Nickeled, Dimed and Screwed
Editor’s Note: Please see our follow-up report at the end of this article. The 2004 magazine ad for Silver American Eagles that caught Maureen O'Neill's eye included a thumbnail history and some mumbo jumbo about the coins being "certified gem brilliant uncirculated" and "sonically sealed in a tamper-evident holder." But the 74-year-old widow and retired nurse didn't understand or care about any of that.
O'Neill just figured that filling out the coupon would save a trip to the mall: "I thought they would make nice Christmas presents for my son and son-in-law."
Two weeks later, O'Neill received a phone call from the Beaumont-based company that sold her the silver. The salesman was extremely personable, eager to hear all about her newly adopted grandson. The salesman also learned that she lived alone in Connecticut and her family resided out of state. It seemed he had all day just to chitchat. She enjoyed the attention.
So, what the heck, she bought some more coins. "I spent a couple thousand here, a few thousand there." And her phone kept ringing.
O'Neill would return home from shopping to several urgent messages on her answering machine. "I told them I didn't want any more, I wasn't a collector," she says. "I cried on the phone, I hung up, but they just kept pushing."
Following the salesman's advice, O'Neill eventually moved her money out of stocks, bonds and IRA accounts and put it all into rare coins. She maxed out her credit cards and took out a $50,000 home equity loan, all for coins she knew next to nothing about. Only that the salesman assured her they were safe, stellar investments. And that she needed to buy them—now.
During the next 15 months, O'Neill invested more than $180,000 in coins—her entire life savings. Appraisers later revealed her collection had been overvalued by about 50 percent, she says.
Today O'Neill is a plaintiff in a lawsuit against several related Beaumont-based companies with very official-sounding names: 1st National Reserve, 1st American Reserve, First Fidelity Reserve and Universal Coin & Bullion. The rare-coin companies gross more than $100 million a year, almost exclusively in phone sales. All operate out of the same nondescript property.
Many of the salesmen and managers are young, former fraternity brothers from Lamar University netting six figures a year. They call themselves brokers, though they are unlicensed. And they claim to operate from a trading floor, though their offices have been described as classic boiler rooms.
"This stuff is straight from a movie," says Jason Gibson, a Houston-based plaintiffs' attorney who represents O'Neill and more than 50 other former customers from across the country. Many are 70 to 90 years old, and some suffer from serious health problems such as epilepsy, Alzheimer's disease and other forms of dementia. Collectively, they claim to have spent more than $10 million on grossly overvalued coins and allege a laundry list of abuses against the companies, including:
· using high-pressure sales tactics
· targeting the elderly
· selling coins with 100 percent markups
· using religion to gain trust with customers
· fabricating stories about the origins of coins
· misrepresenting the value of coins
· making unauthorized charges to credit cards
The lawsuit, one of several currently pending against the companies, represents the latest black eye for an industry that remains unregulated despite its centuries-old association with fraud. There is no governmental agency that oversees the highly speculative rare-coin market. The Federal Trade Commission, which can take action only under truth-in-advertising laws, has not prosecuted a case against a dealer in 15 years.
The lawsuit has sent shock waves through the coin industry since it specifically targets Michael Fuljenz, a veteran numismatist—or coin expert—and award-winning author and occasional CNBC pundit. Fuljenz, a named defendant, has denied all charges made against the companies, claiming he is the victim of an overzealous attorney.
But Gibson says when he filed information requests with the FTC and state attorneys general offices throughout the country seeking consumer complaints against coin companies, he discovered a pattern: "All roads led back to Beaumont."
Michael Fuljenz trains his salespeople that customers do three things: lie, puke and say no. It means they lie about personal finances, puke excuses and ultimately say no to purchasing rare coins.
His staff of several dozen salespeople, who call thousands of people across the country every day, are taught to overcome these obstacles by "isolating objections" and "finding out where the money is."
They receive packets with sales tips such as, "To be successful you must have good acting skills and you must be sincere when you apologize."
According to depositions given by several former employees, the salespeople also learn to "mind-screw" customers, or deliberately confuse and berate them into making purchases (see "To Coin a Phrase").
But Fuljenz is uncomfortable with the notion that he promotes high-pressure sales. He prefers to call his employees by another name: enthusiastic.
"What is high-pressure?" he asks rhetorically. "It really depends on the individual."
For centuries, the unscrupulous corner dealer was the scourge of the rare-coin industry. Today that role has been filled by take-no-prisoners phone solicitors, according to Bill Haynes, president for 30 years of Arizona-based CMI Gold & Silver.
"I know about the dark side of our industry, where people pay double what coins are really worth," Haynes says. "I have heard absolute horror stories."
