SANTA MONICA (CN) - In a "massive bait and switch" scheme, a precious metals dealer "bilked consumers out of tens of millions of dollars" by promising gold and silver bullion and then aggressively persuading them to buy overpriced coins instead, a state prosecutor claims in court.
The Santa Monica City Attorney's sued Santa-Monica based Seacoast Coin, Inc., also known as Merit Financial and Merit Gold and Silver.
City Attorney Marsha Jones Moutrie claims that since at least Sept. 26, 2009, Merit has run a bait and switch scam by enticing customers - many of them senior citizens - to order gold and silver bullion at "1% over cost," then bullying and deceiving them into buying overpriced collector's coins.
Also sued are the company's co-owners, Peter M. Epstein and Michael J. Getlin, both of Los Angeles County.
Merit's advertisements promote gold and silver bullion - bars and coins worth their melt value - as an excellent investment. The defendants claim they sell the bullion at "1% Over Cost," according to the city attorney.
But Merit has "no intention to sell gold and silver bullion at 1 percent over cost, or at all," the lawsuit states. "Instead, their business model depends on, and they have intended, selling the overpriced coins instead of bullion, at a much higher markup. In fact, selling gold and silver bullion at 1 percent over cost is not a viable business model for defendants in light of their substantial overhead including advertising, labor costs, and other expenses."
Gold and silver bullion are commodities that carry a relatively small profit margin for precious metals dealers like Merit. Collector's coins and "numismatic" and "certified" gold and silver coins are more profitable to Merit, as they typically fetch higher retail prices than bullion and their markup is easier to conceal, according to the complaint.
To persuade consumers, who seek a safe investment for their savings, to switch from bullion to overpriced coins, Merit falsely states that the coins offer more privacy than bullion, are not "reportable" on taxes and cannot be confiscated by the government, unlike bullion, according to the complaint.
Merit also intentionally confuses consumers "as to which products they are buying, so that many still believe they are paying only 1 percent over Merit's cost when in fact they are paying far more," the attorney's office says in the complaint.
Merit's sales people, who are given incentives to sell the overpriced coins, "pretend to impart objective investment advice, touting gold and silver as an investment while also discouraging bullion and pushing the overpriced coins. However, the investment 'advice' is not at all neutral, but is designed solely to sell the overpriced coins. As a result, consumers unknowingly pay more than they intended, for products they did not want," the complaint states.
Most of the overpriced coins have little or no extra value above Merit's bullion products. Even assuming gains in the prices of gold or silver, consumers are not likely to recoup their initial investment within a reasonable period of time because of how overpriced the coins are, the complaint states.
The nationwide scheme has allowed Merit to defraud consumers of "tens of millions of dollars," as a "typical Merit customer 'invests' five figures, six figures, or more in overpriced coins," the complaint states.
The State of California seeks injunctive relief, civil penalties and restitution of money wrongfully obtained from customers.
Santa Monica has won two previous judgments against Santa Monica-based precious metals dealers, Goldline International and Superior Gold Group, in 2012.
Superior Gold shut down its business and was ordered to pay $2 million in restitution. The settlement with Goldline called for it to pay more than $5 million in refunds and agree to an injunction requiring that it disclose its actual price markups, not tell consumers that the government can confiscate gold bullion, and not attempt to sell customers higher-priced coins once they have already paid for bullion, according to the City Attorney's Office.
"We hope this is a wake-up call to other large coin dealers and to other businesses," Adam Radinsky, head of Santa Monica's Consumer Protection Unit, said at the time about the judgment against Goldline. "They need to know that it's against the law to mislead consumers with false fears and misinformation. And consumers need to be especially careful when investing in this uniquely unregulated industry."