    [Senate Hearing 113-900]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 113-900

                            EXPLORING THE PERILS OF
                           THE PRECIOUS METALS MARKET

    =======================================================================

                                    HEARING

                                   BEFORE THE

                           SPECIAL COMMITTEE ON AGING

                              UNITED STATES SENATE

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 WASHINGTON, DC

                                   __________

                                 APRIL 30, 2014

                                   __________

                               Serial No. 113-21

             Printed for the use of the Special Committee on Aging

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

            Available via the World Wide Web: http://www.govinfo.gov

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    46-912 PDF                  WASHINGTON : 2023

    -----------------------------------------------------------------------------------

                           SPECIAL COMMITTEE ON AGING

                         BILL NELSON, Florida, Chairman

    ROBERT P. CASEY, JR., Pennsylvania   SUSAN M. COLLINS, Maine
    CLAIRE McCASKILL, Missouri           BOB CORKER, Tennessee
    SHELDON WHITEHOUSE, Rhode Island     ORRIN G. HATCH, Utah
    KIRSTEN E. GILLIBRAND, New York      MARK KIRK, Illinois
    JOE MANCHIN III West Virginia        DEAN HELLER, Nevada
    RICHARD BLUMENTHAL, Connecticut      JEFF FLAKE, Arizona
    TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
    JOE DONNELLY, Indiana                TIM SCOTT, South Carolina
    ELIZABETH WARREN, Massachusetts      TED CRUZ, Texas
    JOHN E. WALSH, Montana
                                  ----------
                      Kim Lipsky, Majority Staff Director
                   Priscilla Hanley, Minority Staff Director

                             C  O  N  T  E  N  T  S

                                  ----------

                                                                       Page

    Opening Statement of Bill Nelson, Chairman.......................     1
    Opening Statement of Susan M. Collins, Ranking Member............     2

                               PANEL OF WITNESSES

    Joe Melomo, Victim of Precious Metal Fraud.......................     4
    Dama Brown, Director, Southwest Region, Federal Trade Commission.     6
    Rosemary Hollinger, Regional Administrator and Deputy Director,
      Division of Enforcement for the Central Region, Commodity
      Futures Trading Commission.....................................     7
    Karl Spicer, Former Precious Metals Telemarketer.................     9

                                    APPENDIX
                   Prepared Witness Statements for the Record

    Joe Melomo, Victim of Precious Metal Fraud.......................    33
    Dama Brown, Director, Southwest Region, Federal Trade Commission.    35
    Rosemary Hollinger, Regional Administrator and Deputy Director,
      Division of Enforcement for the Central Region, Commodity
      Futures Trading Commission.....................................    45
    Karl Spicer, Former Precious Metals Telemarketer.................    54

                           Statements for the Record

    Judith M. Shaw, Administrator, Maine Office of Securities
      Statement......................................................    63
    Department of Professional & Financial Regulation, Office of
      Securities, State of Maine.....................................    66
    Precious Metals - Senate Special Committee on Aging Staff
      Investigation..................................................    68

                            EXPLORING THE PERILS OF
                           THE PRECIOUS METALS MARKET

                                  ----------

                           WEDNESDAY, APRIL 30, 2014

                                           U.S. Senate,
                                    Special Committee on Aging,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:15 p.m., Room
    562, Dirksen Senate Office Building, Hon. Bill Nelson, Chairman
    of the Committee, presiding.
        Present: Senators Nelson, McCaskill, and Collins.

                     OPENING STATEMENT OF SENATOR
                         BILL NELSON, CHAIRMAN

        The Chairman. Good afternoon. Senator Collins is on her
    way, and she insisted that I go ahead.
        I want to thank you all for being here. Today we are going
    to talk about precious metals and the schemes that have cheated
    Americans out of millions.
        A year-long investigation by our Committee has uncovered
    that over 10,000 Americans, many of whom are senior citizens,
    have lost nearly $300 million from these schemes.
        We have seen all the commercials on TV touting the benefits
    of owning precious metals--gold, silver, platinum. Indeed, many
    investment advisors agree that investing in precious metals can
    be a responsible way to diversify an investment portfolio.
        We are not here to talk about the virtues of different
    investment strategies. We are here to spotlight the worst
    practices in an industry that has run amuck and largely remains
    in the shadows. Consumers are increasingly trapped in bad
    deals, and some of these bad practices include hefty fees and
    commissions, using bait-and-switch tactics to sell products at
    highly inflated prices, using high-pressure sales tactics to
    get consumers to buy metals on leverage, and it becomes flat-
    out fraud.
        Now, many precious metals firms will also downplay the
    risks associated with precious metals in order to get the
    customer to spend more money, which the company can then get
    the excessive fees and commissions, but the most blatant type
    of fraud occurs when the seller outright lies to the customer,
    either through a Ponzi scheme or by charging fees for
    fictitious service. An example: The Commodity Futures Trading
    Commission, which will testify today, has gone after a number
    of companies for charging storage fees when, in fact, no metal
    was ever stored on the customer's behalf.
        Customers can also be tricked into buying metals on credit,
    sometimes called ``on leverage,'' where they are charged an
    interest expense on top of other fees and charges, and this
    makes it nearly impossible for them to make money or break
    even. In fact, investors often end up losing money from these
    deals with no metal to show for their troubles since the
    company can seize the customer's holdings during a short-term
    dip in the market.
        Clearly, whenever there has been money to be made, you can
    bet that unscrupulous individuals will soon follow. Well, that
    is what is happening in this industry, so you get a deal like
    this or this looks official, it has got bulls and bears, and it
    says, ``Precious Metals Corporation.'' On the front page, it
    says, ``We do the right thing on principle, not regulation.
    PMCO was founded on the name and the principle synonymous with
    the highest degree of ethics and professionalism in the
    precious metals industry. Whether you are a seasoned investor
    or new to the industry, we listen to your desires, dig deep to
    understand your needs, and offer you our extensive resources
    and expertise to meet your investment goals.'' It ends up with
    a quote: ``Patience is more important than market timing.''
        Well, thanks to all these good folks, we have done a year-
    long investigation, and so we want to bring the focus now into
    the panel which is going to be able to go into greater detail
    about what is going on in this industry and how law enforcement
    is responding to protect consumers from these schemes.
        Senior citizens that have often seen through the ups and
    downs of the marketplace want to get into something to provide
    for their future. There is always a fear in the back of the
    mind of a senior citizen: Are they going to have enough to take
    care of themselves? They are particularly susceptible to this
    kind of scheme, so we are going to hear from a star-studded
    panel. First we are going to hear from Mr. Melomo, a former IBM
    physicist and a victim of precious metal fraud.
        Next we are going to hear from Ms. Dama Brown, Director of
    the Southwest Region of the Federal Trade Commission, and then
    we are going to hear from Ms. Rosemary Hollinger, Regional
    Administrator of the Commodity Futures Trading Commission,
    Chicago office, and Deputy Director in charge of the
    Commission's Division of Enforcement in Chicago, and then we
    are going to hear from Mr. Karl Spicer, a former industry
    insider who will share with us how this scam works based on his
    personal experience, and so when Senator Collins arrives, I
    will finish whosoever's testimony is there so that Senator
    Collins can make her statement, so--and she is here right on
    cue, with a flourish.

                     OPENING STATEMENT OF SENATOR
                    SUSAN M. COLLINS, RANKING MEMBER

        Senator Collins. Thank you. Thank you, Mr. Chairman. I
    apologize. I was on the floor because we have a Maine judge who
    I hope will be confirmed later today that I needed to speak to,
    so my apologies to you and to the witnesses as well.
        Mr. Chairman, since you and I assumed leadership of this
    Committee, we have conducted five hearings on various scams,
    swindles, and cons used by fraudsters to separate America's
    seniors from their hard-earned money. Today's hearing is the
    sixth. It is indeed a sad commentary on human nature that the
    cruelty of the scammers who target our Nation's seniors 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 on some portion of
    their nest egg to their children and their grandchildren.
        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 actually delivers
    and often does not even own. These scammers use dubious sales
    tactics to steer their victims into highly leveraged
    derivatives contracts where the victim acquires not precious
    metal but a piece of paper.
        Too often victims are not told that they are purchasing a
    derivatives contract, nor are they told that leverage greatly
    increases the risk that they could lose their investment if the
    precious metal drops in value, and, of course, they are not
    told of the exorbitant fees built into the contracts that
    virtually guarantee that they will lose money.
        One company brazenly operated a Ponzi scheme that bilked
    945 investors out of at least $90 million over an 11-year
    period until it was finally shut down by Federal regulators.
        Over the past several years, Federal and State prosecutors
    around the country have been pushing back against this type of
    fraud, and I am pleased to say that they have met with some
    success. In preparation for this hearing, we looked at 34
    Federal cases involving more than 9,100 victims who lost a
    total of nearly $300 million. As a result of Federal action,
    many of these scammers have faced steep penalties, and some
    victims have been able to recover part of their financial
    losses.
        Despite these successes, however, precious metals fraud
    remains the sixth most significant form of financial fraud in
    our country. According to a report by the Enforcement Section
    Committee of the North American Securities Administrators
    Association, what we have always called the ``other NASAA,''
    the Vice Chair of that Committee, Judith Shaw, is head of the
    Maine Office of Securities, which I oversaw during my five
    years as head of the Department of Professional and Financial
    Regulation quite some years ago. While Ms. Shaw is unable to
    join us in person today, she has provided written testimony,
    which I would like to submit with unanimous consent for the
    record.
        Ms. Shaw describes how con artists monitor the markets to
    figure out what type of scam they should run. When the stock
    market looks like a bad place to put your money, as it did a
    few years ago, the con artists know that seniors are more
    likely to turn to gold and silver, which they may perceive as
    safe investments. That makes them vulnerable to precious metals
    scams.
        Maine has been fortunate to avoid the worst of the precious
    metal cases, a fact that Administrator Shaw attributes in part
    to the aggressive enforcement of Maine's commodities law and
    transient sales law. She warns, however, that scammers may have
    neglected Maine simply due to the fact that our elderly
    population is less wealthy than that in other States.
        There may, of course, be many good reasons to invest in a
    portfolio of any well-managed, diversified portfolio in
    precious metals, and there are many reputable dealers who can
    help investors. Our focus today is not on these legitimate
    dealers in precious metals but on those who would use these
    metals as a tool to defraud the elderly.
        Again, Mr. Chairman, thank you for calling this hearing,
    and I look forward to hearing from our witnesses.
        The Chairman. Thank you, Senator Collins.
        Without objection, we will enter the Committee staff's
    investigation report into the record.
        We will proceed according to the order in which I
    introduced you. First, Mr. Melomo.
        By the way, your written testimony is entered in the
    record, and we want you to just give us a verbal summary.
        Mr. Melomo.

