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Precious metals Ponzi scheme defrauds over 200 investors

The owner of a rare coin business in Salt Lake City, Utah, has recently been hailed into court by the Securities and Exchange Commission, the U.S. Futures Trading Commission and the Utah Division of Securities for a precious metals Ponzi scheme that defrauded over 200 investors in sixteen different states. The scheme defrauded investors over $170 million since 2013.

The scheme

The company at issue is Rust Rare Coin, Inc., a company solely held by Gaylen Rust of Salt Lake City, UT. Rust’s scheme recruited investors to pool funds for the purchase and sale of physical silver bullion. Rust told investors he purchased silver bullion as prices dropped and sold as prices rose, increasing the amount of silver held in the pool and each individual investor’s share of silver simultaneously. However, Rust lied to investors. There was no silver being stored, nor was he making any trades. To cover his tracks, money from new investors was paid to existing participants to keep the operation afloat, a classic Ponzi scheme move. From January through August of 2018 alone, $42 million coming in from new investments was used to turn around and pay out $26 million back to existing investors as false redemptions.

A pool of lies

Rust told investors that the company kept almost $80 million in physical silver bullion stored at various locations nearby, when in reality there was no silver held in storage. No trading was taking place, other than diversion of funds to precious metal dealers for his retail coin operation. Instead, Rust provided false account statements to the investors that made it appear as if their quantity of physical silver bullion was increasing, silver which was purported to be held in storage by Mr. Rust, but in reality was not.

Instead of using investor funds to purchase silver, Mr. Rust diverted the funds to his horse racing business, a music and production studio, and a catering and event planning business. The funds were also used to make mortgage and other direct payments to members of his family, in addition to the funds paid out to investors as false redemptions.

Red Flags

In retrospect, there were some red flags present. Investors were not offered a prospectus or offering circular, and there was no investment contract between the parties. Rust claimed he never lost money, and the investor’s account statement never showed any expenses for storage of the bullion or the cost of the independent auditor who supposedly verified that silver shipped to storage matched the investor’s account ledger.

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