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Feds File Suit in One of the Largest Precious Metal Fraud Cases in History

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The US Commodity Futures Trading Commission (CFTC) has filed a civil lawsuit against California-based gold dealer Monex Deposit Co. in what officials call one of the largest precious metals fraud cases in the history of the commission.

The CFTC alleges Monex defrauded thousands of retail customers nationwide out of hundreds of millions of dollars, while executing illegal, off-exchange, leveraged commodity transactions.

As alleged, the Defendants defrauded thousands of retail customers—many of whom are elderly—out of hundreds of millions of dollars as part of a multi-year scheme. Fraud in our markets, like that alleged here, undermines confidence, reduces transparency, and harms competition. As this investigation shows, we’ll work tirelessly to detect and prosecute fraud of the sort that’s alleged here.”

The allegations revolve around leveraged trading in gold, silver, platinum and palladium through the company’s “Atlas” program. Leveraged trading simply means the investor borrows money in order to invest in precious metals. If the investment pans out, the metal will increase in value enough to repay the loan, cover commissions and interest, and generate a positive return.

For example, a customer could invests $5,000 to purchase $25,000 in gold. The company lends the investor the $20,000 balance and charges interest. The company also charges a commission on the entire $25,000. Commissions and fees can add up fast. If they are high, it can make it nearly impossible to earn a return on the investment.

The CFTC alleges that Atlas program was a huge money-loser for clients.

Nearly everyone who placed leveraged trades in an Atlas account between July of 2011 and March of 2017 lost money, the Complaint alleges. According to the Complaint, over 12,000 trading accounts were used to place leveraged precious metals trades resulting in more than $290 million in customer losses between July 16, 2011 and March 31, 2017.”

It’s important to note gold prices fell during most of the time period covered by the CFTC investigation. Leverage is inherently riskiest during periods of falling prices. Monex customers certainly made money on leveraged accounts in the years of rising precious metals prices prior to the time covered by the investigation, and actually would have had better returns than if they had not used leverage.

The Complaint alleges that Monex brokers used high-pressure sales tactics, downplayed the risks associated with leveraged transaction, and falsely promised customers that Monex would act as the customers’ fiduciary and would always act in their best interests.

CFTC also alleges the transactions were illegal because they were not executed on a regulated exchange, and weren’t subject certain rules as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

It’s easy to run afoul of obtuse federal regulations. It remains unclear if Monex technically did anything wrong. Of bigger concern are the charges of fraud and high pressure sales tactics. Still, it’s important to remember government agencies often overstate and grandstand to increase publicity for their cases. We don’t know for certain how much of the loss customers suffered can be attributed to the fact they took a gamble and lost, and how much stems from Monex sales tactics. That key question is whether or not customers had all the information they needed to adequately assess the risk and make an informed decision.

Buying gold and silver historically provides investors with a safe, long-term store of value. Leverage and high commissions can turn it into a highly speculative investment with a high level of risk. Leveraged trading is not necessarily a bad thing for the savvy investor, but customers should understand the risks. If a dealer does not adequately explain the product to its customers, reveal how much risk they are assuming, and disclose full costs, you should be wary of doing business with them.

Also beware of dealers who claim leveraged accounts are “fully physically allocated.” There should be no guarantee of physical delivery for leveraged accounts if the account is physically allocated.

Unfortunately, there are many deceptive physical dealers that give the industry a black eye. For every honest dealer out there, there a dozen other dishonest ones,” SchiffGold managing director Jonathan Sosnay said. “We primarily specialize in physical coins and bars for delivery as there is no substitute for having physical precious metals in your possession. However, if storing in a vault, first make sure it’s fully allocated or segregated without any margin if you want any guarantee of future delivery.”

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