                       STATEMENT OF JOE MELOMO,
                     VICTIM OF PRECIOUS METAL FRAUD

        Mr. Melomo. Chairman Nelson and Ranking Member, thank you
    very much for inviting me here.
        My name is Joe Melomo. I have had considerable success in
    my business life as a former physicist with IBM. My wife and I
    have raised four successful children, of whom I am very proud.
    I was always raised to try to do the right thing and to treat
    other people the way I would like to be treated. I consider
    myself a reasonably savvy businessman and investor, and yet I
    sit here today before you having lost more than $170,000
    investing in what I know now was a precious metal scam, so that
    you can understand my frame of mind at the time I invested in
    precious metals, I would like to share with you the events
    leading up to the call I received from American Precious
    Metals. My wife passed away at the end of 2001 after 41 years
    of marriage, and I was lost and found it very hard to look
    back. I sold my house in 2004 and moved from the outskirts of
    Austin back to downtown Austin to be around my kids and my
    grandchildren.
        In Austin, after much due diligence, I became a silent
    partner in a restaurant but soon discovered the majority
    partner in the business was stealing a lot of money. While I
    succeeded in proving this in court--this man was convicted of
    fraud--he was unable to pay me the quarter of a million dollars
    the court ordered him to pay, so at that time, at age 71, I
    took over the business, dealing with all the stress that comes
    with having to support a team of employees and their families
    and cover the enormous bills that came due, due to his terrible
    management of the business.
        While all this was going on, I received a call at the
    restaurant from American Precious Metals, even though my number
    was on the ``Do Not Call Registry.'' The person who called
    talked to me about investing in precious metals, primarily gold
    and silver. The conversation got my attention because I could
    see a way to possibly cover some of my losses from the
    restaurant, so I asked him to send me some information, which
    he did, and all of the materials, like you just pointed out,
    looked very professional and legitimate. Between his
    encouragement and what seemed to be genuine interest in helping
    me profit from this investment and my desire to make back some
    money, I started to invest in gold and silver.
        To me, it was a perfect storm. The economy was bad. I was
    wrapped up in a restaurant. I was not focused on precious
    metals. It looked good. I was consumed by a restaurant. I could
    have done better. Apparently I did not do it.
        I never really understood the leveraged process and was not
    clear on the kind of fees I would be charged. Storage,
    commission, and interest fees were never discussed. I trusted
    him to watch out for my interests since I explained to him the
    kind of turmoil I was going through at the restaurant. That was
    probably not a good thing to do because now he knew I was
    really vulnerable. He told me there is some risk associated
    with precious metal investments, but assured me that he would
    be watching out for me. I guess that feeling of assurance
    allowed me to let my guard down, so with that I focused my
    attention on trying to correct all the issues with the
    restaurant. When the monthly statements came, I looked at them,
    but I did not really understand them. All I did make of them
    was my investment was looking good. Occasionally, I would call
    asking if I should be concerned and was told no, that
    everything looked good.
        During this period, several different sales representatives
    worked my account. The sales reps working with me changed for
    various reasons, but each salesperson that was assigned made me
    feel like I was a friend. We talked about our children and
    where they went to school, et cetera. A nice ``bond,'' I guess
    I would call it.
        For almost an entire year, they kept calling me and urging
    me to invest more money because everything looked good.
        Around August of 2008 the precious metals prices dropped
    significantly, and most of my precious metals were liquidated.
    As you pointed out before, they took your assets and paid up
    what was needed, so American Precious Metals contacted me and
    told me to send more money to protect my investment. I told
    them I did not have any more money to send and that I wanted
    them to return my money. They said they did not have it. I
    called numerous times demanding that they return my money, and
    then ultimately they said it was entirely gone.
        I was devastated to realize that I had been deceived by
    this company. I paid them just under $170,000, and they charged
    me approximately $165,000 in administrative fees, another
    $37,000 in interest charges. With the help of an attorney from
    Florida, I was able to get back $25,000. The overall loss from
    this investment, along with the cost of the restaurant,
    completely--I would not say ``completely,'' but a majority of
    my retirement was gone.
        When I told my children what had happened, they were not
    too pleased with me and obviously not with American Precious
    Metals.
        My daughter Nancy, who is here with me, took it upon
    herself to research the company and the people who worked
    there, and she found that they were banned once before, in
    2005, for doing the exact same thing, yet they restarted again
    in 2007 under a different name, so they were banned from doing
    it, and they came back and did it again. She contacted the
    Federal Trade Commission, specifically Ms. Dama Brown, and
    between my daughter's tenacious drive and the excellent work by
    Ms. Brown and the FTC staff, they were able to get the people
    from American Precious Metals convicted in December 2012.
        I commend Ms. Brown and her staff at the FTC for following
    through and getting this conviction. Unfortunately, to this day
    I still have not fully recovered the money that I lost to
    American Precious Metals.
        I come here today to have my story serve as a warning to
    others who may fall victim to this trap and encourage our
    elected leaders to help protect us little guys from the
    predatory schemes of these companies.
        I thank you for the opportunity to share my story and stand
    ready to answer any questions you might have.
        The Chairman. That is a riveting story, and that is the
    reason that we are having this hearing, to try to elevate it.
        Ms. Brown, you cannot get much of a better introduction
    than what you have already had. You are recognized.

                  STATEMENT OF DAMA BROWN, DIRECTOR,
               SOUTHWEST REGION, FEDERAL TRADE COMMISSION

        Ms. Brown. Thank you, Chairman Nelson and Ranking Member
    Collins, for inviting me to speak about this important issue
    today. My name is Dama Brown, and I am the Regional Director of
    the Southwest Region of the Federal Trade Commission.
        As you know, the Federal Trade Commission is the Nation's
    leading consumer protection agency, and our mission is to
    protect consumers from unfair or deceptive acts or practices. I
    am honored to be sitting today next to Mr. Melomo, who has just
    testified about his experience with American Precious Metals. I
    had the pleasure of working with Mr. Melomo and his daughter on
    numerous occasions while we were prosecuting our case against
    American Precious Metals. His assistance and his willingness to
    come forward and speak about his experience was invaluable to
    the FTC, and it helped us to unravel this scheme and helped
    prosecute the perpetrators of the scam.
        As the testimony makes clear, stopping precious metals is
    and should be a top law enforcement priority. In recent years,
    the FTC has observed an increase in complaints involving the
    deceptive telemarketing of leveraged precious metals
    investments. Unfortunately, the experience that Mr. Melomo has
    just described to the Committee is typical of the scams that
    the FTC has investigated. Telemarketers cold-call consumers
    nationwide. They claim to be professional precious metals
    brokers. Citing headlines about the economy or recent precious
    metals performances, the telemarketers claim to be offering
    safe and lucrative investment opportunities in precious metals.
        Using phrases like, ``This is an investor's safe haven'' or
    comparing the leveraged transactions to an insurance policy
    that is similar to keeping metal under your mattress, these
    telemarketers deceive consumers about the safety of the
    investments, and they urge them to invest heavily in the scam.
        Consumers are pressured to liquidate their IRAs, to
    withdraw equity from their homes, or even to borrow money from
    credit cards or life insurance policies to invest in these very
    high risk scams.
        Telemarketers may call a consumer for weeks before
    convincing them to invest in the precious metals scheme. During
    each conversation, the telemarketer repeats claims regarding
    the profitability and safety of precious metals. Telemarketers
    often fail to disclose that the investments are leveraged, and
    they hide a whole host of substantial fees and interest
    charges. Consumers who purchase these leveraged investments are
    highly unlikely to realize any gains at all. Many consumers
    have seen their entire life savings wiped out through these
    schemes.
        We continue to work vigorously to prosecute these scams.
    Most recently we brought three successful law enforcement
    actions against companies that defrauded more than 1,000
    consumers and resulted in judgments totaling more than $33
    million.
        The FTC seeks to return money to consumers who were ripped
    off. Unfortunately, in the majority of situations, the
    defendants have spent all the money. Nevertheless, critically
    the final orders that we obtain do include bans that prevent
    these defendants from ever selling precious metal investments
    again.
        Thank you for the opportunity to speak today, and I look
    forward to answering any questions you may have.
        The Chairman. Thank you, Ms. Brown.
        Ms. Hollinger.