Sonny Toupard, owner of Houston-based Royal Coin & Jewelry, says several former customers of
Fuljenz's fast-talking salespeople have asked him to appraise their collections, only to find they are worth 25 to 50 percent of the original purchase price.
"They come to me under the impression that they made all this money," Toupard says, "then they get all upset."
Once known as a gentle hobby for kids, in just the last two decades rare coins have developed into a multibillion-dollar industry dominated by auction houses, large dealers and Wall Street brokerage houses.
Most numismatic coins in circulation today were minted between the Civil War and the Great Depression. Since their values are affected by rarity, quality and investor demand, the market is notoriously volatile, with certain types of coins falling in and out of favor fast.
The biggest factor in the industry's growth and increased legitimacy is grading, a measure of a coin's physical condition. National grading services, started in the mid-1980s, employ panels of experts to rate coins, which are then certified and slabbed into plastic cases.
The grading system has made rare coins more like commodities or stocks that can be bought sight unseen on electronic exchanges such as the Houston-based Certified Coin Exchange. Prior to grading, dealers could swindle buyers by
simply misrepresenting a coin's condition.
Haynes describes today's rare-coin industry as a relatively small, tight-knit community that tends to stand together. He compares the industry's acceptance of aggressive phone solicitors to South American businesspeople who thrive off the underground economy, though they may not actively participate in it.
"In the legitimate numismatic industry, there are people who would never call up a naive person and say, 'Buy this coin,'" Haynes says. "But those legitimate dealers benefit immensely because of the money that the [phone solicitors] pour into the industry. And they are reluctant to talk about it."
Michael Fuljenz has not exactly been hiding underground. The 52-year-old Lake Charles, Louisiana, native has made two dozen appearances on CNBC shows such as Smart Money. He is also a regularly featured speaker at the Greater Houston Money Show and other similar conferences across the country.
Fuljenz writes the esteemed monthly newsletter Investor's Profit Advisory and has authored several self-published books that have won awards from the Numismatic Literary Guild, a national trade group based in New Jersey. "Some say we have too many awards, that we give one to everybody," says Ed Reiter, executive director of the guild and senior editor of COINage magazine.
A collector since age 8, Fuljenz served as a coin authenticator and grader for the American Numismatic Association, a nonprofit educational organization based in Colorado. He later became vice president of Blanchard and Company Inc., a New Orleans-based rare-coins giant, before moving to Beaumont in the mid-1990s.
Today Fuljenz, along with business partners Tyrrell Garth and Elaine Henderson-Millar, are majority owners of 1st American Reserve and Universal Coin & Bullion. Fuljenz is also a paid consultant for First Fidelity Reserve and 1st National Reserve, owned by Garth and Henderson-Millar.
Neither Garth nor Henderson-Millar responded to interview requests for this story. Garth, a prominent Beaumont attorney, backed out of a scheduled phone interview. "Mr. Garth decided to take an unexpected vacation," explained Fuljenz, who denied requests to tour the buildings, including the companies' salesrooms and vault, which has an inventory that exceeds $10 million, he says.
All four companies were founded at different times and have separate ownership structures. They share employees and, occasionally, customers.
They also share space in four interconnecting, single-story red-brick buildings with white columns on a commercial street on Beaumont's west side. During the day, the interior parking lots are filled with BMWs, Cadillacs and Hummers. There are no signs identifying the businesses located on the property; drawn blinds cover the windows.
Fuljenz serves as the public face of all the companies, which are in good standing with the Professional Numismatists Guild, a California-based nonprofit group that requires members to adhere to a strict code of ethics, and the Better Business Bureau of Southeast Texas. Fuljenz is a frequent co-sponsor of the BBB's annual marketplace ethics award.
First Fidelity Reserve and 1st National Reserve, the oldest of the companies, were bought some 20 years ago from Milton Verrett, a veteran Texas coin dealer with a checkered past. In the late '90s, the Securities and Exchange Commission permanently barred Verrett from serving as an officer or director of a public company after his publicly traded film-marketing company made "false and misleading statements" about a movie's revenues.
Then in late 2004, the state of Georgia charged Verrett with violating the state's consumer protection laws by running magazine advertisements for rare coins that "exaggerated claims about the immediate and potential increases in the price and value of gold" and falsely implied "that the company is associated with the federal government." To avoid a lawsuit, Verrett, who denied liability, agreed not to market products in Georgia.
Verrett, who could not be reached for comment, remains affiliated with the Austin-based U.S. Rare Coin & Bullion Reserve, which has numerous outstanding complaints with the FTC and the attorney general of Texas. Verrett has continued his ties with the Beaumont coin companies, occasionally selling Fuljenz advertising copy.
