[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                    
          
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                       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

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                                                                   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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