On Wednesday, 30 state regulators and the Commodity Futures Trading Commission (CFTC) announced a settlement with a precious metals dealer and its owner for operating a nationwide $68m fraudulent scheme targeting elderly and retirement-aged people.
The settlement resolves the federal lawsuit filed in February 2022 in the US District Court for the Central District of California against defendants Safeguard Metals LLC and Jeffrey Ikahn, and it finds them liable for executing a nationwide fraud involving the sale of fraudulently overpriced silver coins.
The order alleges that the defendants executed a nationwide fraud from approximately October 2017 through at least July 2021, soliciting and receiving approximately $68m, the majority of which was retirement savings, from at least 450 people for the purpose of purchasing precious metals, primarily consisting of silver coins.
False and misleading statements
The defendants deceived customers into purchasing silver coins through false and misleading statements, including about the risk and safety of their investments in traditional retirement accounts.
The defendants also deceived customers into purchasing silver coins at prices that included grossly inflated price markups that vastly exceeded the price markups disclosed to customers. In one example cited in the order, customers paid an average price markup of 71% when the customer agreement stated that defendants would charge a maximum price markup of 23% on silver coins. These excessive markups caused customers an immediate and substantial loss on their investment.
The defendants then continued to mislead their customers about the true value of the silver coins they had purchased to cover up their fraudulent scheme, the CFTC said.
In a parallel, separate action, on February 1, 2022, the US Securities Exchange Commission filed a civil action against Safeguard Metals and Ikahn for violations arising from the fraudulent precious metals scheme and fraudulently overpriced silver coins and for rendering unlawful investment advice.
“Unfortunately, this case is not an isolated incident, but rather a symptom of a widespread problem of investment scams targeting senior and vulnerable citizens.”
Claire McHenry, President, NASAA
Comments from the CFTC and the North American Securities Administrators Association (NASAA) revolve around the abuse of the retirement-aged community targeted – people who could be more susceptible to coercion and fraud, lack the support or technological savvy needed to make informed judgments, or who do not fully appreciate the tremendous risks that investing (especially in nontraditional products) entails.
“The defendants targeted elderly victims to liquidate their retirement savings to invest in a precious metals scam. Working closely with the 30 state co-plaintiffs, this resolution as to liability is a critical step in addressing the defendants’ fraud,” said Director of Enforcement Ian McGinley.
“This settlement is an important reminder of the role state securities regulators play in investor protection. We urge investors to contact their state securities regulator with questions about any investment opportunity or the person offering it for sale before investing in the product,” said NASAA Enforcement Section Committee Co-Chairs Brett Olin, Montana Deputy Securities Commissioner, and Amanda Senn, Director of the Alabama Securities Commission.
Rule 2165 allows a broker-dealer to place a temporary hold on a transaction if there’s a reasonable suspicion of financial exploitation of a senior.
“This action to stop a nationwide precious metals fraud is the result of a strong partnership between state and federal regulators who share a common goal of protecting investors. Unfortunately, this case is not an isolated incident, but rather a symptom of a widespread problem of investment scams targeting senior and vulnerable citizens,” said Claire McHenry, NASAA President and Deputy Director of the Nebraska Department of Banking and Finance Bureau of Securities. “I want to thank the CFTC and the NASAA members for their diligence and hard work.”
The CFTC ordered the defendants to avoid future violations of the Commodity Exchange Act and state laws, plus enjoins them from trading or registering with the CFTC and any US states as set forth in the complaint. The order set aside a determination of the amounts of restitution, disgorgement, and the civil monetary penalty as a future decision by the court or by consent of the parties.
The SEC entered a similar consent order with the defendants in which they admitted liability, and it enjoined them from further violations, saying the amount of disgorgement and civil monetary penalty will be determined at a later date.
In 2022, there were more than 88,000 victims of elder fraud who lost an average of $35,000 each. The total amount of losses for the year was just over $3.4 billion, an 84% increase from 2021. Worse, true losses may be difficult to calculate, since many incidents go unrecognized or unreported.
GRIP analysis
Because many crimes are carried out through wire transfers, withdrawals and electronic payments, it is financial services firms that can act as front-line watchdogs in elder-exploitation cases. Regulatory obligations already require such businesses to be aware of the flow of money and know who their customers are and what aberrant activity by these customers looks like.
For instance, if you have a relationship with your customer, and you know what the transaction history is on their account, it might be suspicious if they start making a bunch of small withdrawals that continue to increase in amount and maybe frequency. That’s when the tough questions and documentation imperatives come into play.
Collecting KYC data, filing suspicious activity reports if the business knows, suspects, or has reason to suspect a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity (among other reasons), and other reporting requirements under Bank Secrecy Act/anti-money laundering rules, are often helpful. But regulators such as FINRA have instituted more specific approaches.
FINRA rules 4512 and 2165 were the first uniform national senior investor protection standards, and they are designed to ensure broker-dealer firms and representatives can better protect their senior and other vulnerable adult customers. Rule 2165 allows a broker-dealer to place a temporary hold on a disbursement of funds or a transaction if there’s a reasonable suspicion of financial exploitation of a senior. Rule 4512 requires broker-dealers to ask customers for information about trusted contacts – someone (hopefully more than one person) that the broker-dealer could contact when questioning the reasonableness of investment requests, decisions and other behaviors.
The agency also issued Reg Notice 22-31 in December 2022, summarizing member firms’ regulatory obligations, discussing the benefits of trusted contacts in administering customers’ accounts, highlighting customer education resources, and sharing the effective practices member firms have used.
These rules (and guidance) are not designed to be the complete answer to the issue, of course. Specific training needs to be provided to the relevant people about the red flags of vulnerability, exploitation, cognitive impairments, and the like, and what follow-up questions to ask once suspicions set in.
Businesses must also keep timely records related to placing the hold on any transactions and the follow-up actions they have taken in the matter, and developing easy-to-follow escalation procedures, such as how to document suspected diminished capacity and how to escalate the information.