1st American Reserve and Universal Coin & Bullion sell rare coins as investments, whereas First Fidelity Reserve and 1st National Reserve sell rare coins as collectibles. The distinction is significant. Collectible coins, like art, jewelry or sports memorabilia, can be sold with huge price markups, whereas coins marketed as investments cannot.
Gibson, the plaintiffs' attorney, alleges that the Beaumont companies frequently blur this distinction, selling collectible coins with high markups as investments—a big no-no that in the past has led to federal and state prosecutions on fraud charges.
In the early 1990s, the FTC prosecuted a string of cases against coin dealers in California and Florida for deceiving customers about the investment potential of coins and charged a large coin-grading service with misleading investors in ads and promotional materials.
But the FTC has been silent since then, not bringing a single case against a coin dealer anywhere in the country for 15 years, says Lois Greisman, associate director of the commission's division of marketing practices. "We have not publicly sued any member of this industry in a while," Greisman says. "There is no one [at the FTC] with expertise in the industry."
Fuljenz says the FTC had received virtually no complaints against the four companies he either consults for or owns. In fact, an open records request revealed more than three dozen complaints filed with the FTC against those companies since 2000.
These complaints echo the ones from plaintiffs in pending lawsuits. Many were from customers ages 70 to 90 who claim they were pressured and conned by his salespeople into frittering away tens or even hundreds of thousands of dollars.
Fuljenz dismisses the volume of complaints as insignificant. "It's a feather," he says.
In fact, Fuljenz claims he is the true victim, targeted by a predatory lawyer. Last month, he sued Gibson for libel, slander and business disparagement.
"They're trying to create another story to take the heat off themselves," Gibson says.
Neither the FTC nor state attorneys general offices will confirm whether they are currently investigating the Beaumont coin companies. "We do not make potential targets aware," says Paco Felici, a spokesman for the Texas Office of the Attorney General.
While leafing through the pile of complaints against the coin companies from her office in Washington, D.C., Greisman offers some "general comments" on why a company might use names such as First Fidelity Reserve or 1st National Reserve, which sound like financial institutions.
"Companies can use names that try to deceive consumers about their government affiliation," she says, "or that they're a different type of entity than they are."
Greisman also suggests a reason why closely related companies like the ones in Beaumont may use different business names. "It's to mask their true identity," she says, "so that when complaints come in, it looks as if there were complaints against 20 different, wholly unrelated companies."
The total client base for all four companies, estimated at 175,000, was built by direct advertising, in which customers such as Maureen O'Neill mailed coupons in response to coin ads, Fuljenz says. The ads contain disclosures, in tiny print, informing consumers that "we may contact you from time to time regarding items of interest."
Fuljenz says he does not target the elderly since he advertises not only in places such as AARP The Magazine but also in several mainstream national publications, including National Geographic, Newsweek, Parade, Smithsonian, Time and U.S. News & World Report.
All the companies offer a 10-day refund policy, he adds. And since May 2006 they have operated a phone recording system to provide double verification on sales, meant to protect customers against unauthorized credit card charges made by "rare rogue salesmen," he says.
The majority of complaints, Fuljenz says, are the result of miscommunication or buyer's remorse. "Most clients are wonderful people," he says. "Once in a while they lie; once in a while they puke."
According to his deposition, John Rollins got sick of lying.
In 2005, Rollins sold $4.6 million in coins, earning him $366,000 and the title of top salesman at Universal Coin & Bullion. He was the first person ever at the company to exceed $1 million in sales during a single month. He was 27.
The key to his success, he said, was following orders handed down by management under the direct supervision of Fuljenz and his business partners.
In depositions taken last summer, Rollins and several other former salespeople provided a description of the inner workings of the Beaumont-based coin companies that contradicts Fuljenz's claims and provides support for the scores of former customers seeking redress.
(Many of the former employees who have given depositions, including Rollins, were sued by Fuljenz and his business partners for allegedly breaking their employment agreements, which prohibit them from disclosing any confidential company information.)
In his deposition, Lance Loftin, a salesman for two years at First Fidelity Reserve, said managers instructed him to tell customers that putting money in coins was like putting money in the bank. "If they buy $10,000 worth of coins from First Fidelity, it's really worth about $4,500," Loftin said.
In his deposition, Mark Fumoso, who still works as a sales manager at Universal Coin & Bullion, said that he often encouraged customers to move money out of government-insured certificates of deposit and into coins. When pressed, Fumoso admitted he didn't even know what CD stands for.
