Caveat Emptor


Caveat Emptor

“It was a confidence shattering experience.”

As he spoke the words, his face spilled emotion: anger, relief, and reluctance to talk.

Reeves Francis is in the polymer business. He doesn’t have an Office; he has a 5-story Office Tower. A tall grey rectangle encircled by sunshine and trees. Beyond the front door I expect an atmosphere that reflects its product­­––gray, dull, somehow rubbery.

But the ground level isn’t host to cloth furniture or an aged lobby. One room. Clean and modern and most unusual. An open-floor, glass-enshrouded museum. An overture to polymer.

One thing I learned from the museum is that polymer is used to make every product ever invented by man and nature.

Apparently, most things I enjoy are thanks to polymer: fishing rods, Velcro, Cool Whip, golf clubs, jelly, epoxy, Nerf, swimming pools, gravy, duct tape, and my HK VP9. On behalf of the South, I’d like to say thanks for the gravy, or as we know it, our way of life.

Nature’s polymer inventions include DNA, RNA, and amino acids–– as well as our enemy, the carbohydrate. Turns out polymer is the most common organic compound on earth, comprising one third of all plant matter.

And it’s all on display at Mr. Francis Reeves’ first floor museum, although the DNA and amino acids were too small to see.

I meet Mr. Francis on the top floor: 20ft. ceilings, open design, part Silicon Valley Start-up part Office Above a Factory Floor. A bullpen of desks in ambiguous formation, flanked by an arrow of glass offices. The corner cube is Reeves’, just large enough to park a Bush Hog alongside a snow groomer, like we always wanted to do.

Reeves is charming and complex and shines like an ornament. Thick, black-framed glasses atop loud, rich fabric. Very European.

We head to the bar, a sunny outdoor patio. German Porter and Belgium White. Cheers mate.

His story is the kind you love to hear. The kid with a dream that finally gets a shot. And shoot he did. The mom-and-pop shop he took over now supplies an entire hemisphere with polymers. Offices in 13 countries. That’s a lot of polymer museums.

Reeves holds a story I’m chasing, but I discover the Polymer King is also a fluent, sophisticated investor. Bonus. We go back and forth about private placements, mining, taxes. Our portfolios overlap quite a bit. A FatCat of good taste.

And crypto. Wow is this guy good at crypto. I’m curious enough to be direct.

“If you don’t mind me asking, what kind of returns have you made solely on your cryptocurrency investments?”

His mind abacus reels for a moment, then he prefaces, “I didn’t get into Bitcoin early, which is where a lot of the crypto guys really made it. My bets are across a number of coins. Over the last 2 years I’m up well over 300X.”

To be clear, that’s 300 Times, or 30,000%.

“Wow, well done,” I remark, “Since we’re on the subject, do you care to share with us your current positions in the crypto space, and how you pick them?”

“Sure,” he responds. Double Bonus.

“I have two simple criteria: people are actually mining it, and there is a cap on the total number of coins/tokens created. Right now, roughly 60% of my holdings are in Litecoin, DigiByte, and Bitcoin. The other 40% are spread between EOS, Populous, Veritaseum, FUN, and BAT.”

“Thanks for that. Hard to argue with 300X.”

A nice intro. I’ve been skipping continents in search of the world’s best bullion storage facilities, and finding some of the worst along the way. One of the very few I trust is now home to Reeve’s bullion, which I’m told arrived with a story of deceit.

The stereotype of fraud in the precious metals industry is boiler room telemarketers pushing rare coins to grandma, a victim pool filled with society’s most vulnerable. But not successful businessmen. Not sophisticated investors. Not a guy as clever as Reeves Francis.

“How did it begin?” I ask.

Anger. Relief. And one I didn’t expect: reluctance. Apparently this is a story not often shared.

“I wanted to purchase a number of 1000oz. silver bars,” he says, “I heard of James Turk from King World News. Reputable, well-known guy with one of the largest bullion businesses in the world. So I went with his company, Goldmoney.”

