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Collaring White-Collar Crooks : FTC Finds a Wealth of Gold-Scam Cases to Prosecute

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Times Staff Writer

When Marcy J.K. Tiffany became director of the Los Angeles regional office of the Federal Trade Commission, there were only two lawyers and an investigative and support staff of five. It was July, 1987, and the commission had lost ground because of budget cuts throughout the 1980s.

Tiffany’s first task was to build the staff to its current level of 19, including 10 attorneys, she said. Her second was to “start pulling cases together,” and she had a lot to choose from. Her Southern California-Arizona territory is among the nation’s most fertile for white-collar crime.

Rare coin scams, strategic metals rip-offs, oil-and-gas-lease schemes, the whole range of telemarketing investment fraud is in Tiffany’s back yard, including the prevalent gold-in-the-ground scam.

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For while the FTC engages in some antitrust enforcement, its best-known mission is policing unfair and deceptive business practices such as boiler-room fraud. And among the toughest jobs federal regulators face is choosing what cases to pursue.

“Everybody has more cases than they could possibly bring,” Tiffany says. “My only limitation is my staff.”

Tiffany graduated from UCLA Law School in 1977. She served as an antitrust lawyer and chief economist for the Senate Judiciary Committee, was assistant to the chairman of the FTC and served as general counsel of Guess Jeans before returning to the commission.

Tiffany recently discussed the plethora of investment scams and the pressures facing her office with Times staff writer Maria L. La Ganga.

Q. The so-called gold-in-the-ground scam is supposedly the latest and most popular white-collar crime. Are you seeing many of these?

A.. Yes, this is the scam of choice. I have a list of 50 or more boiler rooms selling different gold-in-the-ground scams in Los Angeles and Orange counties. Newport Beach is a haven for telemarketing fraud. There are a lot of them in Newport Beach. There are just a ton of them.

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Q. How do they work?

A.. There’s two different variations on the gold-in-the-ground schemes, at least two that I’m aware of. One such scheme is that the company says, “We have mineral rights to a mine in Arizona.” That’s an interesting concept, because apparently under Arizona law, the way you get mineral rights to a mine is you go in and start digging the hole and say, “I’m developing the mineral rights.” By doing that you have mineral rights. One such case involved an Orange County mining company.

Q. Did the company own the land and really have a mine?

A. The owner of the land was not privy to the digging of the “mine.” The operators of the company just simply brought some backhoe equipment on and started digging the hole. And then they said, “Well, we have tested this mine site and we have decided that it’s got some phenomenal percentage of gold. We have these special ways of getting the gold out of the earth. Instead of using the old water techniques, we use this chemical treatment, heat treatment technique. Using this technique, we’re able to get a lot more gold out than previously had been imagined. Now, we’re confident that this gold in the ground is just wonderful. That this mine is tremendous and is going to be very profitable.”

Q. How do they get the money from investors?

A. Well, this is their line. They say: “We need capital to develop it. Banks just don’t like to give money to gold mines. That’s not the kind of lending that banks do. They’re much too conservative for that. And we could get private investors, millionaires, to give us money, but they’re demanding. They want a share of the mine. And we just don’t want to give up our equity rights. That’s why it makes sense for us to come to you, a small investor, and ask you for $5,000. And we’ll give you a good deal. We’re going to sell you the gold for half price. And as soon as it’s mined, you’re going to get it. In one year, you’re going to double your money. You buy the gold today at half the market price, and in one year, you’re going to have gold right there on your living room table. If you don’t want the gold we’ll give you the monetary equivalent of it. But you’re going to double your money in a year. It’s a sure thing. We have assay tests. You want copies of the assay tests, sure, we’ll give you copies. This is no risk and the only reason we’re going to you is because we know this is such a wonderful investment that we want to keep our equity interest in it.” It makes a good story.

Q. Who falls for it?

A.. I’ve had investors who were actually relatively sophisticated people fall for this story. And they check it out. They try calling the banks. They get bank references. Sure, they have a bank account. Everybody has a bank account. They get copies of the assay report. I had one where a lawyer had signed off on the prospectus. The investor had their lawyer call that lawyer and ask them about it. You can try very hard to safeguard yourself. The truth of the matter is, when you get called on the telephone to invest in a highly speculative scheme--and gold mining by anybody’s perspective simply has to be put in that category--it’s a tremendous risk.

Q. That’s one gold-in-the-ground approach. What’s the other scheme?

A. In the other one they’ll say: “We have rights to the tailings from an existing gold mine. The gold has already been mined out of the vein, but there’s a lot of gold in these tailings. And, again, because of these new techniques that have been developed recently, we’re going to be able to go back to these tailings and take out the gold. So we’ll sell you a ton of tailings and you have all the gold that’s in that ton. But we’ll give you a minimum guarantee. So if it doesn’t exceed, say, 5 ounces of gold in the tailings, we’ll give you more tailings until you get up to the 5 ounces. On the other hand, if it exceeds 5 ounces, we get to keep the excess.”

