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It Must Be Legitimate, Thelma, They Advertise in the Wall Street Journal.

ROWSE, ARTHUR

"It Must Be Legitimate, Thelma, They Advertise in the Wall Street Journal." BY ARTHUR ROWSE Consider the case of Joanna Gatens, a cleaning women in Coldale, Pennsylvania. In May 1979, she saw an...

...Although the CFTC once charged Premex with fraudulent practices, it was a technical charge of having an invalid license that finally put the firm out of business...
...Both the Journal and USA Today have created an obligation to readers in addition to that of covering the news of the day...
...Gannett's USA Today is another purveyor of silence on commodity schemes while taking ads for them...
...Utah’s state securities division has only one investigator and not a single employee capable of reading a financial statement...
...Lack of attention has kept its budget down, too, leaving it with only $25 million to watch over a $1 trillion industry with more than 140 million transactions a year...
...And when the final regulations finally did appear in full in the Register earlier this year, they were virtually ignored by both the business and the general press...
...Phone calls to all three remaining registered firms were not returned...
...The commission itself concurred unanimously, in a vote that in effect would have put them out of business...
...Yet Premex continued to advertise freely for new customers for more than a year and a half while the CFTC pondered its final decision...
...These firms, moreover, are just the tip of the iceberg...
...That was just the beginning...
...First, there are the poignant stories of the Gatens and Piskur variety played out almost daily in public hearings at the CFTC and in state and federal courts but almost never covered by the media...
...You put your money on pork bellies...
...Such outfits may skip town after collecting lots of cash, leaving customers holding the bag...
...Without receiving any further literature or seeking professional advice, she and her husband were cajoled by a skillful salesman into sending $3,358 of their life’s saving for 40 of the South African coins...
...The agency’s own law judges opposed the changes because they allow no appeal to the agency or to the courts...
...Acccording to the theory the firms impress upon their potential customers, the contract enables the customer to cash in on a possible increase in the market value of some precious metal...
...Both occasionally have described bucket shops and other scams, but neither has more than briefly mentioned the leverage business...
...Leverage dealers have also been free to set “buy” and “sell” prices unrelated to the market, and to impose a variety of charges, including transaction fees and interest on the customer's unpaid balance (the difference between their down payment and the total investment they agreed to make...
...After a year of similar persuasions initiated by the firm, she and her husband had parted with $66,000, including all their government “E” bonds...
...That was in 1982...
...How ads hook Customers Given such exploitative practices, and the financial loss they have inflicted upon the public, you’d think that leverage contract firms might have some trouble attracting new customers...
...formally, the Gatenses were notified, by phone, but in reality they understood very little of what was going on...
...He made his first investment in precious metals in 1977, and over the ensuing three years he entrusted the company with $120,000, nearly all he had...
...The firm functions, in short, as a sort of "rigged exchange," one CFTC official said...
...But thousands of other, more innocent, investors are ready to send in their life savings, based largely on their trust in the publications printing the ads and the absence of critical articles or broadcasts about the risks involved...
...Rosenthal claimed he also beat his larger rival with exclusives exposing IGBE long before it too went under, leaving 23,000 customers waiting for some $75 million...
...The agency’s passivity in the face of such financial abuses could not have occurred without the neglect of those whose job it is to report the news...
...To forestall such misfortune, they managed to get themselves written into the 1974 act creating the CFTC...
...In proposing the first rules for leverage firms in June 1983 the CFTC published in the Federal Register not the rules themselves, but rather a mere notice of their "availability...
...A fourth firm, Premex, recently lost its license on a technicality and went into receivership...
...IMPC claims that it has not violated any CFTC regulations...
...If the Journal really wanted to cover commodities in full, it would be easy, according to Daniel M. Rosent!ial, editor of the Silver and Gold Report, a newsletter based in Bethel, Connecticut...
...Despite its technical-sounding name, a leverage contract is really not that hard to understand...
...Arthur Rows...
...On television, the only glimpse of the leverage contract scene has been a seven-minute segment on Cable News Network last fall...
...These scattered papers tend to keep readers far more informed than the large national papers do...
...The only detailed explanation of the leverage business was done by the Commodity News Service in 1982 as part of an effort to interest general papers in taking the CNS package...
...Its 2 million daily readers undoubtedly include a healthy percentage of amateur investors...
