SEC case accuses firm of abusing retirement savers with multimillion-dollar coin scheme

A California advisory firm's alleged scheme to persuade government workers and other investors to move tens of millions of dollars of savings into overpriced silver and gold coins highlights the dangers of self-directed retirement accounts.

The Securities and Exchange Commission and the Commodities Futures Trading Commission — which, respectively, oversee the securities and futures markets — on May 15 charged Red Rock Secured with five alleged violations of federal securities laws. Among other things, the unregistered firm in El Segundo, Califorina, is accused of using alarming statements about the stability of the U.S. stock market to persuade hundreds of customers to drain savings out of their 401(k)s and similar accounts and put the money into so-called self-directed retirement accounts.

These accounts have long been subjects of concern to federal regulators, in part because they have relatively few guardrails on what they can invest in. Regulators have issued alerts during the past year about the risks associated with both self-directed accounts and investing schemes directed specifically at older investors. In February, the SEC joined the Financial Industry Regulatory Authority, which oversees broker-dealers, and the North American Securities Administrators Association, which represents state regulators, to warn of the dangers of self-directed individual retirement accounts, or IRAs.

"Fraudsters may be more likely to exploit self-directed IRAs because custodians or trustees of these accounts may offer only limited protections," the regulators warned.

'Premium' coins
The SEC said Red Rock and its representatives urged customers who had moved their savings into self-directed accounts to buy so-called premium coins that they said would be sold at a markup of no more than 29% over the cost of minting them, plus a 2% sales commission. In reality, the smallest markup was usually greater than 100%, according to the regulator.

Read: Millennials care more about their parents' retirement than their own inheritance

The asset Red Rock most often steered customers toward was a premium silver "Red-Tailed Hawk" coin that came with a markup of 130% and that provided an 8% commission to sales representatives. The SEC said the firm sold more than $50 million worth of premium coins to 700 clients between January 2017 and June 2022.

"As our complaint alleges, the defendants used fear and lies to defraud investors out of millions of dollars from their hard-earned retirement savings," said Antonia Apps, director of the SEC's New York Regional Office.

Target clients
Along with Red Rock, the SEC is bringing its allegations against the firm's CEO, Sean Kelly, and two senior account executives, Anthony Spencer and Jeffrey Ward. The perpetrators of the alleged scheme, according to the SEC, had a certain type of retirement saver in mind. 

An email sent by a Red Rock employee to a company that might help advertise the firm's services listed various desirable client traits, including being "Right Wing Conservative," "59+ years of age," and "anyone who works for the government" and owns a "Thrift Savings Plan" — a retirement plan offered to federal employees. According to the SEC, the defendants reached out to savers using an extensive marketing campaign of millions of emails a month, telephone calls and advertisements in various media sources.

Many of the emails the company sent out contained the line: "Most people are worried about losing money in their retirement accounts. At Red Rock Secured we convert that money into physical gold & silver so they can enjoy a worry-free retirement." 

Red Rock also circulated an investing guidebook that warned that investing in the stock market was like "putting all your eggs in one basket" and that "another market down turn is coming." The book and the company's website both falsely suggested that metal prices move inversely to the stock market and have always outperformed the market. 

The firm, in an official statement, accused the SEC and the CFTC of trying to control the precious metals industry.

"Around a decade ago, Congress voted down requiring precious metals dealers to disclose their markups," according to the statement. "The argument made in committee was that the U.S. mint sells to customers with markups that oftentimes exceed the markups charged by Red Rock and other precious metals dealers."

 The firm said it is preparing a "vigorous defense."

The SEC's case also accuses Red Rock of market manipulation. The firm, according to the SEC, had an exclusive agreement to purchase the Red-Tail Hawk coins from a metals distributor in California which in turn had an agreement to buy them from the Canadian mint where they were made. On one occasion, according to the SEC, a prospective client found the coins for sale on another company's website and questioned Red Rock officials about the offer.

Red Rock eventually responded by buying up all the coins. The SEC complaints notes that the 770 coins then bought made up only a very small percentage of the 1.3 million Red-Tail Hawk coins the firm is alleged to have sold.

"The fact that Kelly quickly moved to ensure that a tiny fraction of the number of silver Red Tailed Hawk coins sold by Red Rock would no longer appear on the Canadian company's website, shows the extent to which he and Red Rock knew, and made certain, that they, and not the market, set the price of silver Red Tailed Hawk coins," according to the SEC's complaint.

The SEC's case, filed in federal court in Los Angeles, is seeking to have the company pay penalties and refund any ill-gotten gains. It's also asking for Kelly to be permanently banned from serving as an officer or director of a public company.

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Regulation and compliance 401(k) Equities Financial crimes Investments Investment returns IRAs Lawsuits Litigation Risk Risk management Sales and marketing Securities Securities fraud
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