“For purchase as well as storage?”

“Correct.” Reeves continues, “Segregated storage, so stored separately from any other bullion. I was even given the choice of seven different storage locations from around the globe, as well as a variety of vault operators.”

One of the vaults was in a major city a short drive from Reeves’ home, in a facility secured by Brinks, and fully insured. Goldmoney arranged to have the silver shipped there.

“The terms were very clear,” Reeves says, “And all in writing. My privately purchased and 100% owned metal, sitting in a vault, which I had the right to redeem physically at any time. They sent me the statements, and I paid the bills. For two years I paid them for insurance, and for two years I paid them storage fees.”

“Since you used Goldmoney for the initial purchase and for storage,” I ask, “I assume you never actually saw your bullion in person, before it was shipped to the vault?”

“That’s right. But, I had the invoice and purchase order for the bars, I had a storage contract, a complete paper trail. And when you’re paying storage fee’s every month you assume…. It all appeared correct, and I had no reason to believe otherwise.”

That would soon change. Spot prices rose. There were shortages, and rumors of shortages. Reeves was not alarmed; these things happen. But it was time to pull his metal out of the system.

“So I contacted Goldmoney and requested physical delivery of my metal.” Reeves continues, “After three weeks and no delivery, I contacted them again, and was told the bullion was on the way to my house.”

“They said it had been shipped?” I ask.

“Yes, shipped from the vault to me. With the vault being local, I expected delivery within a day or two,” Reeves says, “but two weeks later my bars had still not arrived.”

“So we’re up to five weeks now, what were they saying?” I ask.

 “It’s on the way. Another week passes. It’s been shipped to you. Another week goes by. Eventually I start telling them I want to drive to the vault myself and pick it up. I’m paying for segregated storage with Brinks, why can’t I just drive there and pick it up myself?”

“Did Goldmoney agree to that solution?” I ask.

“I was demanding every day to take physical delivery in person. Brinks would not speak to me as their contract was with Goldmoney, not me. I was demanding Goldmoney tell me the location of the Brinks Vault. After nine weeks, they agreed. A few days later I got a call from the vault, along with a message: ‘Your Bullion Shipment Has Arrived.’”

The metal Reeves had paid storage fees on for 2 years had now arrived at the vault. I ask him if he addressed the issue with Brinks, if they confirmed they had in fact stored or not stored his bullion for two years.

He smiles, “It gets better. When I got there, it wasn’t a Brinks facility. I took delivery of my silver, but from a totally different vault operator.”

“So,” I summarize, “you bought bullion from Goldmoney, you contracted them to store your metal, separately labeled and segregated from any other bullion, in one specific city in one specific vault operated by Brinks. For two years they charged you storage fees. You asked for your bullion back, and for eight weeks the metal was being delivered, until week nine, when the metal became undelivered, appearing suddenly and ready for pickup inside of another company’s vault? How do you explain that?”

“They obviously never bought the metal in the first place!,” says Reeves, and as his face melts crimson, fade to an animated Alex Jones from that scene in Waking Life:

Much obliged, Alex. But seriously, Reeves is losing it. Fist. Table. The dishes Clap!

Fingers waving, he’s shouting, “I gave them my money, I paid the storage fees, but it didn’t exist! What did they do with all that money for two years? And why did it take 9 weeks to collect?! Did it take that long for Goldmoney to find the metal on the open market? Or did it take 9 weeks for them to come up with the cash to buy it?! And if that’s the case, where the hell did they get the money? Was it from other customers?! Are we using new investors to pay for old ones?! Don’t we all know how that story ends??!!”

The last syllables echo and fade. That was raw and astonishing. And Loud. In a parallel universe where I’m a much better interviewer, I demonstrate my equal outrage at this point by shattering my porter against the wall, grunting, then taking out the bouncer with a swift leopard fist to the throat. Reeves is so touched I walk away with a lifetime supply of polymer. Triple Bonus.

