[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.]
=======================================================================
APPENDIX
=======================================================================
Prepared Witness Statements
=======================================================================
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
Statements for the Record
=======================================================================
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]