               STATEMENT OF ROSEMARY HOLLINGER, REGIONAL

              ADMINISTRATOR AND DEPUTY DIRECTOR, DIVISION

                 OF ENFORCEMENT FOR THE CENTRAL REGION,

                  COMMODITY FUTURES TRADING COMMISSION

        Ms. Hollinger. Chairman Nelson, Ranking Member Collins,
    thank you for the opportunity to address you today. My name is
    Rosemary Hollinger. I am a Deputy Director in the Division of
    Enforcement of the Commodity Futures Trading Commission. I am
    here today to speak about the issue of precious metals fraud--
    to be precise, off-exchange transactions in precious metals
    with retail investors.
        The Commission has been fighting precious metals fraud for
    most of its existence, and the Division of Enforcement has used
    whatever tools we have had available at the time.
        In 2010, Congress passed the Wall Street Reform Act, which
    clarified our jurisdiction to combat precious metals fraud in
    the area of leveraged or financed commodity transactions with
    retail customers. Going forward, these instruments would be
    treated as if they were futures in our fraud cases. This
    enabled us to bring cases against metals dealers offering
    financed metals while avoiding protracted battles over our
    jurisdiction.
        Using this authority, the Commission has filed 21 cases
    since the passage of Dodd-Frank. Nineteen of those cases have
    been filed in the area of financed precious metals and two
    involved non-financed investments in precious metals.
        Many of the CFTC actions have now been resolved, and the
    Commission has obtained a large range of sanctions, including
    restitution, civil monetary penalties, and trading and
    registration bans.
        Typically, these firms operate at multiple levels with a
    so-called metals wholesaler or clearing firm at the top, which
    claims to buy and sell precious metals with a retail dealer,
    who then in turn buys and sells precious metals to the retail
    customer. In reality, it is really the wholesaler just
    outsourcing its sales function to a host of telemarketing
    firms.
        Senior citizens, as you noted, are often victims of
    precious metal telemarketers who attempt to build trust and
    rapport and then reassure their victims by saying things like,
    ``We are bound by the law to give you the best advice at all
    times.'' Or they will talk about how things have changed for
    the worse like, ``Our economy is in a recession. How long will
    it last? How deep will it get?'' Or they will say things like,
    ``The U.S. dollar is poised for new all-time lows with almost
    $3 trillion new U.S. dollars being printed. It is dramatically
    devaluing the existing dollars in circulation.''
        Then the telemarketer will offer an alternative investment:
    precious metals. They present it as an opportunity to ``invest
    in the actual commodity, not just a piece of paper.'' In fact,
    there often is no metal and not even a piece of paper.
        They claim that this investment will ``protect your buying
    power, protect your assets and provide . . . the safety of
    gold,'' because, as they say, gold will ``always have a
    value.''
        They talk about the benefits of compounding profits through
    the use of leverage without disclosing that leverage also
    compounds the risk, so, in fact, the investor could lose their
    entire investment.
        What is advertised as safe, secure, and reliable is
    anything but. The telemarketers promise to ``deliver your gold
    to your depository within 72 hours after the purchase is
    made.'' Often, as I mentioned, there is no gold.
        In the typical financed transactions, customers pay
    commissions, service fees, and markups immediately. About 38
    percent of the customer's initial investment will go to fees.
    Thereafter, interest and storage fees are charged every day,
    eroding the value of the customer's account until the equity
    falls below 10 percent, and then a margin call and forced
    liquidation.
        When the fees are taken into consideration, the price of
    the metal has to increase at least 25 percent to break even, so
    even if the market moves in favor of the investor, the investor
    can still lose their money.
        In the rare instance when the customer makes a profit, the
    telemarketer will push another trade until eventually the
    customers lose their money, but one thing is certain: The
    transactions will always result in fees for the metals dealer.
        The Commission continues to bring cases to stop fraud in
    this area and to seek restitution for the defrauded investors.
    Typically, we seek asset freezes to preserve the funds for the
    investors, but, frankly, recovering investor funds in this area
    is difficult. The retail dealers are thinly capitalized,
    spending every dollar as soon as they get it.
        In addition to our enforcement efforts, we also strive to
    educate the public about metals frauds and other related frauds
    through public advisories and consumer outreach efforts through
    our Consumer Protection Office. We will also work closely with
    the Department of Justice and other Federal and State criminal
    and civil authorities to stop illegal and fraudulent conduct.
        Thank you again for the opportunity to address this
    important issue. I will be happy to answer any questions you
    may have.
        The Chairman. Ms. Hollinger, why wouldn't the legitimate
    precious metals sellers be just completely up in arms and be
    your greatest advocate?
        Ms. Hollinger. Well, that is a really good question. I am
    not sure I could answer that question. You would think it would
    be in their best interest because it does harm their industry,
    but they sure have not been.
        The Chairman. None of the existing legitimate precious
    metals folks have been rushing to support the FTC or the CFTC?
        Ms. Hollinger. No, they have not supported us in our cases.
        The Chairman. Well, Mr. Spicer, we want to hear from you
    how all of this is done. Share with us, please.

