Hot Commodities, Hotter Fraud: Investigating Commodity Fraud

July 2013

IN THIS ISSUE

— Scarcity, Security and Scams Can Lead to Scandal: How Commodities Fraud Works
— A Deal Too Good to be True: Spotting Commodities Fraud

GREETINGS!

Welcome to the July 2013 edition of our newsletter! In this issue, we’ll examine differing types of commodities fraud, and offer some examples of how to protect your clients.

SCARCITY, SECURITY AND SCAMS CAN LEAD TO SCANDAL: HOW COMMODITIES FRAUD WORKS

Commodities are in almost everything we consume today — smartphones, televisions, and, increasingly, headlines. As the U.S. Senate investigates whether large Wall Street firms were hoarding precious metals and other commodities — in moves meant to raise the market prices of the goods, such as aluminum or copper supplies — it is worth reviewing the more common type of manipulation, by which fraudsters target investors of all kinds with scams touting the “safe haven” aspect of such items.

Many people have seen advertisements, in both print and on television, offering to help customers invest in metals such as gold, either directly or via an exchange traded fund. Many of the advertisements use talk of federal government instability — rising taxes and government debt — as a reason to own metals, especially gold, that can be seen as a hedge against other investments which, the pitch goes, are more susceptible to the influence of bad decision-making, whether in Washington D.C. or worldwide. Many of these claims, in addition to stressing the safety of the investment, also boast of past returns well above average, and often above the historical trends of equity market indices.

A DEAL TOO GOOD TO BE TRUE: SPOTTING COMMODITIES FRAUD

Such fantastic returns are just that — fantastic and unreal. The signs of the commodities fraudster are similar to instances when we’ve investigated investment advisers for the sale of unregistered “penny stock” offerings to often unwitting clients: If the broker or firm offering to sell the metals (or fund backed by such metals) is not registered with the National Futures Association’s BASIC system (and is not regulated by its sister agency, the Commodities Futures Trading Commission), the absence of those professional bona fides should be a concern in itself. Scrutinizing the regulatory and administrative histories of registered professionals, as well as reviewing litigation records and other public sources, can help create a profile of the adviser’s trustworthiness before an investment is made.

Although these types of fraudsters often try to prey on older, potentially less sophisticated investors — a trait shared by many “pump and dump” stock operations — even high net worth, sophisticated investors have fallen victim to the high pressure tactics employed by some commodities scammers, including repeated telephone solicitations at odd hours. While the proper due diligence won’t keep them from badgering your clients until they succumb to a scam, confronting a fraudster with details of their checkered past could lead them to part with your client’s company, instead of with their money.