"I would tell [a customer] to go to whatever measures, you know, sell stock, do whatever you've got to do as far as moving some other investment dollars around to make it happen because it will benefit you," Fumoso testified.
In his deposition, Fumoso said customers can always say no to buying coins: "I can't jump through the phone and make them do it."
But Rollins and other former employees said in their depositions that customers were in fact forced to buy coins since managers instructed them to make unauthorized charges to customer credit cards.
Rollins also testified that salesmen would run out the clock on the companies' 10-day return policy by avoiding phone calls from irate customers, and then inform them that any refunds would include an expensive restocking fee.
In her deposition, Stacey Hernandez, a saleswoman for 11 years at First Fidelity Reserve, explained the importance of storytelling. "It was because people bought stories," she said. "We were always told to build a story because people buy stories. Not the coin, the story."
And many stories were outright lies, according to Hernandez.
For instance, she said, there was the moose head story, about a couple who bought a cabin in the woods and discovered a trove of one-of-a-kind rare coins in some taxidermy on the wall. Then there was the divorce story, about an amazing deal on rare coins hastily unloaded by a couple in the midst of a messy separation. And, perhaps most common of all, was the tall tale that Fuljenz—known to customers as "the Warren Buffet of coins"—had personally handpicked some coins from the vault for that customer's collection.
The building that formerly housed First Fidelity Reserve even had a "heat room," Hernandez said, where salespeople told made-up stories as part of hyper-aggressive sales pitches to customers. In order to create a false sense of drama and urgency, as if they were operating on an actual trading floor, salespeople often yelled things like "Ten coins gone! Fifty thousand gone!" according to Hernandez.
"If someone just got off the phone with a client, people would ask, 'What did you get them for?' Or 'How much did you get?' Or, you know, 'You took him for this or that...'" Loftin said.
According to several depositions, there was no better storyteller than Jason Whitney, a current sales manager for 1st American Reserve and First Fidelity Reserve and son-in-law of company owner Tyrrell Garth.
"He would give them so much information so fast, and everything almost ran together, that they didn't even know what was going on, really," said former First Fidelity Reserve salesman Aaron Freeman in a deposition.
"[Whitney] sold an individual a coin, and everything that he told the individual about the coin did not pertain to that particular coin," Freeman testified. "It was a totally different story about another coin. And after he got off the phone with the client, he said, 'I'm that good. I didn't even know what I was talking about, and I still closed the deal because I'm that good.'"
Whitney, who did not respond to interview requests, is also fond of invoking religion when selling coins to the elderly, according to several former customers.
In May 2004, 80-year-old Oklahoma resident Mary Wensauer sent a formal complaint regarding Whitney to the Texas governor's office. Wensauer wrote that Whitney convinced her to move all her savings into coins, then made several unauthorized charges to her credit cards.
"Governor Perry," Wensauer wrote, "this incredibly cynical young man even used my Christian faith as a sales tool. He claimed that he had re-dedicated his life to Jesus Christ. He said he prayed about these investments for two hours and that God had given him a 'peace' about it being the right thing for me to do. In later conversations, he always said to remember that 'we' prayed and God gave 'us' peace about doing this.
"As I began to run out of money, Mr. Whitney became increasingly angry and abusive. He quit asking me to invest and started ordering me to do things."
According to depositions from several former employees, Whitney and other managers ordered them to use these bare-knuckle sales tactics. Anyone who complained or questioned them was labeled "a cancer."
"It was always turned around that I was the negative one," said Hernandez in her deposition. "I was the one with the problem."
In his deposition, Rollins said that he approached his managers several times to complain. "I wanted answers. I just wanted to know, hey, just for my own conscience, tell me this is the right thing we're doing." He was called a cancer and instructed to make more calls, he said.
"When [customers] start saying, 'Hey, I'm putting liens on my house to buy coins' and shit like that, and you say, 'Hey, that sounds great,' I mean, look, it gets hard to sleep at night," said former Universal Coin & Bullion employee Shannon Smith in his deposition. "I mean, shit, that guy's probably doing this to help his kid get through college, and I just knocked his head off."
In his deposition, Rollins said he felt betrayed by the companies. "I couldn't get taken care of by the only company that I trusted and—you know, them people were my family," he said.
And he got tired of betraying the trust of his customers.
"We were taught that they'll never send their last dollar," Rollins said, "but it happens."
Kathleen Watkins, an 85-year-old widow, has taught classical and jazz piano and voice from her home in Austin for more than 50 years. She and her late husband, a two-star general in the Air Force, had amassed savings of nearly $400,000.
"I always managed my finances in a superb way," says Watkins, who continues to teach, though she is on kidney dialysis three days a week. "I planned to use it to help my grandchildren and great-grandchildren go to college."
