THE GEMSTONE FORECASTER VOL. 14, NO.4 - PART TWO

TABLE OF CONTENTS PART TWO

CANADIAN BOILER ROOM UPDATE

Gemstone Scams
This is an excellent article by the Jewelers-Circular Keystone, a gemstone trade publication. Remember, if anyone "high pressures" you into any investment that sounds "too good to be true", this should tell you to watch out!

JCK Magazine, October, 1996
"When I hear the word 'gemstone', fireworks go off," says Mary McDonald (not her real name). Her image of gems and fireworks is not beautiful and thrilling. Her fireworks are full of rage and terror, her gemstones clouded with lost hope and trust.

MacDonald's father, a farmer in Ohio, poured $150,000-his life savings-into the pockets of Canadian-based gemstone telemarketers who hounded him three to five times a day with telephone calls lasting 45 minutes or more. "It was brainwashing," says MacDonald. "After you hear what a good deal it is for hours, you feel you must take a leap of faith." Her father did, time and again, in a frantic attempt to recoup his growing losses.

James McDonald (also not his real name) was not alone. More than 2,200 Americans suffered a total loss of $50 million due to the scam, says Michael C. Hartman, a certified fraud examiner and the U.S. Postal Service inspector who investigated the case. James McDonald began to invest in telemarketed gemstones in the 1980s. Back then, these "boiler room" operations were run out of Florida, with a sales pitch touting gemstones as a good investment. Poor quality stones were sold at grossly inflated prices to uninformed buyers as a hedge against inflation. A government crackdown sent the telemarketers fleeing to Canada, first to Toronto and then to Montreal. The scam artists set up operation again, but with a new tactic-the "liquidation story"-using new company names and old client lists. The gemstone sellers called the customer and offered to sell their gems to other buyers overseas. Great, the customer would respond.

But there was a catch. The telemarketers would tell the customer, "Because yours is the smallest portfolio, you must buy one more gemstone," says Hartman. The customer would then invest $5000 or $25,000 for another poor stone. The gems were sealed in plastic with a certificate of authenticity from New York or Florida. If the plastic was broken, the telemarketer would inform the client, the stone could not be returned for resale. This prevented a true appraisal. Each time a customer was sure he or she was buying the last gemstone needed to complete the portfolio, another complication would arise. "Imagine taking out a loan to buy one more gemstone," says Mary MacDonald. "Imagine the joy of the anticipated windfall, the relief that the loss was going to be paid off finally, that your savings would be safe again. Imagine having that joy turn to fear and desperation when the deal fell through again. Being told by your salesperson, 'It was all your fault! You screwed up the deal!' This was the type of emotional turmoil my father endured." That was typical, says Hartman. The victim would be blamed for holding up the deal and would get a series of telephone calls from different people-a certificate driver, then an account opener, then a senior sales officer and then the overseas buyer-so he would think he was dealing with separate and credible representatives. The pitch was sophisticated, says Hartman. The con artists changed their business names, voices and locales to avoid capture and embellish their stories. "Oh, you dealt with (the old company name). We are (the new company name)." They pointed out the negatives of the old company and the positives of the new one, never letting on they were one in the same.

At the beginning of each month, says MacDonald, the telephone calls would begin from companies named Equity Control Exchange, International Exchange Board, Capital Exchange Board, Associated Overseas Investor Services, Bo-Shek Cutting and Polishing Inc. and more. Each told her father not to deal with anyone else or the deal would fall through. "It made it seem something was really going on in the gemstone market," she says. She and her three sisters tried to intervene. One sister tried to contact the salesperson, only to be told he was out. She left an angry message with his secretary. The salesman called James MacDonald. "I do not talk to daughters; I do not talk to sons," he said. "I talk to you because it is your money." Her father's face turned red. "It became almost a panic to my father," she says. "He kept digging himself in deeper in hopes he could get out of debt." In anticipation of reaping $435,000, her 79-year-old father took out some bank loans-$18,000 for one stone. "They wanted him to mortgage his home," she says. "Thank God he didn't."