                       STATEMENT OF KARL SPICER,
                  FORMER PRECIOUS METALS TELEMARKETER

        Mr. Spicer. Thank you. Thank you, Chairman Nelson, Ranking
    Member Collins, and distinguished members of the Special
    Committee on Aging for this opportunity to testify at this
    important hearing on the protection of the elderly.
        My name is Karl Spicer, and as a result of my participation
    in a South Florida-based commodities fraud scheme, I am a
    convicted felon. Consequently, I have firsthand knowledge of
    the deceptive methods employed by scam artists to entice
    unsuspecting and vulnerable victims to part with their hard-
    earned savings.
        As this Special Committee is uniquely aware, because of
    their accumulated assets, the elderly are particularly
    attractive targets for a wide array of fraudsters, regardless
    of the specific nature of the investment vehicle being offered
    to the public. From my vantage point, it is clear that the
    elderly need to be well educated and equipped with the
    necessary skills to protect themselves from financial
    exploitation.
        My purpose in testifying today is to provide the Special
    Committee with some measure of insight into the specific
    methods used by trained salesmen to deceive the investing
    public. I wish to impress upon the Special Committee that my
    willingness to speak candidly about the so-called tools of the
    trade is based upon a clear recognition of the magnitude of the
    monetary and emotional harm that my conduct has caused to the
    victims in my specific case. It is my hope that, by testifying
    about the pitfalls in succumbing to high-pressure sales
    tactics, I can help prevent elderly victims from being ensnared
    in ongoing or new investment scams.
        In approximately 2000, after working a number of years in
    the construction industry, I became a licensed commodities
    broker in South Florida. After cycling through a number of
    questionable firms, some of which came under the scrutiny of
    the Commodity Futures Trading Commission, I became steeped in
    the methods used to sell investment opportunities. Throughout
    the period of time that I was a commodities broker in South
    Florida, I earned commissions in the approximate amount of $1.5
    million.
        Eventually, in about March 2012, I became affiliated with a
    South Florida commodities firm known as PMCO Services, Inc.--
    the brochure that you have there before you today. From that
    period of time through February 2013, myself and a number of
    business associates engaged in a systematic scheme to defraud
    the investing public through the sale of silver bullion and
    other precious metals. The PMCO scheme involved 150 harmed
    investors and resulted in approximately $7 million in losses.
    As a result of my efforts, I earned approximately $227,000 in
    commissions during the PMCO scheme.
        Specifically, after purchasing a lead list from other
    telemarketing firms, or ``boiler rooms,'' potential clients
    were subjected to a carefully choreographed plan which was
    designed to emphasize the supposed safety of the highly risky
    investment along with the need to immediately take advantage of
    a unique investment opportunity.
        In my experience, the elderly are particularly susceptible
    to succumbing to high-pressure sales tactics that emphasize a
    ``time is of the essence'' investment decision. In order to get
    the scheme off the ground, a ``fronter,'' or a less experienced
    salesman, would utilize a sell script in order to gauge
    investor interest in a leveraged program designed to entice
    clients by offering the ability to finance a significant
    portion of the investment.
        After forwarding glossy promotional materials, the client
    would then be contacted by a ``closer,'' who would misrepresent
    the safety of the opportunity in order to secure an initial
    modest investment in the program.
        Shortly thereafter, the client would be contacted by a
    ``loader,'' who would claim that he had just acquired highly
    relevant information that would have a significant impact on
    the market and that time was of the essence for the investor to
    increase their position.
        In order to construct a superficial layer of plausible
    deniability, the new client was then directed to the Compliance
    Department, in reality an untrained secretary or other
    administrative person. The closer would then ``school'' the
    investor to give the appropriate responses during the recorded
    compliance call, including a confirmation that the client was
    specifically aware of the risks associated with the highly
    speculative nature of the leveraged program.
        Finally, through the use of a simple mail drop, we
    intentionally deceived potential investors into believing that
    PMCO was a well-established firm located in the financial
    district in New York City, when, in fact, it was located in
    South Florida.
        Immediately upon learning that I was the subject of a
    criminal indictment filed by the New York County District
    Attorney's Office, I fully accepted responsibility for my
    conduct, and I also agreed to cooperate against other culpable
    individuals, including my partner. I am scheduled to be
    sentenced for my role in this scheme in June 2014.
        There can be no doubt that I knew that my conduct in
    connection with the PMCO venture was not only illegal but
    morally wrong. As a result, I accept full responsibility for my
    conduct, and I know that I alone must face the consequences of
    my actions.
        Thank you again, Senator Nelson, for the opportunity to
    testify today. I am here and prepared to answer any questions
    put forth by the Special Committee.
        The Chairman. Mr. Spicer, before I turn it over to Senator
    Collins, how about giving the Committee your sales pitch? You
    are making a call. It is a cold call. Give us the pitch.
        Mr. Spicer. It is actually a four-act approach, and the
    whole thing is a very long, drawn-out, choreographed plot. I
    mean, for each part of that act--or each act would take about
    20 minutes per act. What I would like to do, if it is okay with
    you, is really explain each act, the purpose of each act, and
    then really give you the full pitch on what I believe is most
    important, which is really the setup for Act 3, which is
    designed to really extract where the money is--extract the most
    amount of money from clients where it is set up for the loader.
    Would that be okay?
        The Chairman. Of course.
        Mr. Spicer. Okay. The way it works is, like I described,
    there are four acts. Act 1 is done by the fronter, which is,
    again, a less experienced salesperson. Okay? That part of it
    and the purpose of that fronter is really designed to get three
    things: to pique investor interest by, you know, scamming or
    hyping up the projections of the market and what the percentage
    returns will be; also to gather information from the client or
    the prospect, things like their income, their net worth, their
    age, how much money they can invest; and, most importantly, to
    find out who the decisionmaker is in the process.
        The fronter then sends out prepared glossy material, a
    folder, a package, if you will, and then turns it over to Act
    2, which would be the closer.
        The closer's job is to really introduce some new
    information, new market information, whatever is going on that
    day, just something that the prospect has not heard before, and
    to really build on the fronter's hype that was set forth in the
    original call.
        They really are designed primarily just to get the
    investment commitment, just to get them in the door. No matter
    how small the investment may be, their job is to solely get
    that client to fill out the account forms and send in an
    initial investment, generally around $5,000 or $10,000 it can
    range, but that is the general.
        Then it gets turned over to Act 3, which is really--it is
    done by the closer. Once the account comes in, the documents,
    the money, et cetera, as I described in my opening statement,
    they are put into Compliance. Once the compliance call is done,
    we place their trade for that initial $5,000 or $10,000 for XYZ
    amount of ounces.
        What I will do is I will certainly role-play and give you
    the pitch on what happens at that point. It is a very
    choreographed plan, but what I was taught to say was:
        ``Mrs. Jones, I have got great news for you. I just got
    your fill back. We have got a great fill. Here is what
    happened.'' ``Fill price'' meaning what price they paid for the
    ounces they bought. We say, ``Here is how it happened. As soon
    as we got you through Compliance, I took your trade ticket. I
    ran down to our trade desk to try to get you the best possible
    fill as quickly as possible. As I went to the elevator, it was
    packed. Everybody was trying to get down there to get their
    clients in as quickly as possible. I actually took the
    stairs.''
        ``When I came down through the stairs, I actually ran into
    our chief bullion dealer, our head trader''--whoever that
    person may be, and in my case it was a gentleman that was using
    an alias by the name of Mr. Goldman.
        ``When I ran into him, I actually knocked all his trade
    tickets out of his hand, et cetera, and he asked me where I was
    going in such a big hurry. I explained to him that I was just
    trying to get a new client in the market and that I was eager
    to do so.''
        This was all, obviously, a lie.
        I then said, ``Mrs. Jones, he then told me to go back to my
    office, get back on the phone, and he would take care of it
    before I knocked anybody else over on the trading floor.'' I
    said, ``Mrs. Jones, when I came back, I was on the phone. I
    went to get some coffee. I came back. Your trade was on my
    desk, and I have got great news. We actually got a phenomenal
    fill, probably the best price of anybody out of the entire day.
    My chief bullion dealer saved you about 30 or 40 cents per
    ounce. You got the best fill of the day, so we owe him a huge
    thank you.''
        I said, ``More importantly, we have a huge mandatory
    meeting that I just found out about that is being called
    tomorrow at around 10:00 or 11:00 a.m. Now, this has got to be
    something major, simply because we make our living on the
    phones, and for the firm to call all the brokers off of the
    phone in the middle of the day, something major has to be going
    on, so I want to know where you are going to be at, you know,
    and how can I reach you tomorrow at 10:00 or 11:00 a.m.?''
        We find out, we let them go, give them their fill price,
    ``Have a great day.'' Call them back the next day in the
    morning around 10:00 or 11:00 a.m. We tell them, ``Listen, I
    have got great news. The meeting went phenomenal. There is a
    lot of stuff happening in the market. We believe it is going to
    have a tremendous impact on the market. You are not going to
    believe this. In fact, the gentleman conducting the meeting was
    our chief bullion dealer, the guy that gave you the great fill
    price.''
        ``I went up to him after the meeting to thank him for
    helping us out, giving us that great price, and he took an
    interest in your account and would like to speak to you. Do you
    have a few minutes to speak to him?'' They of course say yes.
        At that point I say, ``Listen, I want you to do a couple of
    things: one, take a pad and pen, jot down some notes. He is our
    chief bullion dealer, our head trader. He certainly knows more
    about what is going on in these markets than I do, and, you
    know, he hopefully can shed some insight on your account.''
        ``The other thing that we want you to do is thank him for
