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The Rare-Coin Business Feels a New Tarnish : Investing: Two Newport Beach firms--a dealer and a value-rating service--are among the latest accused of abuses. The government may regulate the business if things don't change.

September 02, 1990|GREGORY CROUCH | TIMES STAFF WRITER

Jimmy Hayes was in New Orleans looking for buried treasure.

The year was 1958 and he was 13. Up and down Royal Street he traveled, stopping at store after store looking for something like a doubloon. Deep inside an antique shop, he discovered a piece that would launch a lifelong coin hobby--an 1889 gold dollar that cost $21.

Now a member of Congress, Rep. Hayes (D-La.) tells this story as a remnant of a bygone era when coins only interested kids and small-time collectors.

Today, the rare-coin industry has outgrown its penny-ante status and become big business. Electronic trading, nationwide appraisal services and Wall Street limited partnerships have made the corner coin dealer something of a relic.

For the Record
Los Angeles Times Sunday September 23, 1990 Home Edition Calendar Page 95 Calendar Desk 1 inches; 16 words Type of Material: Correction
The Jill Giegerich profile (Sept. 9) erred on the name of art theoretician Jacques Derrida, calling him Carlos.

With the industry's growth has come big problems. Fraud, long a problem in the largely unregulated rare-coin business, recently reared its head in a grand way.

The Federal Trade Commission last month filed a complaint against Newport Beach-based Hannes Tulving Rare Coin Investments, one of the nation's largest coin dealers, saying it bilked thousands of investors of as much as $40 million. The company denied the charges but agreed to be placed in receivership. And this week, the agency charged that a Florida coin dealer, Certified Rare Coin Galleries, misled investors about the investment potential of coins. It ordered the firm to return $400,000 to customers.

While the allegations of fraud are worrisome, an even bigger concern is an FTC charge that a major grading service has made false and misleading claims to investors. Grading had been heralded as a standardized way of rating coins that could eliminate most consumer rip-offs.

The FTC last month filed a complaint against Newport Beach-based Professional Coin Grading Service, one of only three grading services in the nation, saying that the firm misled investors in advertising and promotional materials.

FTC consumer protection director Barry Cutler called the consent decree "the most significant and far-reaching complaint in the coin industry to date."

The impact is even being felt on Wall Street, where some major brokerages have gone into rare coins in a big way. Merrill Lynch and Kidder, Peabody & Co. have formed multimillion-dollar limited partnerships that invest in rare coins, and Salomon Brothers Inc. maintains an index of rare coins to gauge the rise and fall of those investments.

Some analysts believe that the recent government crackdown on rare-coin dealers and graders could chill investment in an industry whose reputation has again been sullied.

As a result, the rare-coin fraternity finds itself at a fork in the road. The industry is debating whether to provide better self-regulation or face greater government oversight. The answer could determine whether the rare-coin industry rises to be an equal of the stock and bond business or whether it will be relegated to a sideshow where caveat emptor is the creed.

For decades, the rare coin business was small, with a somewhat sleazy reputation. Before the 1980s, serious investors rarely considered old coins as a way to finance a college education, a new house or retirement.

Those who did often paid dearly. There was the Boston man, for instance, who invested a $500,000 settlement from a medical malpractice lawsuit filed on behalf of his brain-damaged child. The coins he purchased turned out to be worth only $5,000.

"For many years, the coin industry was filled with flagrant abuses," admitted New York rare-coin dealer and author Scott Travers. "We don't have abuses like that today."

The industry has come a long way in cleaning house in recent years, say industry officials and government regulators. But some, including FTC officials, wince at dealer claims that rare coins are as safe an investment as stocks and bonds and perhaps more profitable.

"There is less fraud but there is still a lot," said Phoebe Morse, the FTC's New England director. "We still get letters every week from people who bought coins and then find out they were only worth 15% of what they paid for them."

The public's fascination with rare-coin investing is partly fed by market indices which show gains for rare coins of as much as 50% in a year. But these returns are based on a very limited number of coins, many of them very rare and costly. The widely quoted Salomon Bros. U.S. Coin index ranks numismatics as the fourth-best performing investment in the last year, but that figure is based on only 20 coins.

The biggest factor in the rare-coin industry's growth and increased legitimacy in recent years is grading--a measure of the physical condition of a coin on a scale from 1 to 70. Those coins considered investment-grade hover around MS-65 (MS means Mint State).

Before there were nationwide grading services, buyers were pretty much forced to rely on grades assigned by the same dealers selling them the coins. This was a sure-fire system for swindling because a dealer could mark up a coin several grades and the customer wouldn't be the wiser.

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