Others did. They also took out credit card loans. They were told, "You have to beg, borrow, and steal," says Hartman. That's how he and the U.S. Postal Inspection Service got involved. The Reverend Robert Finkbeiner, who lived near York, PA lost $300,000 of his own money to the telemarketing scam. Believing he could recoup his losses and make more money, he took out $1.1 million in loans under false pretenses. The loans-to pay Associated Overseas Investors Services-were from two banks, a social services agency of which he was president and the agency's primary contributors. While MacDonald's family filed complaints with 16 agencies in the U.S. and Canada from September, 1991 to March, 1992, it was not until the U.S. Postal Inspection Service heard about Finkbeiner that it got involved. The service combined forces with the Royal Canadian Mounted Police,and the chase was on. The Postal Inspection Service couldn't touch the telemarketers because they were on foreign soil. But when the con artists flew to a satellite office in Boca Raton, Fla. to recruit pitchmen in September, 1993, they were arrested. Eventually, 47 people and 11 corporations were charged. Thirty-seven pleaded guilty: 26 have been sentenced to three to 51 months in prison each. More are awaiting extradition. Fines exceed $400,000. Restitution totals more than $3 million.

But this doesn't lessen the pain and loss for the MacDonald family. One telemarketing salesman who worked five hours a day, four days a week earned $2 million in commissions during a 2 1/2 year period. James MacDonald, now 85, will be lucky if he gets back $1,000. "Our lives are ruined because we can't trust anyone anymore," says Mary MacDonald. "If they had acted on our complaint (in 1991), Finkbeiner wouldn't have been involved." The MacDonalds feel victimized by the justice system. But there is one person who draws their praise-CFE Mike Hartman.

His battles continue. "I have been doing this almost non-stop for 30 months," says Hartman. Currently, he's investigating two more boiler room operations, one already shut down, one not. He estimates victims have lost $20 million to these operations. The latest developments? One "freelance" in Boca Raton was arrested. There is Montreal to investigate. There are more gemstones and fireworks to be watched.

For more information on Canadian Boiler Rooms see The Gemstone Forecaster, Vol. 14, #3, Fall, 1996

PRIVACY SECTION

Safe Deposit Theft Claims on Rise
Los Angeles Times
Thanks to subscriber C.M. of California for sending this article to the Gemstone Forecaster. Those of you who hold substantial assets in your safety deposit box may want to contact your insurance company regarding insuring your valuables. Although these charges are unproven allegations, forewarned is forearmed.

A great book on this subject is How to Bury Your Goods: the Complete Manual of Long Term Storage. You can buy it on-line at http://www.amazon.com.

"Did someone sneak into the vault of Bank of America's Century City branch, manage to get into the safe deposit boxes of at least three customers, steal hundreds of dollars of jewelry, cash, and gold coins, and, in some cases, substitute fakes-all without the bank's knowledge?

That is the substance of allegations contained in three separate lawsuits filed in Los Angeles County by former customers of the branch at 1901 Avenue of the Stars, which closed last year.

The bank denies the thefts occurred. But if they did, they would not be unprecedented: Clusters of safe deposit thefts have been reported in recent years. Just this month, Chicago police reported that at least six customers opened safe deposit boxes at a bank in the Loop to find more than $500,000 in diamonds, jewelry, and gold coins missing. Although rare, such thefts highlight the vulnerability of safe deposit boxes, which consumers have heretofore believed virtually impregnable. According to Bank Security report, an industry newsletter, a new breed of thieves may be targeting safe deposit boxes. "Many safe deposit robberies are apparently being perpetrated not by intruders, but by bank customers: renters of safe deposit boxes who gain access to others' boxes," the newsletter reported. And box holders may not learn of a theft for years unless they carefully check the contents periodically.

In Century City, the alleged thefts were uncovered only after the bank, a former Security Pacific National Bank branch, sent notices to the customers to clear out the boxes in preparation for a move to a new branch in the spring of 1995, the customers say.

According to court documents:

The victims say they reported the alleged thefts to police and the FBI, as well as to the bank. Neither the police or the FBI said they have records of any formal investigations into the complaints. As for the bank, the alleged victims say the bank executives have stonewalled them at every turn, refusing to turn over internal investigative reports and, in one case, refusing even to answer legal questionnaires, according to court documents. For its part, the bank said: "We have three lawsuits pending relating to claims of items allegedly missing from safe deposit boxes at the Century City Branch. We've investigated all three claims and have concluded they are all without merit. We therefore intend to proceed with our defense of the lawsuits, and we believe we will prevail." said spokesman Peter Magnani.

The people who say they suffered losses aren't taking the bank's explanation at face value. A. Richard Grossman, a physician after whom two Southern California burn centers are named, is half owner of the gold coins. "The coins had been inviolate for years," he said, "When I first heard about it, I felt sad and thought, 'It's not right.' But then I thought about it, and I got mad." Thieves opened plastic vials containing some of Grossman's gold coins, replaced the middle coins in a stack with counterfeits, then put genuine coins at each end so that a casual inspection would not show them missing, Grossman's suit alleges. Grossman and his business manager, Eugene Kaufman, who owns the other half of the coins, flatly denied any attempt to defraud the bank through a false claim.

