Unsolicited pitches from “metal dealers” and “metal merchants” may describe enticing opportunities to earn a great deal of money by buying and trading gold, silver, palladium, platinum and rare earth metals. Yet promises of easy profits in precious metals are a red flag for investment fraud.
Hudson Intelligence conducts investigations of precious metals fraud for private and institutional clients. We also assist with comprehensive asset searches to recover funds from failed and fraudulent schemes.
Legitimate investments in precious metals can take several forms. Some investors hold gold bullion and gold coins, such as one-ounce South African Krugerrands, or buy stock in mining companies. Precious metals are traded as commodities in the futures market, and mutual funds and exchange-traded funds (ETFs) also offer exposure to metal markets.
Precious metals may be pitched as an alternative offering that will outperform traditional investments. Many investors do not have previous experience in the metals market and may not understand its risks and technical aspects. In an unfamiliar market, they may fail to recognize warning signs for sales arrangements and investment deals which are not legitimate:
- Investors may be told they only need to pay a small percentage (between 15% and 25%) of the total purchase price, when in fact their money is never used to purchase any precious metals. They may also be asked to pay fictitious “storage fees” for their non-existent stockpile.
- Investors may be told the rest of their purchase will be funded by a phony “financing arrangement” that is not backed by a legitimate financial institution. They may also be required to pay “interest fees” for their phony loan.
- Investors who are caught in these frauds may also be told they need to make additional payments or “margin calls” due to unfavorable price movement in the commodities market.
Commodities trading in precious metals is regulated by the Commodities Futures Trading Commission (CFTC) and the National Futures Association (NFA). Investors should contact CFTC and NFA to check a company’s registration status and disciplinary history before making an investment in any precious metals offering. Extreme caution should be exercised if unsolicited offers are received from salespersons or promoters who claim their precious metals transactions are not regulated by CFTC or NFA.
Case Study: Fraud Detection
A business owner in the Northwest was approached by a stock promoter with a new prospectus that described a kind of modern-day alchemy, as profitable as turning lead into gold.
The investment prospectus claimed a Utah company had invented a process for recovering precious metals from mountains of mining waste. Investments were being solicited to acquire stockpiles of centuries-old mining slag that could be processed for a projected 500% return on investment within two years. Profits were practically guaranteed.
Our investigator determined the claims made by the company and its stock promoters were demonstrably false and misleading. The investigation revealed the subjects had not developed – and did not possess – the technology needed to recover precious metals.
A web of purportedly “independent” companies involved in the enterprise were determined to be corporate shells, under common ownership and control, without any assets or operations.
In an admission-seeking interview with the principal, he acknowledged the scheme had netted nearly $10 million from investors.
In consultation with the client, our investigator submitted the investigative findings to the Federal Bureau of Investigation (FBI) for criminal investigation and to the Securities and Exchange Commission (SEC) for regulatory enforcement action.
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