This article on precious metals fraud is part three of a series on some of Wall Street’s biggest frauds and how to avoid them. Click here for part one on the “Wolf of Wall Street” and microcap stocks. Click here for part two on pre-IPO scams.
Precious metals fraud is one type of fraud that doesn’t capture a lot of headlines. However, it has caught the attention of the Commodity Futures Trading Commission (CFTC), and it does happen. Given the rally in gold and other precious metal prices right now, it seems like a good time to warn investors to watch out for fraudsters looking to take advantage of increased interest caused by the higher prices.
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Real cases of precious metals fraud
First, lets talk about some actual cases of precious metals fraud. The Miami Herald reported this month that two Florida men, two South Carolina residents and a Minnesota man faced charges in connection with a scam in which they masqueraded as brokers selling gold, silver, palladium and platinum. Authorities say they scammed at least 17 people out of $1.2 million from their retirement funds. Less than 1% of the funds they collected were actually used to purchase precious metals. The rest went into the scammers' pockets.
In another case, the CFTC won an appeal in a case it filed against Monex over allegedly illegal off-exchange commodity trading. According to the National Law Review, the agency accused the company of "defrauding thousands of retail customers nationwide out of hundreds of millions of dollars, while executing thousands of illegal, off-exchange leveraged commodity transactions" for precious metals. The CFTC alleged that Monex made "false or materially misleading claims" about how profitable the transactions made through its Atlas trading program will be even though it allegedly new that customers usually lost money. The allegations were initially dismissed, but the Ninth Circuit Court overturned the dismissal.
Look for red flags
So how can investors interested in precious metals get a piece of the action without being defrauded? The CFTC provides a number of warning signs to watch for in sales pitches.
For example, scammers might call themselves "metals dealers" or "merchants." They may advertise their investment product on radio, TV or online. They may try to convince you that you can profit from news that the public already knows about and might contact you asking you for personal information.
Among the persuasion tactics is often a claim of exceptional claims and a guarantee that large amounts of money will be earned. For example, the scammer may claim that gold bought from them "is guaranteed to rise double what your current investments are doing." Honest brokers should be upfront about the risks involved in investing.
Unfortunately, some scammers even claim to be with a reputable firm or to have some sort of special credential. If you can't verify their employment with the firm they claim to be with, then there's a serious problem. Scammers may also offer to give you a break on commission if you invest now or claim supply is limited to create a false sense of urgency.
Another concern to watch out for when thinking about purchasing precious metals is the way the sales agreement is arranged. For example, offering a "financing agreement" with a promise that you can make a lot of money with little risk should be a warning. Some scammers offer a structure that has you paying only 15% to 25% of the total purchase price up front. The precious metals market doesn't work like this.
Others may suggest that the full price be paid with a loan that the person arranges to finance the rest of the purchase. Companies which are trying to rip you off may claim they will store your precious metals in their own storage facility or "bank."
Precious metals fraud regulation
Other signs that the person you are speaking with is just trying to scam you include a statement that precious metals transactions aren't regulated by the CFTC or the National Futures Association. Any agreement you sign should state which financial institution or bank is loaning you money and where the physical metal will be located. Be wary of claims that physical metal will be stored overseas.
Scammers often don't use your money to purchase precious metals. They simply pocket it. Some don't even arrange for financing with an independent firm and charge phony interest. Others charge storage fees without actually storing the metals with an independent storage facility or bank. Still others say that since you aren't paying full price for the metals, you will need to send them more money if the price falls. Fraudsters typically don't earn you the profits they promise and lose all or most of your money.
Here's how to buy without falling victim to precious metals fraud
Before signing any agreement, make sure to verify the company's license and the license of the salesperson. Also be wary of extremely complex transactions and missing documentation. Ask what makes the person qualified to sell you precious metals and how the investment product will meet your financial needs. Also ask about how the salesperson is paid.
To check the company's registration status, background and history, call the CFTC at 866-366-2382 or contact the National Futures Association.
For more information from the CFTC on precious metals fraud, click here. If you feel you have fallen victim to precious metals fraud or know about suspicious activities, file a complaint with the CFTC here.
This article first appeared on ValueWalk Premium