Con Artists Sell Worthless Piles of Dirt : Officials Warn of Rising Gold Swindles

Thousands of American investors will lose millions of dollars this year in what authorities on Tuesday branded the “fool’s gold rush of 1988”--various swindles offering the chance to buy gold at below-market prices.

State securities regulators and the Council of Better Business Bureaus warned in an “investor alert” that the gold schemes represented the fastest growing fraud threat in the country. In the spring of 1987, they said, there were eight known gold scams. Currently, 52 are under investigation.

Officials said last October’s stock market collapse created a climate allowing swindles to proliferate.

“Thousands of individuals fled the markets, turning their backs on mainstream investments,” James C. Meyer, director of the Tennessee Division of Securities, told a news conference. “The result: a huge pool of potential, cash-rich victims ripe for exploitation by the promoters of exotic investment swindles.”

‘Boiler-Room’ Operations

Meyer, who is president of the North American Securities Administrators Assn. representing 50 state securities offices, estimated that tens of thousands of Americans nationwide would lose $250 million in the bogus gold deals this year.

The typical “dirt pile” swindle works this way:

A high-pressure salesman calls from a boiler room telephone operation, offering to sell 100 tons of dirt for $5,000. The con artist guarantees that the dirt pile will yield at least 20 ounces of gold, an effective price of $250 an ounce, far cheaper than the current spot market gold price of $430 an ounce.

“The problem is, the gold doesn’t exist beyond microscopic, economically unrecoverable levels,” Meyer said. He said investigators have found that many of the mine sites contain less gold than can be found in sea water.

“The mine is nothing more than a Godforsaken patch of desert scrubland,” he said. “These deals are a rip-off from the word go.”

James H. McIlhenny, president of the Council of Better Business Bureaus, said virtually all the swindlers operated by telephone, calling people in other states, thus avoiding detection by local authorities.

“These swindlers are skilled. They sweet-talk you, they guarantee you big profits in a short time,” he said. “Their victims are from all stations of life, from unsophisticated elderly persons to professionals who think they understand the risks of investing.”

In one case, officials said 2,000 investors were bilked out of $20 million by a former California furniture salesman selling off a New Mexico mine site that he claimed would generate almost $100 million in gold sales per year. The salesman was convicted last month in a New Mexico court of 12 felony counts.

In another case, investigators said that a Wyoming inmate already jailed on a fraud charge used prison telephones to persuade investors in Minnesota and Wyoming to pay an average of $6,250 each for worthless dirt in an inactive Utah mine. When he was caught, prison authorities moved him to solitary confinement.

“Why people will commit their life savings over the phone, when they wouldn’t think of buying a car or house sight unseen, is a continuing and troubling mystery to those of us whose job it is to promote investor protection,” Meyer said.

Officials urged consumers to hang up on high-pressure telephone sales tactics. They said investors also should not be swayed by official-looking mineral-content analyses, known as assays, because even legitimate testing labs can be duped by a dirt sample that has been “salted” or taken from a different mine site.

They also said investors should beware of vague promises on when the gold will be delivered.