Q. What is illegal about these? On its face, it sounds questionable, but what law are they breaking by doing this?

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A.. They’re making misrepresentations. They’re deceiving consumers. They’ll tell them that they have these special processes. There are no special processes. More importantly, though, they’ll say that they have assay tests that show a certain percentage of gold. They’re simply inaccurate. Either the tests are completely phony or they’re done at labs that we know are fraudulent labs that will give any result that the person putting the lab request together asks for. And then they make speculations as to what the total content of the gold in the area is based on one or two or three phony tests. So, here you have a couple of tests that have been jerry-rigged telling you that they have these high levels of gold in the sample. Then they multiply that out by the number of tons that they estimate are in the area, and they come up with this wonderful extrapolation. They also say that they are in fact mining so many tons of ore a day.

Q. What happened in the Orange County mining case?

A. Those operators said that they were mining 50,000 tons of ore a day and what they need your money to do is to allow them to have a processing facility that’s even larger so they can try to go up to 100,000 tons a day. They weren’t doing 50,000 tons a day. They weren’t doing anything.

Q. What was out there? What would an investor find if they actually flew out there?

A. I actually went on the mine site myself. What was there were a couple of holes; I’d say four or five holes that looked like they’d been dug by a backhoe. And we saw a couple of piles of dirt as a result of the holes, four or five. And there were some old screens strewn around. And that was it. It was pretty clear that nothing was happening at this site. I don’t even know why they’d bothered digging the few holes. Beats me.

Q. How many people were defrauded out of how much in that case?

A. We don’t have the exact figures on it yet, and our accountants are trying to figure it out. These people do not routinely keep good books. On top of which, sales are usually made out of a network of boiler rooms. So unless you’ve got records from all the different boiler rooms that you can cross-check against the records that the company has, it’s very difficult. But there were, I think, somewhere in the neighborhood of 500 investors.

Q. And how much money had they been defrauded out of?

A. I believe that one had about $2.5 million in investments.

Q. What kind of people were the victims?

A.. I haven’t met all the victims. I did meet one victim who was a very bright, capable businessman, has his own business and had really made an effort to try to check the company out. He was certainly not a gullible little old lady. There were some gullible little old ladies as well. I believe there was one who was a priest in a mission in Orange County. There were some people who were more gullible. But you don’t have to be in a more gullible category in order to be taken in by these. These things are slick.

Q. How?

A.. Their brochures are slick; they high-pressure you. They call you 15, 20 times a day. I kid you not. These people will call repeatedly. Some people just buy so they’ll stop being harassed. And that doesn’t solve it, because they just start calling you back to get you to invest more. But a lot of high pressure. No matter what question you ask, they’ve got a wonderful little pat answer to it.

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Q. Where in the litigation process is this case?

A. We got a temporary restraining order. We have stipulated to preliminary injunctions and we are now doing discovery and engaging in settlement negotiations.

Q. What are some of the waves of scams that you’ve seen in the last few years?

A.. Oil and gas leases were real popular for a while, and we still see a few of those around. I’d say oil and gas leases were hot 8 or 9 years ago. The Federal Communications Commission licensing bids were a nice one.

Q. How did that one work?

A.. The FCC had this program where it had a lottery for licensing cellular telephones. That’s died down because of the way the FCC has changed their lottery rules. At that time, anybody could just simply put in for a license and you might get it. If you got it, because it was all by lottery, then you could sell it to somebody who really wanted it for an incredible profit. So the con men said: All you have to do is pay the filing fees, a few thousand dollars, and we’ll help you do the filing. Well, the chances of in fact winning the lottery weren’t very good. But on top of that, they didn’t actually submit people’s names to the lotteries. Or they charged substantially more than the lottery submission fee would have been, this type of thing. That one was popular for a while and that one has died out, although we still see some of that periodically. Rare coins has been a good one. Strategic metals was another.

Q. About 18 months ago, Brock International in El Toro was closed down for a strategic metals scheme. Is that sort of scheme still around?

A.. Sure. They all are. None of these scams ever completely die away. The gold one is a fairly recent one, in the last few years. You have to come up with something new.

Q. What else does the FTC do for enforcement, in addition to closing companies down?

A.. I do two things. One is to educate consumers as to where the scams are and what the scams are. That effort is not 100%. There are still people who fall for pigeon drops, the classic scam that everyone knows about. But I know that there are people who are going to see my press conferences, going to see some of the other consumer reports around and respond to that. So that when they get that phone call, which they very likely will, they can hang up. The message I try to send is, when you get a cold call on the telephone, asking you to invest in something, be very, very careful. Because that’s how scams are marketed.