    his time and thank him for helping you out yesterday and giving
    you a better fill price.''
        Then we pass them off to the loader, and that would be Act
    4, which is generally done by the most experienced salesperson
    in the room, and it is usually done behind closed doors--at
    least in my case it was.
        The Chairman. What does the loader say?
        Mr. Spicer. Well, in retrospect, after kind of finding out
    later down the road, he essentially lies about everything. In
    my case, I mean, he was saying stuff that, like he was managing
    the New York Mets' money. I mean, it got extravagant after
    that. Really, to be honest with you, we were not privy to that
    information at the time. I found out afterwards, so just
    hearing that one piece of it, I can really in my imagination
    run wild with it, and I can only imagine.
        The Chairman. With the purpose of getting----
        Mr. Spicer. Extracting several hundred thousand dollars.
        The Chairman. Right. As is my practice here, I am going to
    give my colleagues the chance to question first. I want to
    thank all of you, and, by the way, Mr. Melomo, tell me: What
    happened to the restaurant?
        Mr. Melomo. Well, that is a good question. I turned it
    around, spent an awful lot of money and time, and made it a
    successful restaurant, but as I found out, if you try to do
    things the right way, you do not make any money. Usually in
    restaurants, you have a credit business and a cash business.
    What I found out, I always accounted for all the cash and all
    the other. Not everybody does that, and some cash does not get
    accounted for, and that is how money is made, and I did not do
    it that way, and as a result, I did not make any money, so I
    was getting older and tired, and I said, ``This is not for an
    old guy.'' I found a buyer and got out of it. I said I just
    cannot deal with it anymore, and I had accumulated a lot of
    debt to fix it up, so I did not even--that was part of my loss,
    so, you know, there were two errors: that one, and then the
    precious metals.
        I was glad to get out of it. I was unhappy with my
    performance--not in that one but in the gold one. I should have
    known better. I should have done better, but as Mr. Spicer
    pointed out, we did not have a chance.
        The Chairman. Well, let me tell you, you do not look like
    an old guy.
        Thank you for being here and sharing that extraordinary
    story.
        Okay. Senator Collins.
        Senator Collins. Thank you very much, Mr. Chairman.
        Mr. Melomo, when I heard Mr. Spicer go through the sales
    pitch that he would give, I can certainly understand why you
    were deceived, particularly given all else that was going on in
    your life, and when I think of the ads that I have seen in
    reputable magazines and newspapers for precious metals, I would
    not know which ones of those are legit and which ones are not.
        In addition to far more aggressive prosecution, I think we
    need to do a better job of educating consumers, so I have had
    my staff pass out--and I want to give one to the Chairman, and
    I apologize that I do not have one for everyone here, but this
    is a document that has been put out by the Maine Securities
    Office, and it is what every investor needs to know before
    investing in gold, and in large print, it says, ``It is a myth
    to say that gold is a safe investment,'' which is what you read
    in those ads. It is what you read in the precious metal
    publication that was sent to you, and it sounds like it is what
    Mr. Spicer was telling people, or people within your
    organization, you know, ``This is safe, the stock market is
    not, it is very volatile, but gold? Gold is safe?'' I can see
    why so many people are deceived.
        One of the things I like about this publication is it goes
    through two actual scenarios that are very commonly used. The
    one about keeping the gold in a secure vault and promising to
    sell it as soon as it gains in value, it sounds very similar to
    what you were told.
        I have a feeling if this had made--this publication had
    made it to you, that you would not have sent your hard-earned
    money to these con artists.
        I know that the FTC and the Commodity Futures Trading
    Commission also have put out consumer alerts in publications,
    but I do not think these are getting to our seniors.
        Mr. Melomo, had you ever seen any kind of warning about
    being careful in dealing with----
        Mr. Melomo. Not at all. Not at all.
        Senator Collins. You know, I am going to direct it to the
    two regulators that we have here. If you invest in a mutual
    fund, you get all sorts of disclosures that are mandated by the
    SEC. Are there disclosures that are mandated for precious metal
    dealers to have to, such as the kinds of disclosures that are
    included here? Why aren't we requiring--by ``we'' I am putting
    on my old regulator hat here. Why aren't you requiring
    disclosures to be included in these print ads and any kind of
    publication to warn investors that it is not a sure thing? Ms.
    Hollinger, we will start with you and then Ms. Brown.
        Ms. Hollinger. Well, that is a good point that you are
    making, and I think that consumer education is the first line
    of defense in these cases.
        The Commission's public outreach program is going to be
    starting a campaign, a much more aggressive campaign, in terms
    of consumer education in the precious metals area this year. It
    is being unfolded as we speak, so I think that we will be doing
    a better job of getting the message out with brochures like
    what you have shown us, so I think that the consumer advisories
    certainly did not reach people like Mr. Melomo, and, you know,
    it is unfortunate, but we are going to try to do a better job
    in the future.
        Senator Collins. Do you have the authority to require these
    dealers, who are, after all, registered--in the State of Maine
    they are. I do not know whether they are--maybe that is
    something we need to do, but in the State of Maine, the Office
    of Securities Licenses, firms and brokers who sell gold-related
    securities and investment advisors who recommend the purchase
    of gold-related securities or selling securities to purchase
    gold as an investment.
        Tell me what the regulatory scheme is here. Is anyone
    regulating these firms?
        Ms. Hollinger. Well, I am really only qualified to talk
    about what the CFTC registers, but we do not.
        Senator Collins. But you do commodities.
        Ms. Hollinger. We do commodity futures.
        Senator Collins. Right.
        Ms. Hollinger. Options and swaps and a host of other
    things, but under Dodd-Frank Act, if the metals dealer or the
    entity offering the retail commodity to an investor delivers
    within 28 days, they do not have to be registered.
        Senator Collins. Ms. Brown, does the FTC have any ability--
    I would like to not only increase our prosecution efforts; I
    think we need to up front put some disclosure requirements on
    these dealers, the good and the bad. For one thing, it would be
    a lot easier for you to go after them if they violated the
    disclosure, if they have not made the disclosures or they
    violated them.
        Ms. Brown. I understand your concern, Senator Collins. The
    Federal Trade Commission enforces the telemarketing sales rule.
    To the extent that these companies are offering products
    through telemarketing, there are mandatory disclosures that are
    required. A telemarketer must disclose clearly, conspicuously--
    and before a consumer agrees to pay--certain information,
    including cost and quantity. The telemarketing sales rule also
    prohibits companies from misrepresenting profitability or risk,
    and then our Section 5 authority is somewhat broad and
    flexible, and it prohibits a business from relying upon
    deception in their business practices, and deception does
    include deceptive omissions, so the failure to provide
    information upon which a consumer would need to make a prudent
    decision.
        Senator Collins. I know my time has expired. Let me just
    say that I would welcome--and I think the Chairman would, too,
    and Senator McCaskill--if there are gaps here in the laws, we
    would like to know what they are, and I also am really
    concerned when I hear from Mr. Melomo that he basically got
    nothing back, $25,000 out of his $170,000. Obviously this money
    is spent very quickly, but there needs to be more of an
    emphasis on restitution as well.
        Thank you, Mr. Chairman.
        The Chairman. Ms. Brown, Mr. Spicer and his firm were
    prosecuted under the authorities of the Federal Trade
    Commission?
        Ms. Brown. I believe that he was prosecuted by State law
    enforcement. It was not a Federal Trade Commission case, Mr.
    Spicer's case.
        The Chairman. Would the example of the facts as related by
    Mr. Spicer, would that have been a violation of Federal law
    under the authorities of the Federal Trade Commission?
        Ms. Brown. Absolutely. The scam that Mr. Spicer laid out is
    very similar to what we observed and prosecuted in our cases.
        The Chairman. In the case of Mr. Melomo, that was--you
    utilized your authorities in existing law?
        Ms. Brown. That is right.
        The Chairman. Ms. Hollinger, I was struck that you seemed
    to think that you do not have any jurisdiction for scams such
    as Mr. Spicer's.
        Ms. Hollinger. We prosecuted that firm, so we do have
    jurisdiction over what Pan American of Miami did. What I was
    saying is that we do not have registration authority over those
    firms. There is a difference. Under Dodd-Frank, we have
    jurisdiction for antifraud and requiring that transactions be
    executed on an exchange.
        The Chairman. I think that I need to know some more about
    the extent to which your agency is going after these kinds of
    scams and why you said you did not know about the legitimate
    dealers in precious metals, why they were not jumping to the
    fore trying to expose these scam artists. You have a gentleman
    that has been nominated as the head of the CFTC but not yet
    confirmed. Would you please pass on to him, before I will allow
    consideration of his nomination in front of the Senate, I would
    like to have a conversation with him?
        Ms. Brown. Certainly.
        The Chairman. Okay. Senator McCaskill?
        Senator McCaskill. I want to figure out how you got
    prosecuted, Mr. Spicer, and I assume you are here because you
    want to do the right thing, especially since you have got
    sentencing in a month, right?
        Mr. Spicer. Sure. I mean, there is no way that I could
    possibly pay back to these people any monetary things, so,
    yeah, I am certainly trying to do everything I can.
        Senator McCaskill. Who knocked on your door the first time
    you knew you were in trouble? What agency was it?
        Mr. Spicer. The Manhattan District Attorney called me on
    the phone.
        Senator McCaskill. Okay, and are you saying, Ms. Hollinger,
    that you referred that case to the Manhattan District Attorney?
        Ms. Hollinger. No.
        Senator McCaskill. Okay, so how did the Manhattan District
    Attorney get your case? You have got lawyers behind you. They
    can probably tell me.
        Mr. Spicer. Yeah, we had set our corporation up through the
    State of New York with a virtual office and had a physical
    location in South Florida.
        Senator McCaskill. A victim came forward in New York and
    brought this to the attention of the financial sector of the
    Manhattan DA and the Manhattan DA took action?
        Mr. Spicer. I do not know if there was a victim that let
    them know. I am not really sure about that.
        Senator McCaskill. I am sure that it probably was, so how
    many cases have been criminally prosecuted through the FTC or
