Precious Metals? Not so much. CFTC Wins Fraud Trial
On May 16, 2014, a federal court in Florida entered an Order finding in favor of the Commodity Futures Trading Commission (CFTC) following a trial against four Hunter Wise related companies and their owners on charges that they had fraudulently misrepresented the nature of precious metals transactions that resulted in millions of dollars in customer losses.
Hunter Wise was found to have orchestrated a multi-level marketing scheme in which so-called retail dealers served a sales function for Hunter Wise, soliciting customer accounts. The dealers advertised and claimed that they sold physical metals, including gold, silver, platinum, palladium, and copper, to retail customers on a financed basis and forwarded customer funds to Hunter Wise, whose identity was not disclosed to the customers. Using deceptive marketing materials provided to them by Hunter Wise, the dealers claimed to arrange loans for the purchase of physical metals and advised customers that their physical metals would be stored in a secure depository. Customers were then charged “exorbitant interest” on the purported loans and storage fees for the metal they thought they had purchased. In fact, neither Hunter Wise nor any of the dealers purchased any physical metals, arranged actual loans for their customers to purchase physical metals, or stored physical metals for any customers participating in their retail commodity transactions. Over 90 percent of the retail customers lost money.
Hunter Wise Commodities, LLC, Hunter Wise Services, LLC, Hunter Wise Credit, LLC, and Hunter Wise Trading, LLC and the individuals running the companies, have been ordered to pay, jointly and severally, $52.6 million in restitution to the defrauded customers and to pay a civil monetary penalty, jointly and severally, of $55.4 million, the maximum provided by law. The CFTC charged Hunter Wise, its principals, and other related parties in December 2012. The Court found that the principals of Hunter Wise knowingly defrauded more than 3,200 retail customers for more than 16 months, between July 2011 and February 2013, and engaged in fraudulent conduct that was “repeated, callous and blatant.”
In considering the appropriate penalties, the Court noted that the fraudulent scheme was “egregious and recurrent” and “calculated to deceive retail customers.” The Court held that the likelihood of future violations was “strong” given that Hunter Wise principals did not acknowledge any wrongdoing. Further, the “systematic and pervasive nature” of the fraud necessitated full restitution for all customers who lost money between July 16, 2011 and February 25, 2013.
This case follows a CFTC “Precious Metals Fraud Advisory” alert issued in January of 2012 in which the CFTC indicated that it was aware of an increase in the number of companies offering customers the opportunity to buy or invest in precious metals. The CFTC’s Consumer Fraud Advisory specifically warned that frequently companies do not purchase any physical metals for the customer, but instead simply keep the customer’s funds. The Consumer Fraud Advisory further cautioned consumers that leveraged commodity transactions are unlawful unless executed on a regulated exchange.