...Hence the leverage houses will talk at great length-to regulators, not their customers-about aspects of these contracts that set them apart (in ways that just happen to work to their own, not their customers’, advantage...
...No commodities expert or professional investor would be likely to respond to such an ad...
...For example, the record on Premex shows that on July 12, 1982, Administrative Law Judge George Painter of the CFTC declared the company “unfit” to be registered as a futures commission merchant and imposed a $250,000 fine...
...The Journal reported on two of the three days of testimony that year...
...Meanwhile, it would study the problem...
...And both continue to print ads for such outfits with full knowledge of the risks that readers face...
...In cases pending against Monex and FNMC since 1979, the agency has been seeking to invalidate only certain types of contracts they sell...
...Unpublished findings Why has this widely praised paper never carried an in-depth piece on the leverage contract business, especially when carrying ads for such firms...
...He added: “Whenever I find that there is a story on this subject, I will see that it is published .” Managing Editor Norman Pearlstein declined to talk with me when I phoned about commodity news coverage, but a week later, a story urging gold investors to be careful appeared on the first page of the second section, despite the lack of any apparent news angle...
...They can still skin people alive," says the CFTC official, who calls the new rules themselves "fraudulent...
...The effort failed...
...When the CFTC showed unexpected curiosity regarding these leverage contracts, however, the firms prevailed once again upon Congress, and eventually worked out a deal...
...if pork bellies go up, you win, and the firm you deal with takes only a relatively small cut as a commission...
...That means you would have to make $950 on the deal just to break even...
...Kiplinger’s Changing Times also has published leverage ads while failing to explain the business...
...Deregulation may be all right, but it could be at the cost of millions of dollars lost by the investing public I’ Complaints from customers of the four leverage contract firms have constituted about 10 percent of all commodity complaints to the agency and have been growing steadily, according to officials there...
...He cited polls indicating that the Journal is more believable than any other paper...
...She has not received a penny as she struggles to support both herself and her teenage daughter...
...When asked by a reporter whether he had churned his cutomers’ accounts, a former leverage salesman replied, “chur ning and burning ...you got it...
...When asked about it for this article, he claimed to have found nothing worth writing about...
...The value of the metal had rocketed up that much during the period...
...The best job is done by the Los Angeles Times...
...If the value of the metal rises over the period, the investor pockets a gain...
...Most are small, but some grow quite large before the bubble bursts...
...They play the old Ponzi game, paying off prior customers with the deposits of newer ones until they reach the point of no return...
...In a regular futures contract, the investor’s fortunes are tied directly to the market...
...In November he reported that Premex was heading for serious financial trouble...
...He said he was "embarrassed" to be reminded that the paper ran only one paragraph on the February Senate hearings...
...Senators Herman Talmadge and Jesse Helms, then chairman and ranking Republican, respectively, of the Senate Agriculture Committee, and their counterparts in the House, wrote to CFTC Chairman James Stone expressing (in almost identical language)indignation at this affront to an "otherwise lawful business" and instructing the commission to regulate these firms, not eliminate them...
...The three registered leverage firms-IPMC, FNMC, and Monex -are not dealing in small change, with sales totaling from $2.5 to $5 billion a year, depending mostly on gold and silver prices...
...Reuters, the British-based service, provides the most thorough coverage among general news services...
...Yet nothing ever came of his work...
...but The Wall Street Journal was a respectable financial newspaper...
...She said the magazine recently “put a hold” an some leverage ads while continuing to run others, presumably because of a long-range contract . Loose screens Both magazines and both newspapers claim to have some type of screening process for advertisements, presumably checking the firms’ financial stability and its regulatory records...
...When asked why the paper ran ads for leverage i houses, he said he presumed that company officals had approved them...
...For example, the Journal recently featured .prominently, in an article on a commodity scheme that involved a CIA connection in Hawaii, a story told in great detail four months earlier by Money magazine...
...It is that the industry-the term is flattering here-has mustered a surprisingly strong lobby to prevent effective action...
...A California state official told the Senate hearing that the commission had only two experienced lawyers and no investigators to handle all western states...
...Last year, John Emshwiller, an assistant editor in New York specializing in commodity news, interviewed dozens of experts on the subject in and out of government...
...The CFTC registration gives those select firms an imprimatur of respectability which, as mentioned, their ads proudly boast about...
...In 1982, the Senate Permanent Subcommitte on Investigations estimated annual public losses from such commodity schemes at $200 million...