    the CFTC for this, for these metals scams? How many cases have
    gone to a criminal prosecution with people going to prison?
        Ms. Hollinger. I can only speak to how many indictments
    that I am aware of. In addition to the Pan American case, I am
    aware----
        Senator McCaskill. Are you referring to his case?
        Ms. Hollinger. Yes.
        Senator McCaskill. You did not do that case. The Manhattan
    DA did that case. That was not a Federal case. That was a State
    case. You just told me you did not refer that case.
        Ms. Hollinger. I must have misunderstood your question. I
    thought that you asked me how many precious metals criminal
    cases----
        Senator McCaskill. I want to know how many your agency
    began and brought to completion through Federal authorities,
    because I do not think you generated that case, correct?
        Ms. Hollinger. I think we were working on it
    simultaneously.
        Senator McCaskill. Okay, so you were working on it. Did you
    notify the Manhattan DA office, or were you working through
    Federal law enforcement?
        Ms. Hollinger. We were in constant communication.
        Senator McCaskill. Okay, so here is the deal: We have got
    local prosecutors, and you have got an office like the
    Manhattan DA that is very sophisticated.
        Ms. Hollinger. Yes.
        Senator McCaskill. They know a crook when they see one--
    pardon me, sorry--and they go after him, and then we have got
    the Federal folks who have a tendency to dither and take months
    and not bring very many cases, so I am trying to compare and
    contrast how aggressive the Manhattan DA was in this case with
    perhaps how aggressive the CFTC and the FTC has been, and,
    frankly, I do not mean to yell at you guys because a lot of it
    is about resources.
        Ms. Hollinger. The CFTC has brought 21 cases.
        Senator McCaskill. Okay, 21 cases totally in the country?
        Ms. Hollinger. To date.
        Senator McCaskill. Okay, and have those all been prosecuted
    federally, or were they prosecuted at the local level?
        Ms. Hollinger. Well, the CFTC can only prosecute on the
    Federal level.
        Senator McCaskill. Okay. Well, just a minute ago, you tried
    to take credit for the State prosecution, so I want to make
    sure you were not putting State prosecutions in with Federal
    prosecutions.
        Ms. Hollinger. No, I was not trying to take credit for the
    State prosecution. I was just pointing out that we also brought
    a case against that firm.
        Senator McCaskill. Okay, so you did one in addition to the
    Federal--to the State, so the Federal did a case and the State
    did a case in Mr. Spicer's case.
        Ms. Hollinger. The State criminal authorities and the
    Federal civil authorities both brought a case against the same
    firm.
        Senator McCaskill. His lawyers are saying, no, that is not
    true. Would you mind, Mr. Chairman, if they clarified it? I
    think this is important.
        The Chairman. Certainly. State your name and your position
    for the record.
        Mr. Bruno. Yes, Senator, my name is Christopher Bruno. I
    represent Mr. Spicer.
        Senator, there was not a Federal civil action. I think that
    the confusion is this is PMCO. I am not sure what the civil
    case was. There was not a parallel civil action here. I think
    there is a confusion in terms of the identity of the two
    ventures. This is PMCO. I think she referred to Pan American.
        Ms. Hollinger. Pan American of Miami. I thought that was
    the same firm.
        Mr. Bruno. That is not PMCO.
        Senator McCaskill. No, that is not even the same company.
        Ms. Hollinger. Okay. I am sorry. Then I misspoke.
        Senator McCaskill. Okay, so you have got 21 total cases in
    the country, and----
        Ms. Hollinger. Filed.
        Senator McCaskill. Filed, and how many of them have been
    convicted and gone to prison?
        Ms. Hollinger. I think none.
        Senator McCaskill. Okay, and how about you, Ms. Brown? How
    many have been convicted and gone to prison?
        Ms. Brown. Senator McCaskill, we do have a Criminal Liaison
    Unit that advocates and attempts to refer our cases over for
    criminal prosecution. Whether or not a criminal prosecutor
    accepts our case and is investigating it would be non-public
    information that I am not able to disclose. However, I will say
    as of yet there have not been any indictments in the cases we
    have brought.
        Senator McCaskill. Okay. You cannot tell me about--they
    cannot talk about whether or not investigations are ongoing,
    but that is obviously in the context of a specific case. You
    can certainly say, if you know, how many cases are currently
    ongoing. Do you know how many cases are currently ongoing in
    terms of investigations?
        Ms. Brown. I do not know as we sit here today.
        Senator McCaskill. Okay. Well, that is kind of important,
    and I would ask for the Committee that you provide that
    information, because here is the deal: I respectfully disagree
    with you, Ms. Hollinger. The first line of defense is not
    consumer education. The first line of defense is putting the
    crooks in prison, because when crooks go to prison, other
    crooks notice. This is an underbelly of scam artists that are
    working this scam all over the country, and the most effective
    way to ferret this out and protect people like Mr. Melomo is to
    go after them with criminal prosecutors.
        Let me ask you this: Do either one of your offices have a
    liaison with the National District Attorneys Association and
    the local prosecutors that have the authority like the DA in
    Manhattan to bring criminal prosecutions?
        Ms. Hollinger. I would have to check with our office and
    find out.
        Ms. Brown. We do have a Criminal Liaison Unit that works
    with those groups.
        Senator McCaskill. Okay, so what I would like to know from
    that criminal liaison group if they would communicate back how
    many local prosecutors they have met with, how many local
    prosecutors they have brought cases to for prosecution, because
    what happens is in the Federal Government, this gets all tied
    up, and you all do not have prosecutors. All you can do is call
    Justice, and if Justice is busy, then Justice is not
    interested, and we have got to be much more aggressive about
    this.
        Now, I have jurisdiction over the FTC, as you know, in my
    Subcommittee on Commerce. You do have the authority to clear up
    fraudulent advertising. Have you taken any actions against the
    fraudulent advertising that is going on where precious metals
    say this is a safe investment, there is no risk? That is
    fraudulent.
        Ms. Brown. I am not aware of any cases that we brought
    against national advertisers. The cases that we testified to in
    our written testimony were marketers that were presenting this
    as a safe and profitable investment.
        Senator McCaskill. Okay. Well, that I think would be the
    second line of defense, is going after the fraudulent
    advertising. You know, you can turn on satellite radio right
    now and hear it as you drive home tonight. Get on one of the XM
    stations, and you will hear the fraudulent advertising--it will
    not be hard to find them, because it is everywhere--where they
    are not having to follow the same rules as--a lot of these
    investment firms do not advertise on radio because they cannot
    get in the disclosures. They are too long for the radio ads,
    but these guys do not have those disclosure requirements, so I
    would ask that your agency take a much harder look at the
    fraudulent advertising that is going on.
        Thank you, Mr. Chairman.
        The Chairman. I can tell you, we are not going to let this
    go. We are going to have some visitation with the FTC and the
    CFTC, with the Department of Justice.
        In 1983, the Associated Press ran a story that is very
    similar to the one that has been recounted to us here today, so
    why are we still struggling with this problem today?
        Ms. Hollinger. Do you want me to address that?
        The Chairman. Anybody.
        Ms. Hollinger. Okay. I think that this is cyclical based on
    my experience at the Commission for 28 years. When I first
    joined the Commission in the mid-1980s, we were dealing with
    precious metals fraud. It looks like these people are
    opportunists and they will go wherever the opportunity is, so
    we saw them move to options and then to forex and then finally
    back to precious metals, so I think that the reason it is
    precious metals fraud right now--in essence, the flavor of the
    day--is because precious metals' prices are volatile right now
    and they can prey on the fear, the insecurity of investing in
    the stock market.
        I think that the reason you see the same people over and
    over again is that this is their career, telemarketing, and so
    you are going to see them go from one scam to another until
    they are finally stopped. I think that is the best answer I can
    give you.
        The Chairman. Does your agency as the commodities futures
    trading, are there futures in precious metals?
        Ms. Hollinger. Yes.
        The Chairman. Okay, so there are legitimate businesses on
    precious metals.
        Ms. Hollinger. Yes.
        The Chairman. I just simply do not understand why the
    legitimate businesses are not raising Cain about the
    fraudsters, because when we get through with this hearing and
    when the members of this Committee get through telling about
    these scams, it is not going to give a degree of confidence in
    a potential investor that wants to invest in gold or other
    precious metals. Mr. Spicer?
        Mr. Spicer. Yes, if I may. It has been my experience,
    although I am sure that I do not have all the answers as to how
    to kind of stop this, if you will, I do know that where I am
    from in South Florida, there are one of these on every corner,
    and when you take one down, three pop up, and I truly believe
    there are a couple of things that can be done.
        One, I believe with Mrs. McCaskill, I think that with all
    due respect to the civil authorities, the people that I have
    encountered in my experience do not really respect the civil
    authority bans and the things that can be done there. To be
    honest, they still--they take bans that--the gentleman that I
    was with has a CFTC ban. He cooperated, he had a ban, and he
    still went about doing business the very next day. I think she
    is right that the first thing is--I think that the criminal
    aspect exposure, like what happened in my case, is what is
    going to open eyes, as she stated.
        The other thing is I believe that obviously investor
    awareness is key, but I think the other key ingredient to this
    is the transactional lawyers that help these guys put these
    things together and avoid detection and avoid, you know,
    regulation. I think something needs to be done there, because
    there are a group of them, lawyers that help these guys put
    these things together.
        The Chairman. They have escaped prosecution.
        Mr. Spicer. Well, I mean, the guy that I was with had an
    attorney, he was banned, and he was telling him what to do, and
    he was using an alias, and he was using a nominee for the
    business, putting it under somebody else's name, just things
    like that.
        The Chairman. How about the telemarketers? Are they
    prosecuted?
        Mr. Spicer. In most cases, the individual guys are not. It
    is mainly--even in the civil cases, it is the higher-ups. The
    individual telemarketers, fronters, brokers are generally left
    out.
        The Chairman. As a legitimate stockbroker--you said you
    were a registered broker.
        Mr. Spicer. Yes, sir.
        The Chairman. You made a million and a half bucks.
