in many different contexts. Many people who act in a role where other people entrust them with their assets or funds must abide by a fiduciary duty. Examples include trustees of a trust, the personal representative of a probated estate and officers of a corporation. All of these people owe a duty of loyalty and care to the people or entities they represent. They are supposed to act in a reasonable manner on behalf of the entity, treating the assets the way the owner would treat them.

The price of gold has risen steadily in the past few months. In times of financial turmoil, precious metals such as gold make appealing options to investors who seek a reliable return. However, just as the price of gold has climbed, so has the rate of scams involving it.

Whether you are considering purchasing gold or you already own a significant amount, you must remain vigilant to financial scams. Here, we will examine some of the most common gold-related scams currently making the rounds.

Scams to watch out for this year

Insider trading happens when a person makes a trade based on information that is not available to the public. Trading can be based on an event that is likely to either increase or decrease the price of a company’s stock. For example, a better than expected quarterly performance would likely make stock options more valuable. Trading on this type of information before it’s made public provides investors and brokers with an unfair advantage. That’s why it’s important to take steps to level the playing field.

The rewards are small for a big risk

People who engage in insider trading often suffer from a type of tunnel vision. When a broker makes trades in the hundreds of millions of dollars per year, an insider trade involving a few thousand dollars doesn’t seem like a big deal. Years ago, lifestyle guru Martha Stewart was convicted of insider trading. The illegal trading amounted to $45,000. Peanuts for someone with a net worth in the millions. Nonetheless, she still had to pay significant fines and serve a prison term.

For ages, gold has been a safe investment for the uninitiated or market-wary. The stability of gold and other precious metals make them an accessible investment with little influence from volatile markets.

The accessibility of precious metals, however, makes them an easy vessel for would-be scammers and fraudulent brokers to take advantage of unseasoned investors. In many cases, alertness and skepticism can mean the difference between making a solid investment and making a stolen investment.

If a prospective broker attempts to entice you into buying gold, silver, platinum or palladium with any of the following tactics, consider your next moves carefully.

Your broker earns a commission or collects a fee every time they trade a stock. This can tempt some unethical brokers to engage in “churning.” Churning happens when a broker makes several small trades to help them earn extra income from commissions and fees. Churning is solely for the benefit of the broker. It does nothing to help your investments. It can even lead to you losing your hard-earned money.

That said, it’s the job of your broker to make trades. Depending on the type of investments you have, making a high-volume of trades may even be advantageous. However, you should still take note of signs of churning. Recognizing the warning signs can let you know whether you’re being taken advantage of or whether your broker is operating above board.

Times when you should be skeptical

On September 19 2019, William C. Conway, Jr., originally of Fort Lauderdale, Florida, and Steven Schrag, originally of Bartlesville, Oklahoma, had a final judgment entered against them, jointly and severally, in the total amount of $771,350 for fraud and deceit in the case styled Michael Conville, Joseph Gilmore and Beacon Construction Group, Inc. v. William C. Conway, Jr. , Steve Schrag et al, Case No. 12-33381, filed in the Circuit Court of Broward County, Florida.

The final judgment was based upon a unanimous jury verdict which found Willian C. Conway, Jr. and Steven Schrag, among other defendants, guilty of fraud in the inducement, negligent misrepresentation in the inducement and conspiracy to defraud.  The judgment was predicated upon an alleged gold (precious metals scam) which originated in Africa.

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Read Your Margin Agreement:

As with any type of business transaction that you are contemplating, it is important for you to read and understand fully all of the terms and conditions of any type of margin or, for that matter, loan agreement which you are considering.  The explanation of the account executive of the terms, risks and rewards of what is contained in the margin agreement is superseded by the document itself.  Moreover, the agreement will refer the reader to other rules and regulations that are incorporate, by reference, into the document.  These rules and regulations are of equal force with the terms of the margin agreement.

It is for these reasons that a customer is required to sign the margin agreement to open a margin account.  The agreement may be part of your account opening agreement or may be a separate agreement. The margin agreement states that you must abide by the rules of the Federal Reserve Board, the New York Stock Exchange, the National Association of Securities Dealers, Inc., and the firm where you have set up your margin account.

Understanding Margin –

Margin is borrowing money from your broker to buy a security and using your investment as collateral. Investors generally use margin to increase their purchasing power so that they can own more securities without fully paying for it.  The amount owed to the broker is called the debit balance.  Through the use of leverage, investors attempt to magnify gains on actual cash or collateral deposited into their accounts.  But at the same time, the use oft margin exposes investors to the potential for higher losses.  Another reason for borrowing money from brokers is the feature involving a no-repayment-date loan.  This feature is generally not available through other types of lending institutions, including banks.  The no-repayment feature, although very attractive, can be fraught with danger.  The investor should be made aware that if the value of securities on deposit with the broker declines substantially, the broker will require additional funds or collateral to protect the loan.

There are 2 primary types of margin requirements: initial and maintenance.

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