Editor’s Note: Paul Montgomery, past president of the Professional Numismatists Guild, and Lyn Stevens, a Texas-based attorney, operate a precious metals site, but most recently made the news because of their role in the PCA/PCI coin fraud case in which nearly $1.9 million was awarded to plaintiffs. Coin Update reporter Michael Bugeja interviewed Montgomery and Stevens about their crusade to combat coin fraud. Montgomery, one of the country’s leading numismatists, served as past president for Bowers and Merena Gallery, now Stack’s of New York. He is a lifetime member of the American Numismatic Association and was honored in 2008 with the association’s President’s Award for his contributions to the industry. Stevens, a Life Fellow of the Texas Bar Foundation, holds Board Certification in Personal Injury from the Texas Bar Association. He operates the website Coin Fraud Lawyers.
COIN UPDATE: Paul, you have said that you and Lyn Stevens are on a crusade to stop coin fraud. What sparked that crusade and why is it important for the hobby?
MONTGOMERY: When I was 11 years old I bought my first really rare coin from a local coin shop in Nassau Bay, Texas. It was a 1916-D Mercury dime that I bought as a VG for $90. It took three months profits from my paper route to pay for it! It was the cornerstone of my collection and I was very proud to show it. I still often talk about that coin today because I remember how excited I was to bring it home, punch out the “rare” tab in my Whitman coin board and display the coin. Many years passed and in 2004 my parents gave me my collection when they moved from their home. Of course, I went straight to that coin. By that time I was a veteran dealer and recognized the coin’s obverse as an AG instead of a VG. That was disappointing enough but when I turned the coin over to see the reverse (back), my heart stopped. I immediately recognized the coin as a counterfeit with a pasted on mint mark. Wow, someone sold an added mint mark to an 11 year old. I will never forget how disappointed I was that day.
This kind of marketplace fraud still happens every day and it makes my heart sick. The first real fraudulent deal I saw as a professional was back in 1984, my first year in the business. A recently widowed woman came into the shop where I was working and showed me her husband’s collection in order to sell it. Her husband had bought the coins from a nefarious dealer on the East Coast whom I was familiar with. She explained that she and her husband had purchased the coins to pay for their retirement years. Long story short is there was no remedy for her. She sold her collection for a little over $60,000 dollars in auction after having paid over $600,000. She had to go back to work in her 70’s to make ends meet for the rest of her life. It makes me angry to think about it. The industry was certainly different then. I refer to it as the “wild, wild west.” This was before PCGS and NGC, and most dealers did their own grading. Fraudulent transactions are clearly as old as the hobby, I just wasn’t around yet. Since that time with the widow in 1984 I have done everything I can to champion the victims; whether it is appraisals, referring collectors to lawyers or various attorneys general, and have offered to testify on many occasions on behalf of victims.
Lyn Stevens came into the picture back in 2008 when we worked on our first case together. He is a brilliant legal mind who also shared a heart for these victims. He and I have teamed up and are chipping away at the pile. We have to do better. The marketplace has to be safe in order to convince newcomers to the hobby. As coin and metals prices have grown to higher and higher levels over the last 10 to 15 years we’ve seen a lot of new and less experienced players are coming into the marketplace, many of which prey on the unsuspecting new collector. I’m going to continue to go after the bad guys every chance I get. In fairness to the majority of the dealers out there, Michael, I must say that my experience has been that 95% of the guys are doing their best to give people a fair shake. It’s the other guys Lyn and I are after. You mess with our hobby, you better watch out for us!
COIN UPDATE: We often hear caveat emptor when it comes to buying self-slabbed or over-hyped coins. Some dealers I know actually believe anyone foolish enough to lay down good money in coins without knowing the basics of the business essentially gets what they deserve. It seems you don’t believe in that line of thinking. What about caveat emptor?
MONTGOMERY: Well Michael, I guess I agree with you for the most part here but it’s not an easy thing for consumers. There are ways to check for credibility among sellers but they are not perfect, not by a long shot. We need a new system of authority to certify and govern dealer practices. I could write about that forever and I assure you this is on my agenda for the coming years. In my opinion, a true certification for dealers is necessary to grow the hobby. Before the American Medical Association, anyone who studied a medical book could call himself a doctor. Before the state bar associations, anyone who read the law could call himself a lawyer. We have not done enough to protect our consumers as a trade and it needs to be done. While it’s true that buyers should shoulder some of the burden and do need to be more careful when they buy, the predators out there are very good. They shouldn’t be allowed to call themselves professional numismatists.
COIN UPDATE: What else can you tell us about coin fraud that we have not covered here?
MONTGOMERY: It’s important to know that there are remedies for fraud victims. Most write their issues off as bad investments and forget about them. There is help out there. Along with the services Lyn and I provide, the Professional Numismatists Guild has an arbitration process available when member-dealers are involved in a dispute with a consumer. Also the Numismatic Consumer Alliance that is run by industry legend John Albanese, a consumer advocate with undeniable credibility.
COIN UPDATE: Lyn, from a legal standpoint, what role if any does the defense of caveat emptor have in cases of coin fraud?