        Mr. Spicer. That was my entire commodity career, both with
    precious metals and with being a registered commodity broker.
        The Chairman. How did you get seduced into this
        Mr. Spicer. That is a great question. It was a combination
    of several things, I am sure. I actually had my own commodity
    firm for a while, for about three years, that I was trying to
    run by myself with nobody else, just me, myself, and I, and it
    just really got to be too much between trying to do all of the
    regulatory aspect and trying to find investors. Just really all
    by yourself, it was too much.
        I actually got a call from a guy that used to be a
    commodity broker when I first started who owned a precious
    metals firm, and he offered me a position and I took it, and I
    think a lot of the guys that were in the commodity industry
    down there in South Florida went to metals. I think when the
    CFTC lowered the commission rate that they could charge--or
    whatever, the commission that we were able to charge on an
    option, because that is what those firms down there do, do
    option contracts, they were charging back when I first started
    $200 per option on a $1,000 option, and it went down to a
    certain percentage. It may not be a dollar amount, but at any
    rate, a lot of those guys went to precious metals because there
    is no regulation. Originally, there was no regulation. This was
    before the Dodd-Frank Act, and that is just kind of how it--
    what happened.
        The Chairman. Ms. Brown and Ms. Hollinger, do you think
    there is a role for an agency like the Consumer Financial
    Protection Bureau to be more proactive in protecting seniors
    and other investors?
        Ms. Brown. Of course, I think whenever you introduce more
    law enforcement agencies, it is a good thing. Having the
    ability to bring law enforcement actions, engage more in
    consumer education efforts would certainly prove helpful.
        I would also note that already there is a lot of
    collaboration between different Federal agencies and State
    agencies. The CFTC and the FTC both participate in a task force
    that was organized by the U.S. Attorney's Office in Miami,
    Florida, and we speak regularly about law enforcement options.
    That task force includes the SEC, FINRA, the FBI, the IRS,
    several State and local agencies as well, including Attorneys
    General, the Office of Financial Regulation, Florida's
    Department of Agriculture and Consumer Services, and all of the
    agencies work very hard to leverage our resources, share
    information, and find the best means of, you know, going after
    these scams.
        The Chairman. I want our staff to follow up with the U.S.
    Attorney down there.
        Senator McCaskill. Let me just point out, you did not
    mention any local prosecutors. The prosecutor who put him in
    prison was a local prosecutor. It was a State prosecutor. They
    prosecute 99 percent of the crime in this country. Invariably,
    Federal agencies hang out with U.S. Attorneys, no disrespect to
    U.S. Attorneys, but they are not going to go after these guys.
    They are not going to do it. If they were, they would have done
    it since 1963. They are not going to do it. You are going to
    have to bring in local prosecutors and get their expertise up,
    get their interest up. If you have a task force and there is
    not a local prosecutor in it, it is not going to be successful.
        Ms. Brown. We rely heavily on local law enforcement as
    well. In fact, when we bring a new case, we involve the local
    authorities, and they assist us in our immediate access of
    cases, and we do solicit their----
        Senator McCaskill. I am anxious to find out one case that
    the CFTC has been brought against one of these guys that they
    have referred through their work to a local prosecutor. One
    case. I am anxious to hear about it.
        The Chairman. I would like somebody in the Federal
    Government to start providing consumer information like this
    provided by Senator Collins' State of Maine, their Office of
    Securities, because if an investor like Mr. Melomo had seen
    this and read it word for word--yes, sir?
        Mr. Melomo. I think this is excellent, first of all.
    However, I have never seen anything like this, but I thought
    about how could I have done things differently, how could I
    have protected myself, and I thought originally, why don't we
    put in place a law like we have for sexual predators, a
    national list of all those folks who prey on the children, one
    that preys on the elderly?
        Then I thought, that is a lot of work and it is
    complicated, so I thought a little differently, and I said,
    well, here is what a consumer ought to do: A consumer, first
    order of business, in my case what I did not do is I did not
    engage my family when I was called by these people. Had I
    engaged my family, I mean, they would have definitely played
    devil's advocate with me, and I would have re-thought what I
    was doing.
        The second thing is I think we need to put in place a 72-
    hour rule like we do in automobile buying where the consumer,
    after they purchase something, has the ability to go back and
    say, ``I think I made a mistake. I want out of this deal.'' If
    we had something like that and you talked to your family, I bet
    a lot of consumers would say, ``Wait a minute. This is not a
    legit thing.''
        Then the third part of that is we have an Internet out
    there that my daughter used very successfully to find lots of
    dots to connect.
        We ought to be using those three things. I say ``we''--the
    consumer, the person. Had I done that, I definitely would not
    have lost that money, but I did not do that. That was my fault,
    but I think something like that has value. At least I think it
    has value.
        The Chairman. Senator Collins?
        Senator Collins. Thank you.
        Those are excellent suggestions, and I really appreciate
    your sharing them with us. One of the concerns that I have is
    although the CFTC and the FTC have some excellent documents
    that are online, they are just not likely to get to people like
    Mr. Melomo, and what I started doing with a senior newsletter
    that I am doing as a result of our work is putting them in
    senior centers and working with AARP to distribute them and
    putting them in area agencies on aging or places where seniors
    go to apply for low-income heating assistance programs.
        I think that the Federal Government produces excellent
    materials, but really fails when it comes to getting them into
    the hands of seniors, or try to get public service ads that
    would alert people to help counter all those radio ads that are
    heard, and that is what I think we should do a lot more of.
        I want to get back to a point that Senator McCaskill
    raised, Ms. Brown, and that is, she talked about the
    jurisdiction you have over fraudulent or misleading
    advertising, but what I want to know is, can you mandate
    certain disclosures? For example, some of the disclosures that
    are included in the Maine Bureau of Securities brochure, do you
    have the authority to put the kinds of disclosures that, as
    Senator McCaskill memorably said, would be too long for the
    radio ad--which is why we do not hear mutual funds generally
    advertising in 30-second ads because they are required to make
    all these disclosures?
        Can you mandate disclosures? I do not know who has the
    responsibility to make sure these people behave.
        Ms. Brown. Thank you, Senator Collins, and I come here
    today as a litigator who has brought these cases. I am not a
    policy analyst, and I do not engage in rulemaking at the
    Federal Trade Commission. We have a fabulous team of people who
    do those things, and I am happy to forward your inquiry on that
    point to them and have them respond. I feel ill-equipped to
    address potential rule changes or legislation that the agency
    might take on. It has not been my role in the agency.
        Senator Collins. I would ask that the agency get back to
    us.
        Ms. Hollinger, what about the CFTC? Can you--and I realize
    you are dealing with futures contracts, but we know there are
    futures involved in the sale of gold and other precious metals.
    Can you mandate disclosure requirements to appear in
    advertisements?
        Ms. Hollinger. I think in regulated futures and options we
    do have requirements and mandated disclosures. This is
    unregulated, so I have to say I am in the same position Ms.
    Brown is in. I am a litigator also, but I would be happy to
    take your question back to the agency, supplement the record,
    and give you a more precise, focused answer.
        Senator Collins. I mean, can you imagine if seniors had a
    disclosure that said, ``It is a myth to say that gold is a safe
    investment''? I mean, I do not know, Mr. Spicer. You are
    talented at talking people into things. There is no doubt about
    that, but if you had an educated consumer who started pushing
    back at you and saying, gee, I just read a warning to beware of
    buying told through a telemarketer cold call and pointed out to
    me that it is a myth that gold is a safe investment and that
    mutual funds by law have to have 90 percent of their income
    from securities, gold is not a security, and, you know, went
    through some of the--if they started pushing back with the kind
    of information--I realize you have not seen this brochure.
    Would that cause you to go on to your next victim? Or would you
    try to still talk them into it? Or would you be worried that
    maybe they would be on to you?
        Mr. Spicer. To be honest, they would still try to go----
        Senator Collins. You would still try to push it.
        Mr. Spicer. Yes. I mean, there are--I mean, there are
    certain people out there that pay attention and that, you know,
    obviously are aware of the disclaimers that the Commodity
    Futures Trading Commission--the pamphlets that they put out and
    so on. They would continue to go forward until the person hung
    up.
        Senator Collins. It sounds like we get back to Senator
    McCaskill's point that the best deterrent--though I still think
    consumer education and warnings on those ads would be very
    helpful, but the best deterrent is going to be aggressive
    prosecution, although I will tell you what will happen. They
    will just move on to the next scam.
        Senator McCaskill. Not if they go to prison.
        Senator Collins. True, but, I mean, it is amazing. The scam
    hearings that we have had, the creativity of the con artists is
    just unbelievable.
        Thank you.
        The Chairman. Senator McCaskill.
        Senator McCaskill. Yes, first, I have a lot of passion for
    this, so I do not want you to mistake my passion for being so
    abrupt and rude to you that I do not appreciate your service
    and that you are working hard, but I was struck by both of you
    saying that you are litigators, and so I want to probe that a
    little bit.
        Ms. Brown, what do you actually do as a litigator?
        Ms. Brown. I was the litigating attorney on the three cases
    that the Federal Trade Commission brought in this area. My role
    there was to help investigate the operations, work with a
    Federal trade investigator, determine what was going on. I had
    the opportunity to speak to many consumers who were victimized
    by these scams, including Mr. Melomo. I interviewed them,
    determined what representations were made to them. I
    investigated the underlying facts. I looked at the companies'
    Web sites, at publicly filed documents.
        Senator McCaskill. Then you did what?
        Ms. Brown. Then I recommended to the Commission that we
    file an enforcement action against these companies to close
    them, to shut them down.
        Senator McCaskill. Okay, and you successfully shut them