In this universe, I pretend the restaurant isn’t staring at us, but some horrific car accident in the street. Plenty of people here to help the wounded; I have an interview to conduct. Sip the beer and skip to the last question, “Any advice for those looking to store bullion, or those that have already done so?”  

“Yeah. If you haven’t seen it and you can’t hold it in your own hands, don’t assume you own it. If you can’t access it, all you really own is an unsecured debt. That’s nothing more than a promise to deliver from a company that has already deceived you.”

My favorite part of that story is the storage fees. That’s the kind of subtle irony and attention to detail that’s too often lost in scams these days. But they aren’t the only ones charging clients to store imaginary metal.

Morgan Stanley and UBS were both recognized with class action law-suits for their practice of pretend-selling bullion that was then pretend-stored in a vault, for a fee. Morgan Stanley settled for 4.4 million dollars but refused to admit fault, as you do. Their defense was as revealing as it was disturbing: they were just following “Standard Industry Practices.”

Stated differently, Morgan Stanley’s fees for pretend-storage are competitive and in line with a multitude of peers in the marketplace offering the same service. And they’re not lying.

The Bullion Reserve of North America sold the public on Super Storage–– Rocky Mountain Vaults buried two hundred feet underground in Utah. The idea was sexy enough to convince thirty thousand customers to fork over $60 million for gold, silver, and platinum. After the owner died and the company declared bankruptcy, investors found just $900k of their bullion; records revealed the maximum ever vaulted was only 3 million.

So where does all the money go?

Arthur Schlecht’s Global Bullion Trading Group assured customers their metal was secure in depository vaults. Court documents reveal their $25 million was instead spent on jewelry, interior remodeling, cash payments to family members, home décor, landscaping, cars, and maid services. As of March of this year, Arthur is a free man.

Fox, MSNBC, and Home and Garden Television carried the ads of American Bullion Exchange Corp., who promised to store their clients’ bullion in segregated accounts with insurance through Lloyds of London. But there were no segregated accounts, no insurance, and no bullion either; metal was only ever purchased when clients demanded physical delivery. Customer funds were used to speculate in the futures market and to pay out withdrawing customers, and also to fund the bank accounts of the owner and his wife.

They spent half a million on mortgage payments, $300k on credit cards, $90k on car payments, and 160k in cash withdraws; loyal ABEC customers also paid their utility bills, property taxes, insurance premiums, and in the spirit of civic duty, made significant political contributions with their life savings.

Mintline (formerly Alliance Precious Metals) owners Cindy and Paul Vandivier ran the same scam, only ever buying metal to satisfy the occasional customer-requested physical delivery. They spent over a million dollars of customer funds on cars, medical expenses, shopping sprees, and animals, although what kind of animals remains unknown.

Mark Yaffe of the National Gold Exchange only used $800k of his customers money for speculative trading. The other $15 million he used to build this 29,000 Sq. ft. mock 17th century fortress.

This place has 14 fireplaces. Mark was sentenced to 20 months, or 6 weeks per fireplace, however you want to calculate it. A sentence like that can only mean one thing: all the people he ruined must have landed on their feet, nearly a victimless crime. What a relief. Makes sense why the judge called him “a wonderful person and an asset to this community.” With his rather small debt to society paid in full, Mark was released last year.

We could go on. We could also count all the cows in Kentucky.

More nice people are going to end up on the wrong side of this, and not for lack of trying. This industry is unregulated, and a wall of secrecy makes it extremely difficult to conduct proper due diligence, even when you have strings to pull.

Of the dozens of dealers and vaults we’ve contacted, only two have provided all the documents requested. The owners of those two unrelated vaults incorporated for the same reason: in protest of the unethical practices and conditions prevalent across the industry, and the widespread embargo on transparency.

Unfortunately, the court cases can only warn us of the charlatans already caught. Others are operating right now, and with great success…. as we shall see in Part 2.

See you then,

 

 

 

 

-Christoph Grizzard, The Fat Cat Investor


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