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Law enforcement struggles to combat gold and silver schemes targeting older conservatives

Jeremy B. Merrill

Part three in the series, Mining for Silver on Facebook

Stephen Matteo, a retired aircraft mechanic who lives in Hawaii, lost more than $300,000 of his retirement savings while making what he thought was a safe investment in silver, mostly coins. An 80-year-old woman in Texas spent $800,000 on precious metals. One-hundred twenty-five buyers in Texas, Georgia, and Colorado spent an average of $134,000 each purchasing highly marked-up gold and silver from online dealer Metals.com, state authorities say.

A Quartz investigation has found that many of Metals.com’s elderly, conservative customers came to the company through microtargeted Facebook ads that appealed to their political views. The seniors who talked with the company’s salespeople on the phone heard a politically-themed pitch and, in many cases, bought gold and silver coins at prices high above the value of the metal itself.

One reason companies like Metals.com are able to use this operating model is that selling gold and silver falls into a regulatory loophole, especially in US federal law.

A state-by-state battle

Even though Metals.com has customers across the country who lost money, there’s no known federal effort to go after the company.

Since May, however, several state securities commissioners have accused Metals.com of fraud or illegally offering investment advice without being registered to do so. But state officials’ tools can be somewhat limited, forcing them to rely on state securities regulations.

Texas authorities said in May that Metals.com was “engaging in an illegal and fraudulent scheme.” Joe Rotunda, enforcement director at the Texas State Securities Board, told Quartz that Metals.com had committed “fraud in rendering investment advice” because its salespeople had failed to disclose known material facts—such as its fee structure or that consumers had made complaints against the company.

Texas and Metals.com later settled, with Metals.com agreeing to an order saying that one of its salespeople had offered investment advice and agreeing to offer Texas customers the right to undo the sales. Metals.com “contested” Texas’s finding that it had committed fraud.

Georgia, Kentucky, Alabama and Missouri followed Texas’s lead, alleging, in cease-and-desist orders, that Metals.com had broken their laws by advising customers to move their investments out of securities and into precious metals without being registered as an investment adviser. Georgia called it an “illegal advisory scheme.” Kentucky, too, alleged that Metals.com had “facilitated” the sale of securities by, for instance, paying fees related to selling their customers’ ordinary investments so that they could buy gold and silver.

In Colorado, Metals.com settled without admitting or denying the state’s allegations.

“We don’t give any financial advice,” said a spokesman for Metals.com who gave his name as David Rubenstein. “If someone allegedly did, they’d be swiftly terminated.”

The state allegations were “centralized around a rogue actor,” he said, “who’s been terminated.” In a company statement emailed to Quartz, Metals.com noted that Texas had “found only a single instance in which a rogue Metals.com employee acted in contravention of Metals.com’s compliance policies.”

Rubenstein didn’t respond to Quartz’s questions about whether the 10 other employees named in state actions were still employed by the firm.

Kentucky, in a cease-and-desist order, also accused Metals.com of fraud for failing to disclose the difference in how it valued the coins it sold compared to the “melt value,” which is how the third-party custodian that physically held the coins valued them. That state’s authorities also said that Metals.com’s claim of charging markups only up to 33% was fraudulent, since the “potential spread averaged 148% more than the melt value.”

Rubenstein said Metals.com’s prices were set in reference to those charged by its competitors and those charged by the government mints that manufacture the coins.

Metals.com has not filed formal public responses to all the claims. Additional states, such as Hawaii, Matteo’s home state, have told Quartz they’re investigating.

None of the state regulatory actions have led to criminal charges.

“They are preying on older people” said Richard Craighead, a Colorado man who had bought gold and silver coins from Metals.com. He returned his coins to Metals.com, but received only a portion of the purchase price back. As a result of Colorado’s settlement with Metals.com, he believes he is supposed to receive an offer to get the rest of his money back. “Nobody’s gone to jail yet and I think they ought to go to jail,” he says, “Just giving me my money back is not satisfying.”

New state laws are starting to help

Rotunda, from the Texas State Securities Board, credits a new Texas law with helping his state pursue Metals.com. Financial advisers and brokers are required to report “suspected financial exploitation” of senior citizens to state securities regulators. The law, which went into effect two years ago, generates about four reports a week. Though many of the reports Texas receives are for smaller monetary amounts or less-sophisticated schemes, a Texas financial firm had reported that Metals.com had tried to help the 80-year-old Texas woman spend more than $800,000 from her investment accounts to buy gold. “That information wouldn’t have crossed our desk but for that report,” Rotunda said. “It really has proven to be a very valuable tool for combating fraud.” More than twenty states have similar laws, spurred by a group of state securities regulators.

Until the Texas incident pushed some states to take action, customers had little effective recourse beyond occasional mediation efforts by state attorneys general and the Better Business Bureau, which connected Quartz with many of the unhappy customers in its database. But Metals.com fought those mediation efforts, even accusing a buyer who sought intervention of “extortive and potentially defamatory motives” in one letter to a state regulator.

A small number of the coin buyers, including Matteo, took the expensive and time-consuming step of suing, claiming fraud. Those cases tended to settle confidentially.