    down.
        Ms. Brown. We did.
        Senator McCaskill. Okay. Now, at what point in that
    investigation under your protocols would you have been
    instructed to involve criminal authorities?
        Ms. Brown. I was involved with criminal authorities in
    these matters very early on, as was the CFTC. The first case
    that I brought was American Precious Metals. I worked on that
    matter alongside with the CFTC. Carlin Metzger of Rosemary's
    office and I coordinated, shared information, brought our
    respective actions, and we met with prosecuting officials.
        Senator McCaskill. Okay, and who did you meet with?
        Ms. Brown. We met with U.S. Attorneys.
        Senator McCaskill. Okay, and these were U.S. Attorneys all
    over or they were specifically in one jurisdiction?
        Ms. Brown. We met with both Main Justice and from South
    Florida.
        Senator McCaskill. Okay, and when you met with the U.S.
    Attorney from South Florida, was that U.S. Attorney interested
    in criminally prosecuting these cases?
        Ms. Brown. They were noncommittal. They took a lot of
    information, and we shared all of our resources with them.
        Senator McCaskill. Then you went away and did your civil
    stuff, and did anybody follow up with him about why criminal
    cases were not filed?
        Ms. Brown. Our Criminal Liaison Unit has pursued inquiries
    with the U.S. Attorney's Office as well as some other Federal
    regulators and reminded them of our interest in seeing this
    matter prosecuted.
        Senator McCaskill. Are you aware of what the Florida State
    statutes are as it relates to these crimes?
        Ms. Brown. I am sorry. I do not understand your question.
        Senator McCaskill. The difference between State statutes
    and Federal statutes. You know, we have two sets of laws--ones
    that are State laws, ones that are Federal. Are you familiar
    with the State criminal laws around this activity?
        Ms. Brown. I am not familiar with the laws in the State of
    Florida. However, I did speak to a county sheriff also about
    these cases and outlined, you know, a thumbnail sketch of the
    case and asked if they would be interested in criminally
    prosecuting.
        Senator McCaskill. I am guessing that--have either one of
    you ever been trained or told that at the point in time that
    you are investigating these cases and you have criminal fraud--
    because I assume both of you know very well what the elements
    of criminal fraud are broadly----
        Ms. Brown. We routinely refer things to----
        Senator McCaskill. You are both lawyers, so you learned--
    you had to take those exams, like I did, and you learned what
    the elements of criminal fraud were, so when you find elements
    of criminal fraud, are you trained to call the State prosecutor
    that has jurisdiction over the crime to talk to them about the
    crime that has occurred?
        Ms. Brown. We generally refer matters through our Criminal
    Liaison Unit, and that is their role. They contact, you know, a
    variety of different criminal enforcement authorities.
        Senator McCaskill. Well, I would like to follow up with
    that, because I think what is happening here, you know, there
    is this tendency to assume that local prosecutors are not
    worthy or maybe not capable of handling these kinds of cases,
    and they are really pretty straightforward. You know, you have
    got two or three elements you have got to prove, and, frankly,
    local prosecutors do cases--I am sure the lawyers that are with
    Mr. Spicer can tell you, they do much more complex cases than
    these cases. These are not hard. Once you get the elements of a
    fraud, it is like taking candy from a baby, and I can assure
    you, putting these cases in front of juries, you are going to
    get convictions, because nothing infuriates a jury more than
    someone who has done to people like what was done to Mr.
    Melomo, and I know Mr. Spicer is aware of that. That is why he
    pled guilty, because he knew that a jury would have no patience
    with this.
        I hate to be harping on this, but I really think it is time
    that Federal agencies look beyond what they have been doing
    here and try to get into a meaningful partnership with local
    prosecutors who are going to be much more responsive to
    victims, who do not have the luxury of cherrypicking what cases
    they take. You know, I like to tease my friends that have been
    U.S. Attorneys. If only you had to answer a 911 call, you would
    understand what law enforcement is really like, because Federal
    prosecutors get to pick what they take. Local prosecutors do
    not, and if there is a crime committed in a jurisdiction, a
    local State prosecutor does not really have the ability to say,
    ``I am not interested.'' I think we are missing an opportunity
    to get meaningful enforcement here, because there does not
    appear to be a real effort to coordinate with local
    prosecutors.
        You have heard it from Mr. Spicer--and I cannot imagine a
    more potent or powerful witness--that doing civil actions is
    not going to stop these people. Shutting down their businesses,
    they are just going to go somewhere else, but once they have a
    felony record and once they have spent time in prison, then you
    have got a horse of a different color.
        I am going to venture to say, Mr. Spicer, I have a feeling
    that when you finish doing whatever you need to do in
    connection with your criminal prosecution, you are probably
    going to avoid commodity trading.
        Mr. Spicer. Yes, ma'am. Of course, altogether, financials
    altogether.
        Senator McCaskill. Financials altogether, and I would be
    surprised if he returned to that. On the other hand, he can
    probably name you dozens of people he knows that have been the
    victim of your excellent work in terms of litigation, but that
    has not had a deterrent effect.
        I would look forward to hearing from your Criminal Liaison
    Department, and we will have--through this Committee and
    through my Subcommittee, we will follow up with the FTC and the
    Criminal Liaison to see how much local prosecutors are actually
    getting pulled into the loop.
        Ms. Brown. Thank you.
        Senator McCaskill. Thank you both very much.
        The Chairman. Mr. Spicer, what kind of information was
    contained on those lists that you called from?
        Mr. Spicer. They are pretty basic. They have a name, a
    phone number, usually one or two numbers, maybe an e-mail
    address. Some of them are more extravagant. Some of them have
    incomes, occupation, and such. Most of the ones I dealt with
    just had a name and a number.
        The Chairman. Are they purchased?
        Mr. Spicer. Yes and no. Yes, they do get purchased, but I
    have also seen where firms will swap lists. You know, once
    their people have gone through them, even the front sheets, the
    people that are interested, they get packages, it has been
    known in the industry for firms to sell those interested
    prospects, the ones they did not close, to other firms.
        The Chairman. Other firms that are doing the scam?
        Mr. Spicer. Doing the same--selling precious metals or even
    commodities or anything like--a like service.
        The Chairman. Ms. Hollinger and Ms. Brown, if you wanted to
    legitimately buy gold, how would you go about it so that you
    could avoid the scams?
        Ms. Brown. We advise consumers that they really need to be
    skeptical of cold calls. There are very few legitimate
    companies that engage in cold calling and even fewer that would
    be offering an investment through this method, and if your
    number is registered on the National Do Not Call List, as Mr.
    Melomo mentioned, we encourage consumers to hang up when they
    get that cold call. That company has already violated the law,
    and we know that they cannot be trusted.
        We also encourage consumers to be very wary of sales
    claims. No salesperson can guarantee profits, nor can they
    prevent a consumer's losses. Anyone who says otherwise would be
    lying.
        A legitimate salesperson will thoroughly explain the costs
    and risks associated with an offer, in writing if requested,
    and would not pressure any consumer into a quick decision, so
    we encourage consumers to watch for those red flags.
        The Chairman. Just do not take the cold calls. If you want
    to buy it, go to your registered broker that you are accustomed
    to dealing with.
        Tell me, Mr. Melomo--and it is terrible, the experience
    that you have gone through, and the sad human and financial
    cost to you. Before you made the decision to buy these precious
    metals, did the salespeople at American Precious Metals ever
    explain to you how much of your money would go to
    administrative fees?
        Mr. Melomo. There was no discussion about any fees
    whatsoever. None.
        The Chairman. Why Florida, my State? As a matter of fact,
    our Committee investigation, the one that I referred to, they
    found that a large portion of these scam companies operate out
    of Florida. Why?
        Ms. Hollinger. Well, I can only tell you what answer I got
    when I asked someone who was running one of these boiler rooms
    that very same question, and his answer to me--and this really
    was 20 years ago, and I will never forget it--was: ``There is a
    lot of talent here.'' The fact is that this is a group of
    people who go from scam to scam, and they are just located in
    southern Florida; they migrated there years ago; they stay
    there, and they are set up to go there, particularly in the
    same geographic area, and they just go from storefront to
    storefront.
        The Chairman. Well, it is true that there are a bunch of
    other fraud scams going on in South Florida. Medicare fraud, by
    the way, the number one place in the country on Medicare fraud
    is South Florida. Of course, the fact of a high concentration
    of senior citizens, some degree of wealth among senior citizens
    who have moved and retired, so is the advice, is the takeaway
    from this Committee hearing today to consumers, and especially
    to gullible seniors, is the advice, the takeaway that you would
    give do not pay any attention to these cold calls?
        Ms. Hollinger. I think that would be good advice because it
    is gold today and it could be heating oil tomorrow or diamonds
    or something else, so cold calling is probably the predominant
    problem.
        The Chairman. Senator Collins.
        Senator Collins. I do not have any further questions, Mr.
    Chairman. Thank you for an excellent hearing, and thanks to our
    witnesses today.
        The Chairman. Well, I want to thank the panelists. It is
    going to continue to be one of the core missions of this
    Committee to highlight and combat all types of fraud that are
    confronting senior citizens. We have taken a look at Jamaican
    phone scams, identity theft, Social Security fraud, payday
    lending, and today we have focused on precious metal scams, and
    we are going to continue to look into other scams. Every day we
    hear from seniors about scams on our Committee's fraud hotline,
    and we will keep using this as a way to stand up on behalf of
    our senior population. The Committee's hotline number is 1-855-
    303-9470. That is 855-303-9470.
        Thank you all for bringing some light onto this rather
    sordid subject today, and the Committee is adjourned.
        [Whereupon, at 3:51 p.m., the Committee was adjourned.]

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                                    APPENDIX
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                          Prepared Witness Statements

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                           Statements for the Record

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