Senators blast watchdogs over widespread gold investment fraud

Reuters News
Posted: Apr 30, 2014 9:03 AM

By Douwe Miedema and Diane Bartz

WASHINGTON (Reuters) - Lawmakers scolded federal regulators for not doing enough to prevent scam artists from luring retirees into risky investments in precious metals, fraud from which has cost victims an estimated $300 million since 2001.

A convicted felon, a victim and two law enforcement officials testified at a hearing of the Senate Special Committee on Aging on Wednesday, to discuss a report that found an estimated 10,000 Americans - mostly elderly - had fallen prey to such schemes.

One of the regulators, the Commodity Futures Trading Commission, pledged to start informing consumers better. It also said nobody had been sent to jail in the 21 cases of precious metals fraud it had prosecuted.

"The first line of defense is not consumer education. The first line of defense is putting the crooks in prison," said Senator Claire McCaskill, a Missouri Democrat.

Both the CFTC, which regulates U.S. derivatives trading, and the Federal Trade Commission, which enforces laws against false advertising, have investigated and shut down such companies, but the two have no criminal prosecution authority.

McCaskill urged the two regulators to rely less on federal prosecutors and work more with state district attorneys.

Bill Nelson, the Florida Democrat who heads the committee, linked the report to the confirmation of Timothy Massad in his role as CFTC chairman.

"Before I will allow consideration of his nomination in front of the Senate I would like to have a conversation with him," he said. Massad has been confirmed by a different Senate panel, but it is unclear when the full Senate will do so.

Karl Spicer, convicted for his role in a Florida-based scheme to rip off investors though the sale of silver and other precious metals, said that the agencies inspired little fear in the people working on such scams.

"With all due respect to the civil authorities, the people that I have encountered ... don't really respect the civil authority bans," Spicer said. "The gentleman I was with had a CFTC ban, he cooperated; he had a ban and he still went about doing business the very next day."

A group of attorneys helped them evade the rules, for instance, by continuing the business under somebody else's name, he said, adding that the schemes were widespread.

In a typical scam, the report said, a telemarketer phones a potential victim, often a retiree, and gives what is purported to be privileged information about a likely rise in the future price of gold, or silver, or other metals.

The end result is often that a retiree may borrow money at a high interest rate to invest in the metal, pay commissions and storage fees and then lose his or her stake, often thousands of dollars, the report said.

The scams, like many other kinds of fraud, have become more prevalent since the 2008 financial crisis as retirees sought relatively safe investment opportunities. Some seniors, faced with years of near-zero interest rates, have sought out ways to make their retirement nest eggs go further.

Many of the precious metals firms are based in Florida, and the state's Office of Financial Regulation has gone after seven companies whose customers lost more than $54 million, according to the report. Officials in California, Minnesota, North Carolina and Texas have also cracked down on such firms.

In simpler cases, customers are sold coins that are priced at considerably more than their market value. Advertisements for such sales are staples of late-night television programming.

(Reporting by Diane Bartz; editing by G Crosse, Ros Krasny and Ken Wills)