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Q. And the other facet?

A.. The other is to discourage the person who is participating in the scam. If we didn’t bring the cases, and we bring woefully few, it would never stop. But nobody knows who the next case is going to be against, and I think that does act as some deterrence. Plus, we very often see the same faces. And once I’ve caught them once and they do it again, then they’re very likely going to go to jail. Con men tend to stay con men. And what I want to do is raise the cost of being a con man.

Q. There are gold-in-the-ground schemes, which cost people thousands of dollars, and then there are the diet patch and diet pill schemes, in which the victims are not getting horribly hurt, but the con men are making millions of dollars. Both are illegal, but you can’t bring every case because you don’t have enough staff. How do you choose?

A.. What we’re talking about basically is a triage situation, like we all learned about on MASH. You take the people who are bleeding to death first and you worry about cut fingers later. We’re basically faced with very much the same situation. It’s really a very accurate analogy. We have victims. And then, we have victims who have been very badly injured. Now, that’s only one dimension of our enforcement decision. I have to look first of all at how much money is involved regarding the victims and what kind of a scam it is. Another thing that I’m going to look at in the overall dynamic of case selection is how much could the victims have protected themselves.

Q. You’re saying that if people don’t look out for themselves that you can do nothing?

A. No. I’m not saying that any victim doesn’t deserve to be protected. But let me give you a contrast: Gold-in-the-ground and diet pills. First you have a case like the mining company I described where they send a slick brochure, they send you copies of the assay reports that albeit are phony, they send you bank references, which albeit are easy to do. It’s very difficult for a consumer even being very diligent to protect themselves in that situation.

Q. And with diet pill cases?

A.. In diet pill cases, most people at one level or another know that you cannot take a pill and go to sleep and wake up thin the next day. I wish it were so. There’s some level where we all know this. But hope springs eternal. And people fool themselves into believing in these magic remedies. So they send in their $29.95, and they get their 2-month supply and they take it for 10 days and nothing happens. And it goes back on the shelf with all the other remedies that they’ve tried. And that’s the kind of thing where I can’t educate everyone.

Q. But it’s still illegal.

A.. Yes, but if I put one of those companies out of business, there’s going to be another one cropping up to take its place. Even keeping down the proliferation is tougher in that kind of market because it’s so easy to do. It’s easy to start marketing a quack pill. You send out a sugar pill in a plastic wrapper. It’s a real easy entry type of market. It’s not as difficult as putting together a gold-in-the-ground scam.

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Q. So what’s the compromise?

A.. I’m not going to educate consumers out of falling for these diet pill scams. I don’t think there’s any more educating that can really be done. I can educate consumers out of a gold-in-the-ground scam or a rare coin investment, or a telemarketing investment altogether. I think it’s something where I can have an impact.

Q. How do you make the decision?

A.. When I’m making decisions, one of the things I’m going to look at is how badly the victims have been injured, how much money has been spent, whether my bringing action is going to have some deterrence effect in the marketplace. Another thing I’m going to look at is whether I have a possibility of getting any consumer redress. In choosing between two companies, I am not as likely to go after one who’s on the verge of bankruptcy. Because what I want to do is get as much money back for the victims as I can. I want to get a scam early on where the money is rolling in so that I can freeze accounts and hopefully get some money to give back. When you have a company that is doing a penny ante business--$29.95 versus $5,000 at a shot--it’s less likely that I’m going to be able to find substantial amounts of money.

Q. Does this mean that you never bring diet pill cases?

A. No. We don’t want to take our finger out of that dike and say, “Hey, marketplace, it’s a free-for-all in diet pill cases and you can bring on any diet pill fraud you want to.” We’re not going to say that. So we do police that market. But it’s not going to be as high a priority as some other cases, all other things being equal.

Q. You say you have 50-plus gold-in-the-ground scams out there that you know of. Are they all under investigation?

A.. No, they’re not all under investigation by me. One of the things we do is parcel them out. Maybe the FBI will be looking at some for criminal possibilities, maybe the state Department of Corporations has some, the Securities and Exchange Commission is looking at some, the Commodity Futures Trading Commission.

Q. How can can consumers protect themselves?

A. Part of it is just being on guard for the things that are just too good to be true. Don’t let yourself be harassed. It’s your telephone. If you don’t want what they’re trying to sell you, say “No thank you, goodby, I don’t want it.” Or say “I think this is a fraud. I don’t want to talk to you again. If you call me again, I’m going to report you to the Federal Trade Commission.” And hang up. That’ll discourage them. You don’t have to put up with harassment. Most people are simply too polite. It astonishes me that they’ll sit there and discuss these things with salesmen when they don’t want to be on the telephone.

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