FINRA Issues Investor Alert Regarding Precious Metals

FINRA recently issued a new Investor Alert called “Physical Precious Metals: Tips to Avoid Tarnishing Your Portfolio,” which cautions investors about the risks of investing in physical precious metals, such as silver, gold, palladium, and platinum. Precious metals are known for price movements that attract investor interest during market swings, and that interest can generate high-pressure sales tactics and fraud.

Recent enforcement actions by the Commodity Futures Trading Commission (CFTC) and court decisions demonstrate that sellers can charge high commissions and fees while failing to purchase or deliver the physical assets as promised. In a recent CFTC case, for example, the U.S. District Court for the Southern District of Florida ordered $2.5 million in monetary sanctions against Vertical Integration Group, LLC, and its managing members, Richard V. Morello and Junior Alexis, for illegal precious metals transactions. In another verdict, the U.S. District Court for the Southern District of Florida ordered Hunter Wise Commodities, LLC, Hunter Wise Services, LLC, Hunter Wise Credit, LLC, and Hunter Wise Trading, LLC and the individuals running the companies, Fred Jager and Harold Edward Martin, Jr., to pay more than $108 million in restitution and penalties.

To avoid being a victim, FINRA suggests the following precautions:

• Say “no” to pushy salespeople. No reputable investment professional should push you into making an immediate investment decision, or tell you to “act now.” Even if no fraud is taking place, this type of pressuring is inappropriate. Be particularly wary of unsolicited telephone calls. Persuasion tactics–such as dangling the prospect of large profits (the “phantom riches” tactic) or implying that there are limited quantities of an investment available (playing the “scarcity” card)–are often used. Avoid unwanted calls by registering with the National Do Not Call Registry.

• Check out the salesperson’s background before you invest. Although firms offering precious metals to retail customers do not have to be registered with a federal or private sector securities regulator if the metal is delivered within 28 days, a number of the sales professionals involved in enforcement actions were previously registered with the National Futures Association (NFA). Use the NFA’s Background Affiliation Status Information Center (BASIC) to check whether the firm or individual is registered with the CFTC or an NFA member and whether the firm or individual was the subject of any disciplinary actions. It’s also a good idea to check an investment professional’s background using FINRA BrokerCheck and to do a general Internet search.

• Be on high alert when you hear “low risk.” Don’t purchase physical quantities of precious metals based on a promise that the investments are “safe” or have minimal risk of loss. In particular, don’t fall for the pitch that investments in physical assets are not risky. Storage charges, price fluctuations and the use of investor loans to finance the purchase of metal bars, bullion or coins are just a few of the risks associated with an investment in physical precious metals. Ask to receive a risk disclosure statement from the salesperson before you send any money. And request the salesperson’s name, address and telephone number, as well as that of the firm. If the salesperson balks at the request, end the conversation.

• Look out for leverage risk. Precious metals investments often involve the risky and expensive use of leverage, or borrowed money. You may pay a portion of the cost to invest in the precious metal in cash, but then pay for the rest of the investment (in some cases up to 80 percent of the metal’s purchase price) “on margin.” This margined portion is in fact a loan which carries interest and is subject to the risk of a margin call if the value of the investment declines. In the event of a margin call, you may be required to invest additional money to prevent your investment from being liquidated without your consent or prior notice.

• Get a full accounting of fees. There is often an account opening fee with physical precious metals investments, which can be hundreds of dollars. Then there are commissions, which can be 15 percent or more of your investment, including any leveraged portion. Add in storage fees, management fees and ongoing interest on the loan for the leveraged portion of the precious metals purchase, and you may find that you would need to earn an unusually high return on your investment just to break even. It can be extremely difficult to make money on direct investments in physical precious metals.

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