Meanwhile, Carole Cramer, 66, of Bel-Air says she first noticed missing jewelry from her box in 1992, according to court documents. At the time, she assumed she had simply forgotten to replace the jewelry in her box, and thought it had been stolen from her home, she said in an interview. She even called police and hired a private investigator, who turned up no evidence of a home burglary, she said. Several months later, she discovered other missing items and complained to the bank manager, Bruce Baker. "I said...I know specifically that there's a piece I know is missing. He said...( the bank would) do an internal investigation, but nothing came of it." Cramer sued the bank in September, 1995 and is now in court seeking to compel Bank of America to answer legal questionnaires about the alleged thefts. In response to Cramer's suit, the bank argued that the jewelry was not stolen. "Assuming...the subject jewelry was placed in the subject box, it is more likely than not that Cramer removed the subject jewelry herself and failed to return it to the subject box," the bank said in its trial brief.

In the third case, Mara Gudis, a San Fernando Valley woman in her 60s, says she discovered that $175,000 in cash was missing from her box when she answered a bank notice to clean it out in March, 1995, her suit alleges. "She was extremely distressed at what happened," said her lawyer, Ronald Rale. "Imagine having your nest egg taken from you." Again, the bank said there was no evidence of theft.

Safe deposit box thefts have been in the news in recent years. Earlier this month, at least six customers of Firstar Bank in downtown Chicago discovered missing diamonds, gold coins and other jewelry valued at more than $500,000. In that case, there was no sign of forcible entry into the boxes, leading police to believe that bank insiders may have been involved. FBI and Chicago police are investigating the reported thefts. "It has to be one of three things: either the (perpetrator) was a customer who was very good at picking locks and did it all himself, or he had help from an employee...or there was bank management who broke the rules at the bank, allowing him more leeway than he should have had," said Chicago police Sgt. Michael Siciliano.

In 1994, a New York city jeweler reportedly lost more than $115,000 in cash and jewels from a safe deposit box at a Manhattan branch of Republic National Bank of New York. Five or six other customers subsequently reported losses from safe deposit boxes the same day, said Phillip Burgess, a bank spokesman. Burgess said the alleged thefts are under investigation.

Still, law enforcement officials say safe deposit box thefts are rare. Security in most banks is tight. As a result, it's often difficult for victims to prove a theft occurred, or even to prove that items supposedly stolen were ever put in the box in the first place. In some cases, individuals who suffer thefts are loathe to go to authorities, fearing a phone call from the IRS wanting to know what was being hidden.

But observers say the risk to consumers, though small, is nevertheless real. Unlike deposits, items in safe deposit boxes are not insured by the federal government, and private homeowners insurance usually limits losses from safe deposit boxes. One problem for consumers is that thefts can go undetected for months. Bank Security Report details one new method thieves are using to gain access to safe deposit boxes. The thieves rent their own safe deposit box. Later, acting in pairs, they gain access to the vault to open the box. One distracts a guard long enough to make a wax impression of a master key and return it, which can take just a few seconds. With the duplicate, they can later enter the vault and access other vaults if left alone and unguarded.

Perhaps because safe deposit thefts are rare, police and FBI officials in Los Angeles seem unclear about who has responsibility for investigating theft reports. When asked who has jurisdiction over such thefts, LAPD detectives say the local FBI does, while FBI investigators point to the police. Robert Mack, supervisory special agent in the bank robbery squad of the FBI's Los Angeles office, acknowledged that federal jurisdiction applies to safe deposit thefts that occur during the course of burglary or robbery. Any other safe deposit box theft would fall under the purview of the police, he added. But detectives in the West L.A. division of the LAPD, denied they would investigate such thefts. "We don't handle it," said Detective Patrick Anguiano, coordinator of the division's burglary unit. "It's not our jurisdiction."


The information provided in this newsletter has been derived from research and sources believed to be reliable. However, no guarantee is expressed or implied as to their validity. Opinions included herein are subject to change without notice. The gem market is speculative and unregulated. Certification does not eliminate all risks associated with the grading of gems. Recommendations are meant for those who are financially suited for the risks involved. Past performance is not a guarantee of future performance. Neither NGC nor The Gemstone Forecaster guarantee a profit or that losses may not be incurred as a result of following its recommendations. They may also hold positions in areas they recommend. Subscribers should not view this publication as investment advice, nor is it intended as an offer or solicitation with respect to the purchase or sale of any security.
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