...Investors and the general public never knew what happened...
...We don't cover commodities extensively or regularly," he explained...
...He accused the Journal of “lusting after advertising bucks from unsavory or unsound dealers," by allowing IGBE to advertise in the paper right up to the end...
...The government’s passivity toward this financial abuse could not have occurred if the press had been onto the story...
...Marjorie Whyteits editor, said the ad review committee, on which she sits with the managing editor and publisher, has been “taking a close look” at these ads since last fall when a reader complained...
...With a leverage contract, all the risks of the futures contract are there, and then some...
...Indeed, the lure of “leveraging” a relatively small investment into a very big gain is much the same...
...The International Gold Bullion Exchange (sounds impressive, doesn’t it...
...Or consider the case of Joseph Piskur, a 69-year-old Navy veteran and building guard who had seen one of the same firm’s ads in Money magazine...
...Money even ran ads for IGBE, the biggest bucket shop of recent times, as well as a column by an investment advisor recommending a leverage firm to readers...
...Most of these reparation cases (requests for refunds) have ended in settlements or orders for a refund on grounds that the firms violated commission rules...
...Meanwhile, the firm still advertises in the Journal and other publications as “America’s Premier Precious Metals Dealers .” Its ads assuage a reader’s doubts by proudly noting that it is “registered with the Commodity Futures Trading Commission,” the federal regulatory agency...
...Had the ad appeared in the National Enquirer, it might have raised some eyebrows...
...It confirmed Painter’s decision last February 1, and the company eventually went into receivership...
...Advice to the reader is also emphasized by Money and Changing Times, the monthly "bibles" for three million amateur investors and money-wise consumers...
...An agency case against IPMC for fraudulent practices ended up with a $250,000 penalty and a consent order in which the firm neither denied nor admitted the charges...
...Painter awarded this unwary fellow $177,000, which equaled the amount in commissions and fees that the firm generated through all these transactions...
...Piskur is still waiting for his money...
...Except for the cases of the most sensational failures, daily papers usually treat the subject as a local matter...
...The Gatenses had not known that IPMC had not sold their holdings when they had requested, and that IMPC was not required to do so...
...And so are regulators charged with protecting the public...
...What the ad does not say is that investors usually pay more interest on the unpaid balance than they get in interest on their down payment...
...Even if the agency upholds its judge’s decision, the firm can still appeal to the courts, and keep the wheels of justice grinding longer than Piskur himself may live...
...The occasional headlines written when a big bucket shop, such as IGBE, is exposed by authorities, give rise to a vague awareness that commodity contracts can be risky...
...The Journal did not report the story until the firm went into receivership three months later...
...It stems from their concerted efforts to portray themselves as friendly financial advisors, ones you can trust to provide information you need for your own financial protection and profit...
...But they are still free to charge the same fees as before and to widen the "spread" between buy and sell prices...
...Once again, Congress intervened...
...Nobody knows the total number of innocent investors who have been made destitute by such schemes, but the evidence suggests that a good many have lost heavily...
...Judge Painter determined that salesmen for the firm had used Piskur’s money to buy and sell silver in transactions totaling more than $3 million, sometimes without checking with Piskur and always without his understanding what was really happening to his money...
...If it doesn’t, well...
...A former high CFTC official likened leverage to a "shell game, in which the company bets that you will lose and then makes certain that you do...
...By January 1980, wh& they wanted to sell off their investment (which was mostly in silver by that time), it could have been worth $756,000, according to Commodity Futures Trading Commission Judge George Painter, who eventually heard the case...
...There may be more than meets the eye...
...The series of seven stories was virtually ignored...
...They know the CFTC cannot handle it...
...It isn't that nobody in Washington is wise to the scheme...
...Yet the Journal continues to treat the entire commodity business as a specialized area of interest only to professionals...
...In effect, the leverage house usually becomes an adversary that tries to make money from-rather than for- its customer...
...First National Monetary Corporation and another firm, Monex, actually petitioned the agency for regulations...
...It’s absolutely ridiculous,” said a New York official at the hearing...
...Failure to shine a light on the CFTC has helped it live up to its reputation as the weakest regulatory agency in Washington...
...We have screamed and yelled at the ad department,” in the words of one, “until they finally pulled some of the ads in question .” I was denied a request to question William M. Kelly Jr., the magazine’s publisher, about his policy on advertising...
