WEST PALM BEACH, Fla. (CN) – A gold dealer defrauded customers of $13 million by taking money without buying or delivering the goods, the Commodity Futures Trading Commission claims in court.
The CFTC sued Worth Group, of Jupiter, Fla., its owner Andrew Wilshire, and its sole officer and director Eugenia Mildner, in Federal Court.
The CFTC claims that Worth engaged in illegal off-exchange transactions by failing to deliver metal to customers within 28 days, as required by law, and charged storage fees and interest for nonexistent metal.
Worth received more than $73 million in customer money between July 2011 and December 2012, according to the 31-page lawsuit.
“Worth purports to sell physical commodities, including gold, silver, platinum, and palladium, on a leveraged, margined, or financed basis (‘retail commodity transactions’ or ‘financed transactions’), as well as on a fully paid basis (‘fully paid transactions’) to retail customers located throughout the United States,” the complaint states. “Worth is managed by its 100 percent owner, Andrew Wilshire (‘Wilshire’), and its president, Eugenia Mildner (‘Mildner’).”
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a financed transaction such as those conducted by Worth is an illegal off-exchange transaction unless it results in actual delivery of metal within 28 days of accepting the customer’s order.
The CFTC claims that Worth often failed to make such delivery on a timely basis, misrepresented delivery dates on statements, and used customers’ money to finance other customers’ purchases.
Instead of buying metal and delivering it to its customers as promised, Worth bought metals derivatives in its own trading accounts, according to the complaint.
“Because Worth receives only a relatively small ‘down payment’ when its customers make a financed metals purchase, and Worth generally has not had access to outside lines of credit, Worth has been forced to ‘self-finance’ financed transactions to attempt to make physical delivery as required by the exception,” the complaint states. “Self-financing the volume of financed business Worth transacts requires many tens of millions of dollars.
“In its efforts to meet the demands of self-financing for its financed transactions,
Worth has cheated, defrauded, or deceived another category of its customers, who Worth has incorrectly perceived as falling outside of the CFTC’s jurisdiction: those who have made fully paid purchases following the implementation of Dodd-Frank.
“During the relevant period, Worth has represented to fully paid customers that it delivers precious metals purchased on a fully paid basis within 28 days of purchase, making delivery either to the customer or to a depository for the customer’s benefit. In most instances, however, Worth has not purchased any physical metals for fully paid customers unless the customer has demanded personal delivery. Instead, Worth has purchased financial metals derivatives in margin accounts owned by Worth that would purportedly ‘cover’ customer transactions, but that did not involve any transfer or physical delivery of precious metals to either Worth or its retail customers. Because Worth has been required to post only a fraction of the value of a customer metal purchase to open these derivatives positions, it has been able to use the remaining funds to purchase physical metals for financed retail commodity transaction customers.
“Despite using funds paid by fully paid customers to purchase physical metal for financed customers, Worth still fails to make timely actual delivery to many of its financed customers, and thus violates the CEA [Commodity Exchange Act] by failing to conduct those transactions on a regulated exchange.
“Worth’s failure to make timely actual delivery to its financed customers also constitutes fraud. Although Worth leads customers to believe that they have purchased physical metals from Worth for delivery to a depository by a date certain, Worth’s financed customers do not in fact receive metals on those terms, and as a result are unknowingly subjected to additional counterparty risk in the form of exposure to Worth’s financial stability.
“The scale of Worth’s retail precious metals activities is substantial. During the period from July 18, 2011 to Dec. 31, 2012, Worth’s customers contributed over $73 million to Worth accounts and purchased precious metals valued by Worth at over $264 million through fully-paid or financed transactions.”
Worth lured clients through a network of soliciting firms, which charged substantial commissions that were deducted from clients’ money. For those customers who financed a portion of their purchase, Worth added account-opening fees, storage fees and interest to the loan balance as soon as the purchase was complete, even though the metal was not immediately available, according to the complaint.
“These various spread and interest charges combine to quickly reduce the equity in customer accounts, and to place the viability of the customer account at risk,” the complaint states. “When the equity in a customer account is reduced to 10 percent, customers are deemed subject to a margin call, and must send additional funds to Worth to supplement the equity in the account. If they are unable to do so, Worth liquidates the customer account at a loss, which is done by the end of the day on which the account fell below the 10 percent equity threshold, without the customer’s permission. With certain very limited exceptions, Worth does not provide its customers with any notice prior to liquidating their account.”
The CFTC claims that 92 percent of Worth’s customer accounts lost money, and their losses totaled more than $13 million.
It claims that, as persons controlling Worth’s precious metals operations, Wilshire and Mildner are liable for Worth’s violations of the Commodity Exchange Act.
Wilshire, who previously ran Wilshire Investment Management Corporation, was found liable for violations of the Commodity Exchange Act and regulations and for failure to supervise employees. The commission withdrew his registration as an associated person for commission registrant firms in March 2007, according to the complaint.
The complaint against Worth is the third action the CFTC has brought against entities and individuals who purport to buy precious metals and transfer ownership of those metals to customers, when insufficient metal, or no metal at all, is in fact purchased and delivered, the CFTC said in a statement.
It seeks an injunction, disgorgement, restitution, civil penalties and treble damages for violations of the Commodity Exchange Act.
It is represented by Theodore Polley III, of Chicago.
Worth said in a statement: “We believe the CFTC’s allegations are without merit and do not accurately reflect Worth Group, Inc.’s business practices. Unlike previous companies the CFTC has taken action against, Worth Group, Inc. has depositories that are holding tens of millions of dollars of physical precious metals for its customers, completely covering their purchases. None of Worth’s customers’ positions are covered by contractual obligations.
“Fully paid transactions account for a very small percentage of Worth Group, Inc.’s business, so it is inaccurate and unrealistic to suggest the company has used the purchase price of fully paid-for metals from these transactions to finance metals purchased by Worth’s customers who used financing. Our suppliers have delivered over a million ounces of actual physical precious metals to independent warehouses in the United States to back up our customer orders, and those warehouses hold the metals in the names of our customers.”
Worth said its business practices are consistent with the requirement that delivery be made within 28 days.
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