Legal Problems Over, Entrepreneur Hopes for Strike in Precious Metals

Lenny Steven Smith has had a checkered career. He went from being a young star at a brokerage firm in the late 1970s to being convicted of federal securities violations. He resurfaced as chairman of a mining company in the early 1980s, only to be faced with more charges of securities violations. In 1984 he filed for personal bankruptcy and later resigned from his post at the failing company.

Three years ago Smith, 43, started over again as chief executive of American Pacific Mint in Woodland Hills, a small, publicly traded company that trades gold and silver bullion, sells jewelry and runs a private mint.

Smith said American Pacific is “an opportunity for me to rehabilitate an image of me that isn’t entirely accurate.” But American Pacific isn’t yet the comeback story Smith is hoping for. It reported losses in 1987 and 1988, prompting auditors to alert shareholders that American Pacific “might be unable to continue in existence.”

There was some improvement in 1989 when the company earned $15,720 in the nine months that ended Sept. 30 on revenues of $25.9 million, but its net worth--roughly equal to assets minus debts--remains a mere $1.5 million. Investors don’t have much faith in American Pacific: Its stock has been trading at about 45 cents a share.

But Smith still says he can make a go of American Pacific. The company hasn’t been consistently profitable, he said, largely because it has been busy digesting acquisitions of other precious metals operations. The company has also been shifting from mainly bullion trading, which generates profits as low as 1 cent per $1 of sales, to the higher margin jewelry and minting businesses, he said.

The company currently buys gold and silver from individuals, other traders and even directly from mines in Alaska. It sells the metals as bullion to investors and other trading companies at a store in Dallas and at a few recently acquired sites in the Northwest. It also sells jewelry, makes commemorative medallions at its private mint and runs a pawn operation. Smith said his goal is to provide “one-stop shopping” for precious metals in the form of bars, coins or jewelry at various sites around the country.

Smith said he has been reluctant to publicize American Pacific because “I didn’t think it was appropriate to tell our story until we are profitable.”

But over the past decade in each of Smith’s other ventures something has gone wrong. Why should investors trust him and American Pacific Mint this time around?

“There are some very successful people who have had failures in their lives. I have done my share of failing and now I’d like to have my share of success and represent the shareholders well,” Smith said.

Smith was barely 30 years old when, as manager of institutional trading for the Los Angeles securities firm Bateman, Eichler, Hill Richards, he earned a reputation for over-aggressiveness. “He was considered to be a very bright and ambitious young man,” said Peter Eichler, a former president of Bateman Eichler. “I think he just got out of control and went too far,” Eichler said.

In 1979 a federal grand jury indictment charged Smith with using “manipulative and deceptive devices” while making various stock trades without his customers’ permission. According to the indictment, in 1977 Smith purchased large blocks of stock in two companies that he had recommended to clients, but without actually obtaining purchase orders from those clients. He would then call clients and persuade them to “buy” the stock he had already purchased. If they refused, he would put the shares in the accounts of other customers without their knowledge, and intercept confirmation slips that would have notified the customers of the trades. He would also deposit shares in Bateman Eichler’s account, even if it put the firm in violation of Securities and Exchange Commission rules.

Because Smith controlled large blocks of these stocks, his scheme would often cause the stock prices to rise, the indictment said. Both his clients and Bateman Eichler would benefit with “instant paper profits,” it said.

Smith resigned from Bateman Eichler and pleaded guilty in a federal court to two counts of securities violations. He was sentenced to five years probation and 300 hours of community service, was fined $5,000 and as part of his sentence, Smith said, for about three months he spent four hours a night at a halfway house.

By the early 1980s, Smith had moved on to his next business venture, becoming chief executive of Veta Grande Cos., a Northridge-based mining and oil and gas company with about $40 million in annual sales. But at Veta Grande, Smith became embroiled in more allegations of securities violations.

In 1983, the SEC filed a civil complaint against Smith and Veta Grande, charging them with making false statements in SEC filings and press releases about the number of shares that Smith and his company were buying in Seiscom Delta Inc., a Houston energy company. Without admitting or denying the allegations, Smith agreed to a permanent injunction barring him from further violations of disclosure requirements.

Then in 1984, Smith filed for personal bankruptcy protection because, he said, Seiscom Delta’s stock had plummeted and “a substantial amount of my investment dollars became worthless.” According to bankruptcy court documents, Smith had total debts at the time of more than $20 million, and assets of $3.3 million.

Smith said he emerged from bankruptcy in 1986, but by that time he had been forced to sell his home in Santa Barbara, a Santa Barbara County ranch and property in the state of Washington to help pay his debts.

Meanwhile, Veta Grande, which had suffered a string of losses as energy and precious metals prices declined, also filed for Chapter 11 bankruptcy protection. Smith resigned as chairman and the company was sold.

But in December, 1986, Smith had yet another rebirth with American Pacific. The company was founded in 1965 as a mining enterprise, but for years had been a virtual shell with no operating entities. Smith said he invested in American Pacific in the early 1980s and as Veta Grande was collapsing, Smith used American Pacific as a vehicle to purchase from Veta Grande the assets of Ziser Manufacturing, a private mint that made gold and silver medallions, for $1.25 million in stock and debt.

The mint was quickly shut down and the assets sold, and American Pacific was resurrected in yet another form. In 1987 it purchased the Dallas Gold and Silver Exchange, a bullion trading, jewelry and pawn operation that is the backbone of the company, said Robert Zuber, American Pacific’s chief financial officer.

The Dallas exchange is a precious metals store located on the outskirts of Dallas that sells bullion, new and estate jewelry, and runs a pawn operation that lends money to people who leave their jewelry as collateral. The exchange did about $12 million in sales in 1989, Zuber said.

Smith calls the Dallas exchange a prototype that he wants to clone in other parts of the country. There are about 6,000 precious metals dealers in the United States, he said, most of which are small, independently run shops. But Smith said he wants to create a chain of large stores that combine retail and wholesale bullion trading, jewelry sales and pawn operations.

To further that goal, last May American Pacific acquired in a stock swap 58% of Alaska Precious Metals Ltd., an Anchorage-based company with $40 million in annual sales that buys gold directly from Alaskan mines, sells bullion and jewelry, and runs a private mint. Smith said he is looking for partners to help finance an expansion that will include setting up Dallas-type stores in cities across the country. Although 60% of American Pacific’s business comes from bullion trading, Smith said he hopes to lower that share to 30% as he increasingly emphasizes higher profit margin retail jewelry sales.

If Smith is trying to restore his credibility through American Pacific, he certainly picked a business with a troublesome image. Although some self-regulatory mechanisms exist for the industry--such as an accreditation program set up by the Industry Council for Tangible Assets, a trade group--precious metals dealers remain largely unregulated. Consequently, said Barry Stuppler, president of the Gold and Silver Emporium in Encino, fraudulent operations that take advantage of a gullible public have given the industry a black eye. For example, Stuppler said, a common telemarketing scheme involves cold calls to potential customers, who receive wild promises of fortunes to be made in precious metals. Oftentimes, the metal is never delivered.

But Smith insists he will keep everything on the up-and-up with American Pacific: A telemarketing unit was closed down several years ago after a few months in operation. And the company does not store precious metals for customers, a practice that has led to abuses by other precious metals dealers.

Smith insists, “We comply with local and federal laws in every location. Maybe that’s a benefit of my painful past.”