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A cautionary tale for gold and silver buyers

Some Monex customers allege that they were misled and even lied to by the Newport Beach firm and lost thousands of dollars on their precious metal investments, despite the bull market in gold and silver.

November 20, 2010|Michael Hiltzik

In these troubled economic times, it's not hard to understand why people might want to protect their life savings by purchasing a hard asset like gold or silver.

At least, that's the pitch of Monex, the big Newport Beach investment firm, which bills itself as "America's trusted name in precious metals investments" and assures clients that it's "committed to customer service."

So let's take a look at the experiences of some customers who say their trust in Monex was misplaced.

Patricia Mike, 66, of Camarillo says she had no prior investing experience when she and two adult daughters discovered Monex via the Internet in 2008, according to their lawsuit in Orange County Superior Court. Mike owned an annuity and an inheritance worth $240,000 that she wanted to protect. Her daughters, Susanne Drumheller and Johnna Mike-Price, had the proceeds of a lawsuit.

Banks were failing, the stock market had cratered. Their Monex salesman assured them that their idea of buying gold bars was the right one — calling it a "very safe, no-risk investment," the lawsuit says. They say they invested a total of $689,500.

Then the pressure started, their lawsuit alleges. Within days, the salesman was urging them not to sit on their gold bars but to trade actively in the metals market, according to their suit, so they could "double their money," even "quad" their investments.

Over the next eight or nine months he called and texted them relentlessly, sending thousands of text messages, up to 30 a day, urging them to make trades, they claim. Mike, Drumheller and Mike-Price say they gave in to his hectoring, but didn't realize that he had them buying and selling gold and silver on margin — using money purportedly lent them by Monex to make investments much larger than their original stakes. They assert that some of these trades were made without their authorization or contrary to their instructions.

Over the period in which the family held Monex accounts, both gold and silver rose in price. Mike told me they lost a total of $450,000.

Monex's response to the lawsuit was to say the dispute should be handled in arbitration, which is scheduled for next year.

Then there's Rudolph Shaffter, who was a 70-year-old retiree in Menominee Falls, Wis., when he opened a Monex account in 2006. Ultimately he invested $273,000, relying on his salesman's representations that some of his clients were doubling and quadrupling their money, according to a suit Shaffter and four other plaintiffs filed in Orange County Superior Court.

Nothing to it, the representative said — he'd make the decisions on the account, and Shaffter would only have to reply "yes" to questions asked on a recorded line, the suit alleges. Over the next few years, his suit claims, Shaffter's account showed aggregate purchases of $11.3 million in precious metals and he was charged commissions of $87,272. When it was all over, Shaffter alleges, he was almost completely wiped out. He now lives mostly on $229 a month in Social Security.

Monex, in an answer to his Orange County Superior Court lawsuit, denies wrongdoing and contends the losses were "purely the result of adverse precious metals market conditions." Yet both gold and silver have been on a virtually unbroken bull market since he opened his account.

A hearing on Monex's motion to force Shaffter's lawsuit to arbitration is scheduled for Jan. 26.

Kevin Walker of Johnson City, Tenn., was the lead plaintiff in a 2004 class-action lawsuit contending that Monex misled its customers in numerous material ways. When a Monex lawyer asked Walker during a deposition to explain why he sued, he replied, "I felt like they underhandedly lied to me throughout basically my whole trading sessions."

The lawsuit concluded last year with a $150,000 payment by Monex to Walker and his fellow class members.

Monex's website says it was founded in 1967 by Louis E. Carabini, whose son is now associated with the firm. That's an interesting claim, in light of Monex's legal position in a lawsuit that could hit the company hard.

The 2008 case, filed by the IRS in Los Angeles federal court, seeks more than $378 million in taxes, interest and penalties dating at least to the 1980s. Some of the tax is due from what the government asserts were "abusive" tax shelters on which Monex claimed tax losses.

Monex says in court filings that those claims apply to a different, legally distinct Monex. The feds say that's a fraudulent dodge, insofar as today's Monex entities acknowledge that they operate at the same address and with the same phone numbers as the old Monex, and given that today's Monex traces its pedigree back more than 30 years to its founding by Carabini. The case is still in discovery.

I asked Monex for comment on the issues raised by customers and by the federal government. They never got back to me.

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