Then in 2001, she responded to a First Fidelity Reserve ad for some silver dollars for her grandkids, and like dozens of others, her finances were quickly turned upside down.
"The supercharged sales tactics that they used were unbelievable, absolutely unbelievable," Watkins says, recalling the urgent late-night phone calls she frequently received. "Once they get your name, they hound you like you wouldn't believe. They pursue you like a fox."
Watkins had the misfortune of dealing with Whitney and another salesman. "They described themselves as convicted, committed Christians," she says. "They asked me to pray for their kids. We were great friends, I thought."
Most experts encourage investors to move no more than 15 percent of their liquid assets into coins. Fuljenz and his partners in Beaumont advise no more than 25 percent. Watkins and several others who are plaintiffs in the pending litigation invested 100 percent, based on the advice of their so-called brokers.
"I feel like such an absolute fool," Watkins says. "I feel so ashamed of it I could just crawl in a hole."
"My mother's salesman explicitly told her not to tell me about it," says Tenley Carp, a Washington, D.C.-based attorney whose 79-year-old mom, Pauline Cowdery, emptied her savings into coins bought from 1st National Reserve.
"The salesman befriended her," Carp says. "He cultivated a cozy relationship so that she would trust him.
Then he completely took advantage of her."
In case after case, it is the children who are left to clean up after their parents' shattered finances.
Maureen O'Neill-Davis learned about her mother's dubious investments from a concerned family friend. "I was fuming," says the 41-year-old Florida resident.
O'Neill-Davis called the Beaumont coin companies to complain but was hung up on, she says. Then she filed formal complaints with attorneys general offices in Texas, Florida and Connecticut. But nothing came of them.
"My mother is gullible," says O'Neill-Davis. "She grew up in an era like many elderly people where they believe that people are generally good and honest and have everybody's best interests at heart, kind of like neighbors.
"So when she sits there and starts to feel like she's developing a rapport with somebody, not thinking that they have any agenda to screw her out of her hard-earned dollars, she's gonna divulge all kinds of information. And she does. And she did. And it came back to bite her in the butt.
"That's my mother. She's honest. She thinks everybody is."
FOLLOW-UP: In a deposition taken nearly four months after publication of this article, Maureen ONeill stated that she did not invest her entire life savings in coins; she testified that she had assets worth substantially more than she spent on coins. Ms. ONeill testified that she lives on a fixed income and had to take money out of a certificate of deposit and stocks to buy coins, that her total purchases were nearly $190,000, and that she believes she was charged about $100,000 more than the coins were worth.
In the deposition, Ms. ONeill also stated that she did not take out a $50,000 home equity loan for the purpose of purchasing coins. Ms. ONeill testified that she had a preexisting home equity line of credit and drew $30,000 on that line of credit to buy coins.
Also, Ms. ONeill testified that she did not use money from her IRA accounts to buy coins because she was unable to do so. She testified that she did move money out of stocks and cashed in a CD to buy coins. Further, she confirmed that her daughter filed a complaint with Florida authorities that 1st National Reserve representatives encouraged her to sell her retirement holdings in order to make coin purchases, which she did.
Finally, the Houston Press article refers to depositions of former First Fidelity Reserve employees Lance Loftin and Aaron Freeman. These were actually sworn statements under oath from these former employees, but were not depositions because the former employees were not subject to cross-examination. FOLLOW-UP: In a deposition taken nearly four months after publication of this article, Maureen O’Neill stated that she did not invest her entire life savings in coins; she testified that she had assets worth substantially more than she spent on coins. Ms. O’Neill testified that she lives on a fixed income and had to take money out of a certificate of deposit and stocks to buy coins, that her total purchases were nearly $190,000, and that she believes she was charged about $100,000 more than the coins were worth. In the deposition, Ms. O’Neill also stated that she did not take out a $50,000 home equity loan for the purpose of purchasing coins. Ms. O’Neill testified that she had a preexisting home equity line of credit and drew $30,000 on that line of credit to buy coins. Also, Ms. O’Neill testified that she did not use money from her IRA accounts to buy coins because she was unable to do so. She testified that she did move money out of stocks and cashed in a CD to buy coins. Further, she confirmed that her daughter filed a complaint with Florida authorities that 1st National Reserve representatives encouraged her to sell her retirement holdings in order to make coin purchases, which she did. Finally, the Houston Press article refers to “depositions” of former First Fidelity Reserve employees Lance Loftin and Aaron Freeman. These were actually sworn statements under oath from these former employees, but were not “depositions” because the former employees were not subject to cross-examination.
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