Two Southern California precious-metals brokers have filed lawsuits against customers who demanded their money back, raising eyebrows among government regulators who say the firms are operating in a gray area of commodities law.
American Precious Metals Ltd. and First American Currency Inc., both of Laguna Hills, recently filed suits against customers who claimed they lost money and complained to federal regulators.
The customer sued by First American recently filed his own $5.1-million fraud and racketeering suit against the company, claiming that he lost $113,000 by investing in installment contracts for silver and palladium.
"It's a very obvious piece of legal strategy designed to cost the customer money so the customer will back off," said Dorene Wolf, a senior counsel for the Department of Corporations. She described the lawsuits against customers as "an intimidation tool" and "dirty pool."
The two companies are among hundreds of precious-metals brokers selling deferred delivery contracts in which customers typically make a small down payment on a credit contract and hope to profit as the metal's price fluctuates.
In 1978, the federal government imposed a moratorium that prohibits all but three companies--early arrivals in the field--from selling such contracts. First American and American Precious Metals are not among the three exempted companies.
Arthur Salzberg, regional counsel for the Commodity Futures Trading Commission, said the suits filed against customers have attracted regulatory attention to the precious-metals companies.
He declined to comment on whether the CFTC is investigating either firm but warned about the "very severe consequences" faced by investors who deal with unregistered commodity brokers. Salzberg said investors are at risk because the companies cannot be audited by regulators and background checks are not required for their sales staff, among other things.
Alan Weil, the attorney representing both metals companies, denied that he is advising his clients to take an aggressive posture against disgruntled customers. In both cases, he said, the metals dealers contend that the customers are bound by valid investment contracts and that their losses were due to the volatile metals market, not company practices. Whether the companies are registered with the CFTC is not an issue, he said in a recent interview. The companies "contend (that they are) not selling futures contracts and are not required to be registered by the CFTC," he said.
In August, American Precious Metals made headlines by filing an $11-million slander suit in Orange County Superior Court against Marc Gitomer, a Pennsylvania musician who signed an investment contract but later complained to federal regulators and demanded his money back.
The suit claimed that Gitomer's complaints caused American's president, Sheldon Eskow, to suffer "severe and continuing mental anguish, humiliation, distress and emotional shock and injury."
The same month, First American filed suit against Jerry Sorensen, a Visalia oral surgeon who says he lost his entire pension fund by investing in the metals market.
In a lawsuit filed Oct. 21 in federal court in Fresno, Sorensen alleges that First American officials "made fraudulent representations regarding their status as registered commodity brokers and traders" and refused to confirm orders that he placed for the purchase of silver and palladium. Sorensen's suit alleges that First American never bought the silver or palladium he agreed to buy but "fraudulently charged $38,146.50 in fees for purchasing nothing of value."
Gil Traylor, First American's president, declined to comment on Sorensen's suit. Other First American officials declined to disclose any information about First American, referring all questions to Weil.
Of Sorensen's suit, Weil said: "This a case of a disgruntled customer who suffered some losses in the market with his eyes wide open."
A copy of the First American contract filed with the lawsuit does warn potential investors to "seriously consider if you can absorb the loss which purchasing precious metals can engender."
Sorensen said the money he invested with First American was previously invested in certificates of deposit.
"I was looking for a higher rate of return and everyone I talked to said it was a prime time for buying (metals)," he said.