...1978 the commission put a freeze on licenses, giving the four solvent firms a monopoly...
...The Journal deserves special mention...
...Los Angeles is where many of the worst operations are based...
...is a write living in Washington...
...Both periodicals have been cited in numerous lawsuits as the source of the information that led an unsuspecting investor down the slope of financial despair...
...Had to save money, the commission said...
...For example The New York Times ran nothing on the two Senate hearings this year, despite testimony from prosecutors, victims, and perpetrators that other papers such as the New York Daily News and The Washington Post considered newsworthy...
...They get releases by messenger and tend to monitor business wires for other developments...
...There is no shortage of reporting opportunities in the commodity field...
...Although originally a newspaper for business executives and professional investors, its broad coverage of society and its aggressive efforts to sell papers to the general public make it, increasingly, a general-interest newspaper...
...But few people realize the extent of the risk in dealing with firms not trading on exchanges, whether or not these firms are registered with the CFTC...
...Readers of these publications are not the only victims of sparse reporting...
...And both have received irate letters from readers complaining about the ads...
...Neither the Associated Press nor United Press International, the main news services in this country, watch the CFTC closely...
...In fact, when the firm finally got around to liquidating the account two months later, it said there was no money left...
...In its most recent annual "Report to Readers," Journal Chairman Warren H. Phillips spoke of such things as the "public's right to information" and the paper's plans to strengthen coverage of money management and become "more useful to you ." He added that the paper "will continue to take great pains to be worthy of your trust" and "take elaborate precautions against real or perceived conflicts of interest...
...which went under in 1983, had a safe containing only wooden bars painted gold...
...The ad was often the only display ad of that size...
...Then there are the attempts of Congress and the CFTC to investigate the problems and spur more law enforcement...
...An estimated 8,000 unregistered leverage houses and "bucket shops" are playing a similar game with even less propriety...
...The “leverage contract” people, however, have employed the best legalistic minds to dispute that designation, because if they are adjudged to be selling “futures contracts,” then by law they must trade on a commodities exchange and be subject to its regulation, and all the fun would be gone...
...Senate hearings opened a gold mine of newsworthy items in 1982 and again last February...
...Far more effective would be for the news media to simply report what is going on in these newsworthy enclaves of the commodity business...
...The coinmission itself has become a notorious revolving door through which industry and government personnel pass easily from one side to the other as the scope of commodity schemes becomes ever wider...
...In May 1979, she saw an ad in The Wall Street Journal touting Krugerrands (the South African gold coin )as a hedge against inflation...
...The registered firms depend almost entirely on ads in widely read and trusted publications such as The Wall Street Journal, USA Today, Money, and Changing Times to attract customers...
...So are those who rely on other media outlets, which have done even less...
...Not so...
...This enables a firm to cut from 2 percent to 10 percent or more off the sell price and possibly wipe out a customer's profit...
...Neither these publications nor the popular press generally have ever told the full story of leverage contract misdoings or their perpetrators...
...Is it another round of educational leaflets warning the investing public, as the Senate subcommittee has suggested...
...Reporters and editors at Money have long been embarrassed by the ads...
...Not only has the CFTC enacted regulations which do little more than give a stamp of legitimacy to a very questionable business, but in a classic, fox-guarding-the-chicken-coop manuever, the commission recently revised its reparations rules in a way that will channel more cases into an industry-run arbitration system...
...The romance of leveraging Piskur and Gatens are but two of the many losers in what has come to be known as the “leverage contract” game, which is one of the shadier corners of the flourishing commodities speculation business...
...If you're willing to dig for the facts," wrote the newsletter publisher, "the stories are out there waiting, no, begging, to be written up...
...The Times also neglected to cover similar hearings in February 1982, but it had space for some large ads for IGBE, the very type of operation that instigated the Senate investigations...
...This churning generated commissions and fees that ate up 83 percent of the initial investment...
...Gatens took the clipping home and dialed the toll-free number of the International Precious Metals Corporation (IPMC) of Fort Lauderdale, Florida...
...The con men know what is going on...
...Gatens, who is now a widow, was awarded $370,000 in damages, but the company denied any violations and asked the CFTC for a full review...
...Many victims are too humiliated, or financially demolished, to seek redress throught the courts...
...Yet general news organizations tend either to ignore the CFTC or to treat whatever it does as a story only for the business section...
