CFTC Files Lawsuit for Multimillion-dollar Metals Scheme

On December 5, 2012, the Commodity Futures Trading Commission (CFTC) filed a lawsuit in a US district court alleging that a network of firms and their principals are participating in a precious metals scheme. The CFTC accuses the defendants of fraudulently marketing illegal off-exchange retail commodity contracts for silver, gold and other metals. This fraud has allegedly allowed the orchestrator to take in at least $46 million since July 2011.

Defendants

Hunter Wise Commodities, Hunter Wise Services, Hunter Wise Credit and Hunter Wise Trading operate as a common enterprise, according to the CFTC. The CFTC notes that Hunter Wise describes itself as “a physical commodity trading company, wholesaler, market maker, back office-support service provider, and finance company.” The CFTC describes Hunter Wise as “the orchestrator” of a multimillion-dollar precious metals scheme.

Lloyds Commodities, Lloyds Commodities Credit Company and Lloyds Services also operate as a common enterprise. Lloyds claims to provide services such as the “delivery of physical precious metals, financing and data processing services,” but the CFTC alleges that in this scheme, Lloyds plays the role of an intermediary between Hunter Wise and approximately 30 telemarketing firms.

Four of those telemarketing firms — Blackstone Metals Group, Newbridge Alliance, United States Capital Trust and CD Hopkins Financial — are named in the lawsuit and are described as dealers.

CD Hopkins’ affiliate, Hard Asset Lending, is also named in the lawsuit and is supposedly a loan provider.

The lawsuit names 20 defendants, including the principals at these companies.

On March 22, 2010, Hunter Wise entered into a contract with Lloyds in order to outsource trading, financing and data processing services, according to the CFTC’s complaint. This contract did not provide for the purchase or storage of any physical metal. But Lloyds then signed contracts with dealers based on a template from Hunter Wise and those agreements included the purchase, sale and delivery of precious metals.

Mechanics of the precious metals scheme

The CFTC claims that dealers contact prospective customers by phone and using their individual websites, touting the value of investing in physical precious metals.

The dealers convince people to open an account and then solicit retail commodity transactions (RCTs). Via RCTs, customers are led to believe that they can purchase physical metal, such as silver, while only initially investing 20 to 25 percent of the purchase price. The remainder is supposedly covered by loans arranged by the dealers.

“By using credit, the investor gains the ability to multiply the effect of his or her investment dollars, while still owning the actual physical metal,” explains promotional material from Newbridge.

After making purchases, account holders are allowed to place long or short trades to speculate on metal price movements.

The associated fees for these services include: commissions of up to 38 percent, a price spread representing a 3 to 5 percent mark up or mark down of the current metal price, interest of approximately 9.5 percent per year on the loans and costs such as an annual service fee of approximately 7 percent of the total account value.

A customer’s equity is supposed to increase or decrease as metal prices fluctuate. When a customer’s equity falls below 15 percent of the total trading position, there is a margin call requiring the deposit of additional funds. If equity falls to 9 percent, open trading positions are liquidated.

Customers are led to believe that metal has been purchased, received and shipped on their behalf. They are also told their metal is stored in a depository on a fungible basis.

Blackstone’s false statements go so far as to claim that customers purchasing physical metal will receive a receipt from a COMEX-regulated establishment and that bullion assets are 100-percent insured by Lloyds of London.

After each transaction is completed, customers are informed with Transfer of Commodity Notices.

But according to the CFTC, no metal is being bought, sold or transferred.

Dealers send the customers’ funds and trade orders to Lloyds, which in turn sends them to Hunter Wise.

Hunter Wise deposits a portion of the funds into its bank accounts. Another portion is deposited into Hunter Wise margin trading accounts, which the company allegedly uses to trade futures as well as forward and rolling spot contracts to manage exposure to the retail customers’ trading positions.

Lloyds and the dealers are also paid a portion of the price spreads, interest and service fees.

Hunter Wise, which maintains all account and trading records, according to the CFTC, generates the Transfer of Commodity Notices, account statements and trade confirmations on the letterhead of the various dealers.

The firm does not have an inventory of physical metals and does not pay in full for the purchase of commodities in margin accounts, the CFTC says of Hunter Wise.

Furthermore, no funds have ever been disbursed for loans. Hunter Wise merely makes a book entry in its database, then debits customers’ accounts for service fees and interest.

The CFTC says that between January 1, 2010 and March 31, 2012, Hunter Wise charged customers $5,533,401.81 for interest on these purported loans.

The CFTC also alleges that when a customer goes to a dealer’s website and logs into their account, they are actually redirected to a website owned and maintained by Hunter Wise.

Buyer beware

Retail customers caught up in this scheme believe that they own or hold titles to physical metal.

“In effect,” the CFTC notes, “[d]efendants charge customers commissions for purchasing metal, charge interest on loans to buy metal and charge storage and insurance fees for metal in connection with paper transactions that only provide retail customers a way to speculate on the price direction of metals.”

These investments are marketed on the merits of safety, security and limited risk. But the CFTC states that the majority of customers lost money.

Earlier this year, the regulator advised investors to beware of companies selling precious metals investments that offer easy profits, especially when the opportunities allegedly involve low risk and purchases through finance agreements. The CFTC reported an increase in companies offering precious metals and associated investment products, but warned that many do not actually purchase or store any metal.

Warning signs that investors should look out for include statements that transactions are not regulated, failure to identify where metal is located, claims that metal is held in foreign facilities and failure to identify lenders in financed transactions.

 

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.