Minnesota ordered Metals.com to stop operating in the state, saying it wasn’t registered as a coin dealer. In 2013, Minnesota passed a law requiring anyone selling coins to register, after increased instances of similar fraud, state senator and bill coauthor Ron Latz told Quartz. “Registration brings with it the benefit of knowing who’s out there and who you can hold accountable.”

Metals.com eventually registered in Minnesota, lifting the cease-and-desist order.

What about the feds?

At the federal level, the simple sale of gold bullion or coins is only regulated by the notoriously understaffed Federal Trade Commission (FTC), whose role is to regulate almost anyone selling anything. The FTC received 51 complaints about Metals.com and sister company Chase Metals since 2016; spokesperson Mitchell Katz said the FTC couldn’t confirm or deny any ongoing, non-public investigations.

Gold scams that involve complex financial instruments, like futures or options contracts, occasionally attract the attention of the Securities and Exchange Commission or Commodities Futures Trading Commission.

The only movement in the US Congress came in 2010, when then-New York congressman Anthony Weiner introduced a bill requiring coin dealers to disclose the “reasonable resale value” of the coins they were selling, along with any fees. The bill went nowhere.

The lack of action on the federal level has left states—and even cities—to pick up the slack. Earlier this decade, Santa Monica, CA, took legal action against several precious metals firms, including Goldline and Merit Financial, which were based within its city limits. Goldline faced criminal charges in 2011, including fraud and making “untrue or misleading statements in connection with the sale of goods or services.” The case settled; the criminal charges were dismissed, but Goldline agreed to offer refunds and change its business practices.

[ If you or someone you know lost money in a gold or silver scheme, here’s how to get help. If you have tips or information that might help us further cover this story, you can email us at investigations@qz.com or reach us more securely. ]

Merit Financial also sold gold and silver to senior citizens, convincing them “to ‘roll over’ or otherwise convert [their] IRAs to the Overpriced Coins, typically in the form of gold or silver ‘proof’ coins. As a result, these consumers lose a substantial portion of their investments—in many cases, their entire life savings—at the moment they purchase the Overpriced Coins,” according to court documents filed by Santa Monica. Merit Financial was sued in 2014 for false advertising and unfair competition; it denied the claims and the case settled in 2015 without it admitting liability.

Adam Radinsky, the Santa Monica chief deputy city attorney who led that effort, had ideas for the federal government on how to fix the problem.

“If it’s going to be this big investment vehicle and advertised as such, it’s the only investment area in America that’s not regulated,” he said. “And so that’s kind of the Wild West still.”

Radinsky suggested that federal lawmakers look into the 1997 law that made proof coins—collectible coins that derive some of their value from their rarity or beauty—eligible for individual retirement accounts, alongside what he calls “typical bullion products” like gold bars and South African Krugerrands, which are valued primarily for their metal content.

And Facebook?

Facebook’s role in schemes that prey on seniors has attracted attention.

“We are very concerned about what we are seeing on social media websites like Facebook where senior citizens may see information that looks completely legitimate come through their feeds but sets them on the path to dealing with a party that may want nothing more than wanting to defraud them out of their life savings,” said Rotunda, the Texas securities enforcement director.

Microtargeted ads—like those linked by Quartz to Metals.com, and which were limited primarily to conservatives over age 59—can exacerbate what law professor Roger Allan Ford calls “data scams” in a paper with that title.

“Authorities might come across scams anyway, but targeting means they’re much less likely to do so on their own. Most investigators aren’t likely to be members of the groups targeted by scammers, so they won’t naturally see scam ads,” he writes.

One proposed solution has been to ban or severely limit microtargeting. Ford says banning microtargeting may not be necessary, if platforms like Facebook can be incentivized to make it easier to detect and prevent scams. Facebook could search for scams itself or build easy-to-use tools for law enforcement, he suggests.

Another possible regulation would be to subject Facebook to bank-style Know Your Customer (KYC) laws. Banks are required to extensively verify their customers’ identities to prevent fraud, money-laundering, and terrorist financing. New York University data science professor Vasant Dhar has called for similar requirements to be imposed on platforms.

“KYC would require Facebook to identify the advertiser as legitimate, perhaps through some sort of identifier and prevent this kind of predatory advertising. Facebook should know whether ‘Fox News Insiders’ is legit or not,” Dhar told Quartz, referring to one Facebook ad that is linked to Metals.com. (Fox News said that it had no affiliation with Metals.com and that its use of Fox News’s name was unauthorized.)

“KYC would cut down on this kind of scam if the platforms were incentivized to do so. They are not,” Dhar said.

“In many ways, Russia’s malicious activity in the 2016 election has helped to expose the dark underbelly of an entire online ecosystem,” Virginia senator Mark Warner told Quartz in a statement. “In the same way that bots, trolls, click-farms, fake pages and groups, ads, and algorithm-gaming can be used to propagate political disinformation, these same tools can—and have—been used to assist financial frauds,” he said.

“Ultimately, digital ad fraud thrives because of the opaqueness of the programmatic ad market. That’s why we need more transparency in this space, and better enforcement of the laws that are already on the books,” Warner said. “And the social media platforms, like Facebook, still have a lot of work to do.”

This story has been updated to add information about legal action underway against Metals.com in Missouri

Help and information

If you or someone you know lost money in a gold or silver scheme, here’s how to get help.

Let us know if you know more.


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