...Despite its vast resources, including separate staffs of commodity reporters in Chicago, New York, and Washington, the Journal’s Washington coverage of the CFTC rarely goes beyond routine press releases...
...This sweeping reduction in investor rights was virtually ignored by both the business and general news media...
...Detailed reports are limited to occasional scandals, which the paper may not get around to until long after others have done the job...
...J. Taylor Buckley, editor of the paper's "Money" section, said he was unfamiliar with the leverage contract business despite having frequently run a quarter-page ad in that section...
...Soon thereafter, however, the market tumbled...
...The CFTC has not yet gotten around to the firm’s appeal...
...Then there are the two new sets of regulations that the CFTC recently adopted...
...Yet, despite this growing mountain of evidence, the agency has been reluctant to go after these firms...
...Though he himself has recommended Monex to his readers, Rosenthal calls press silence on leverage contracts "the most shameful role of all...
...Take a look also at the Premex ad in USA Today (page 40) saying you can “lock up” $10,000 of gold for $2,000 “plus money market interest .” The ad does not say what many people find out too late: that the firm’s various fees and charges averaged 9.5 per cent, not just of the down payment, but of the total investment of $10,000...
...The chief of the agency’s press office said that in the three years she has worked there, she has never seen the UP1 reporter assigned to the agency...
...A check with the CFTC not only would have disclosed enough information to raise questions about advertising suitability, but also would have provided enough news to fill many columns with lively stories...
...What is the answer...
...The cleaning woman and her husband responded to the investment ad in The Wall Street Journal, and not long afterwards, found their entire investment wiped out...
...So it should not be surprising that the resulting rules are less than stringent...
...Under the rules that applied until last month, a firm was not even required to “cover” a customer’s investment-buy the metals specified in the contract-so it was to the firm’s advantage to discourage a customer from taking his money out at a profit...
...Neither the CFTC nor state regulators have the staff to track all these operations down...
...In June...
...Today, Mr...
...His final statement from the firm showed he owed it $41,000, despite the boom in silver and gold over that period...
...They also have to relate buy and sell prices to an index, and they have to disclose more than they did before...
...Early on, leverage firms worried that the states or, still worse, the Securities and Exchange Commission, might crack down...
...In 1979, under new leadership, the commission's general counsel ruled that the leverage firms were in fact selling futures contracts, which they were not registered to do...
...Last February, the subcommittee raised that figure to $1 billion, a five-fold increase in only two years...
...So far, it seems a great deal like an ordinary futures contract, the kind that started as a way for farmers to lock in a price for their corn or wheat at planting season., and has mushroomed into virtually every corner of the pecuniary imagination in recent years...
...There’s no shortage of horror stories about innocent victims taken in...
...The investor makes a relatively small down payment, agreeing to buy a much larger amount of the metal in question at a set price at some point in the future...
...Perhaps more important, these firms continue to advertise in some of the nation’s most prestigious publications...
...Local papers do a respectable job in the Fort Lauderdale-Miami area-another hotbed of scam operations...
...it did not even stir other news organizations to take their own look at the controversial topic...
...Often half or more of the downpayment is consumed by this “front-load,’’ even for investors who want to back out of the deal before making any further purchases...
...If you are implying that there is any connection between our taking the ads and failing to do more to cover the field, that is preposterous...
...But the process obviously has failed to work in the commodities area, and not for lack of available information...
...Thanks largely to the press’s negligence, unsavory elements of the business have had almost unlimited freedom to swing their surprising weight in Congress and at the commission...
...But we do occasional stories of a how-to nature advising that not everybody belongs in the commodities field...
...Most of the wipe-out resulted from the market tumble, but Judge Painter said that IPMC salesmen had also “churned” the original investment, using it to buy and sell metals 68 times during the ten-month period...
...Note, for example IPMC’s ad in Money (reprinted on page 37 of this magazine) that promises to pay investors 13.5 percent interest on “the money you invest in gold and silver...
...Here, they thought, would be an obscure, underfunded outpost of the bureaucracy that would not presume to secondguess those who merely embody natural and inexorable market forces...
...The Wall Street Journal also ignored the hearings, while USA Today found room for only one paragraph despite plenty of copy from AP, UPI, and Reuters as well as the obvious relevance of the subject to its readers...
...The firms do have to "cover" most customer funds, but not necessarily by buying metals...
...Most of these firms operate in Florida, California, and New York...

Vol. 16 • June 1984 • No. 5


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