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Four precious metals firms and three people were recently charged5 with engaging in illegal precious metals transactions. These activities were part of a multimillion-dollar scheme. Those initially implicated in the scam are “defendants” in a lawsuit filed by the US Commodity Futures Trading Commission (CFTC). The latest group of alleged fraudsters are mere “respondents,” to regulatory orders, as they struck deals with the regulators.

Barclay Metals and Universal Clearing were purportedly6 precious metals firms on Wall Street. In actuality, these corporations were operated in Florida and were never registered with the commission.

Secured Precious Metals International, a Delaware corporation that was also operated in Florida, and Secured Precious Metals Management, an actual Florida corporation, were also never registered8 with the commission.

The CFTC has charged these four firms and their owners with engaging in illegal off-exchange financed transactions.

Under the scheme, Barclay Metals and Secured Precious Metals International solicited a leveraged purchase program. Customers were led to believe that they could purchase silver, gold9 and other metals by paying as little as 20 percent of the purchase price. The remaining portion was allegedly financed by Secured Precious Metals International and Barclay. The metal was then supposedly stored on the customers’ behalf at an independent depository.

Under Dodd-Frank, financed retail commodity transactions must be executed in accordance with the rules of a board of trade, and then only by qualified parties.

In these cases, those requirements were not met, so the CFTC found them to be illegal.

Furthermore, while money was collected from customers, according to the CFTC, trades were never made. The money was instead given to Hunter Wise.

Hunter Wise refers to group of companies — and their principals — that operated as a common enterprise, according to the CFTC. Its business was supposed to be precious metals trading, but regulators allege that these unregistered entities were really “the orchestrator” of a precious metals scheme that is estimated to have brought in at least $46 million thanks to “dealers” such as the aforementioned parties who operated in Florida.

In December, the CFTC filed10 a lawsuit against Hunter Wise and other companies and individuals for participation in this scam. The announcement portrayed the actions in a very negative fashion, with the agency expressly alleging fraud and deception.

With regards to the latest actions, the CFTC clearly notes that the parties engaged in the same type of behavior. In addition to outlining how they intercepted money on false pretenses, the CFTC notes that “[t]he Respondents’ retail customers never owned, possessed, or received title to the physical commodities that they believed they purchased, no funds were expended by Respondents or Hunter Wise to purchase physical commodities for the customers and no physical commodities were stored for the customers.”

Yet, the acts of the those most recently implicated are portrayed in a much different light. They are not described as deceptive or fraudulent. The only time the word “fraud” is used is when describing the goals of Dodd-Frank. The regulators try to paint the main issue as the failure to comply with the trading rules — not the scamming of individuals.

The benefits of snitching

This change in presentation appears to be one of the benefits of a practice commonly referred to as “snitching.” And it not only has the ability to alter regulators’ vocabulary and focus, but also seems to have the ability to minimize the action they take.

The CFTC agreed to settle these recently announced cases without requiring any admission or denials from the respondents. The terms of that agreement prohibit the parties from directly or indirectly making public statements denying the CFTC’s findings. The parties must also agree to stop engaging in illegal activities and are barred from trading for five years.

Furthermore, they agreed to cooperate “fully and expeditiously” with the CFTC in this action and any action related to the subject matter, including testifying.

The CFTC’s orders, which do not include civil monetary penalties, acknowledge the respondents’ substantial cooperation, the CFTC’s press release states.

In the previous Hunter Wise case, which named 20 defendants, the CFTC announced continuing litigation as the agency is seeking preliminary and permanent civil injunctions and remedial relief, including restitution to customers.

David Meister, the CFTC’s Director of Enforcement, said “[h]ere is a prime example of how the Dodd-Frank Act provided the Commission with additional strong authority to go after wrong-doers, such as, as alleged in the complaint, individuals who prey on people looking to make retail investments in commodities like gold and silver. We will use this new authority to the fullest extent possible.”

Regulators have now shown they can pick and choose when they will stand behind those words. That certainly cannot be encouraging for those who have long waited for the CFTC to take a stand against major firms who are believed to be manipulating the precious metal markets.

Securities Disclosure: I, Michelle Smith, hold no direct investment interest in any company mentioned in this article