STEVENS: The Latin term “caveat emptor” means “buyer beware” and is, at its heart, the purist form of capitalism and while its strict application may prove beneficial to the businessman, its application has been severely curtailed for many decades. The more reasonable approach in businesses today focuses more on “fair market value” principles in consumer businesses. This means a consumer should expect to pay a fair market price for a good or service and not fear being bamboozled by cunning and deceptive dealers. To protect consumers, almost all states have some form of consumer protection statutes and most States Attorneys General have consumer protection divisions to prevent false and deceptive practices. To cut to the point, caveat emptor is no longer favored by the courts because it tended to only hurt the consumer and provide no recourse against a deceptive dealer.
COIN UPDATE: What are the legal ramifications, if any, for self-slabbers who sell silver melt as rare coins, grading a cleaned EF Morgan, say, as MS66?
STEVENS: Such fraud has always been actionable in a suit against the self-slabber. In addition, most states have what is commonly called “Deceptive Trade Practices Acts,” which will not only provide a consumer protection against fraudulent representations such as you mentioned, but also punish the self-slabber for intentionally misrepresenting the grade and value of the coin. If the self-slabber uses the US Mail and repeatedly misrepresents the value in a scheme against consumers, then they find themselves liable to treble damages under the Federal RICO act.
COIN UPDATE: Lyn, are there any legal consequences for an auctioneer or auction company offering these self-slabbed coins with descriptions that cite Red Book or PCGS prices?
STEVENS: Auctioneers may believe that they are protected because they are simply repeating the coin grade or value given by the seller. However, since the commission and fees earned by the auctioneer are based in part on the coin’s selling price, they need to be aware of any problems such descriptions and representations pose. If the auction house has knowledge that the coins are materially misrepresented in grade, then they can be liable for selling the coins. The focus is whether there was a material misrepresentation or just an honest difference of opinion; and, what that difference means. Some coins have very little difference in the fair market value between a MS65 and MS66, while others have a significance difference in value. So, each situation is unique.
COIN UPDATE: We know at least one Internet auction company that is changing its terms of service because of this PCI/PCA case, assigning liability to auctioneers for any statements about value. What specific advice can you provide for these companies, assuming its terms of service would exempt them from liability?
STEVENS: These “terms of service” are contracts that attempt to limit the buyer’s remedies to seeking to recover only against the sellers. Such attempts to limit a consumer’s rights are subject to each State’s laws, so a buyer needs to realize that such limitations may be valid. Having said that, most states will not allow a consumer to waive a right to sue for deceptive consumer practices or for fraudulent transactions. Again, the focus is on the action or inaction of the auctioneer. Some questions that should be asked would include: 1) did the auctioneer know of the misrepresentation; 2) has the auctioneer taken any steps to insure that the products it auctions are legitimate; 3) is there a history of misgraded coins on the auctioneer’s site; 4) has the auctioneer ignored past problems of fraudulent transactions by this seller on its site; and, 5) what steps has the auctioneer taken to insure that fraud that has occurred has been corrected.
In short, the Internet auction company may attempt to insulate itself from duped buyers, but many states will not allow such contracts and may require the auctioneers to stand behind the representations made by sellers of the coins.
COIN UPDATE: If a coin buyer, dealer, auctioneer or auction company suspects coin fraud, what should they do?
STEVENS: No one should risk becoming involved with deceptive sellers and should walk away from the deal. To curb such practices, there are several things that a buyer, dealer or auctioneer can do: 1) if the seller is a PNG or ANA dealer, the buyer should report the dealer to those organizations; 2) the buyer should check to see if the seller is a member of the Better Business Bureau, and file a complaint with the BBB; 3) the buyer should report the dealer to the State Attorney General in the state where the dealer does business. Most State Attorneys General keep track of precious metal and coin dealers and will regulatory action, including revocation of their license for repeated violations and/or prosecute the dealer if the fraud is substantial (such actions has occurred in some states, including Texas); and, if the buyer has been duped, they should consult an attorney and seek legal advice as to what actions they can take to recover damages. At one time, the Federal Trade Commission prosecuted coin fraud, but now seems to be leaving enforcement to the States and private litigation.
COIN UPDATE: Lyn, is there anything else you would like to add concerning legal liability or processes involved in coin fraud?
STEVENS: The sale of graded bullion poses the most significant area of coin fraud, especially upon the elderly. This generation has amassed a life time of savings and grew up in an era of openness and trust. They are also the generation that fear economic instability and gravitate toward the assumed safety of precious metals. So, they are easy prey for unscrupulous dealers. And, they along with most consumers have no idea of the true populations of bullion coins or their own ability to have a coin graded (even an MS70) at an insubstantial price.
Further, as Paul Montgomery stated, without certification or licensing of dealers through organizations like the ANA or PNG, state or federal intervention is inevitable. If a collector wants to insure that they are paying good value, the only safeguard in the hobby is to seek assistance from–or only buy from–a PNG dealer. For more information concerning coin fraud, visit www.coinfraud.com. If any of your readers are interested in further discussions, they can reach me at email@example.com or call me at 409-835-5200.