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Misrepresenting a Rare Coin Investment to a Novice

by David L. Ganz

Column 5 - June 9, 1999
Law and Coins David L. Ganz

1394 Third Avenue
New York, N.Y. 10021

Phone: (212) 517 5500   Fax: (212) 772 2720

DavidLGanz@aol.com

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David L. Ganz Biography
         By the turn of the century, as the new millennium starts, rare coins that became assets in pension plans before August 1981 (when they became legally prohibited in self-directed retirement plans) will start to come onto the market as their owners retire.

         It could happen earlier or perhaps later, but it is nonetheless inevitable because so many of the coins sold in the 1979-81 period of time were purchased by individuals not yet of retirement age.

         These coins represent a substantial segment of the coin market of the future, and are likely to raise legal issues in the process that are of interest to collectors who purchased coins as an investment, even if they didn't put them into a pension or retirement plan.

         No doubt it will also raise issues for the financial planners and advisors who suggested that rare coins be acquired in the first place, without taking the time to educate themselves - or their clients - as to the vagaries of rare coin investment.

         The typical investor problem of the future probably began with a call from a telemarketer. The buyer didn't know too much about rare coins when the telemarketer called and sold them. The telemarketer relies on this and a good, smooth manner.

         They made representations about the investment quality of rare coins and the purchaser, perhaps, invested $35,000 to chase the dream of their financial future.

         Maybe the seller then followed up telling the buyer how well the investment was doing, but eventually, three years or more after the sale, telling them that the investment had gone down and was "probably worth quite a bit less" than the original purchase price -- perhaps 30 cents on the dollar.

         And, as some know all too well, even that amount may be overvaluation for what is involved in the investment vehicle. Multiplied out, it represents hundreds of millions of dollars that are lost.

         In the case of coins placed in pensions, perhaps that call has not yet come -- and the buyer is woefully ignorant of changes in grading standards, and pricing, in the rare coin field.

         In one case recently brought, a buyer got angry, and decided to seek judicial redress, only to find out that the seller claimed that the statute of limitations has expired, and that the buyer was simply out of luck.

         They also claim that there is no continuing duty to their customer to inform them about market declines. In Lawrence Daum vs Rare Coin Investments Portfolios, 1995 Conn. Super. Lexis 2442 (Superior Court, Ct. 1995), this was precisely the issue that faced the court when the defendant merchant sought summary judgment on the claims brought by the purchaser.

         The judge didn't buy it -- at least not on an application to have the matter resolved without a trial. The court likened the case to another area of law: it is "very akin to a securities fraud case", the decision from August 1995 noted.

         That turns out to be important, because where brokers who merely sell may have no continuing duty, false or misleading information that is continually communicated can give rise to a greater duty that continues, thereby extending the statute of limitations.

         None of this says that rare coins are a security, only that the logic of securities law applies to analyzing the potential liability of a seller to a buyer who has been sold a tall tale, and an investment that never passed muster in the first place.

         There's still a long row to hoe before obtaining redress. It will be necessary to prove that there was misrepresentation; that the seller hid data from the buyer, or made continued, deliberately false statements as to the value or condition of the portfolio, and that the seller made some statement about continuing to keep the buyer informed about their purchase.

         But consider some of the representations that are typically made to a buyer from a telemarketer. Figure that the follow-up calls all provide a hint at profits that may not really exist in the first place.

         For the buyer that is prepared to do this, there is ample precedent that enables recovery, and substantial damages. One recent case, FTC v Goddard Rarities (93 Civ 4602)(U.S. Dist. Court, S.D. Cal. 1993), the Federal Trade Commission claimed that it was "virtually inevitable that many consumers will lose a substantial part of investment capital", and successfully sought substantial redress.

         If this is your claim against a telemarketer, to have a chance at succeeding, you'll need to have most of the following information:
  • Sales promotional literature
  • Invoice
  • Correspondence from seller
  • Price updates from seller
  • Storage records (showing where the coins were)
  • Current appraisal (also showing appraised value at time of sale)
  • Specific misrepresentations or misstatements on part of seller

             The specific misrepresentations sometimes can be in the sales pitch, otherwise in subsequent telephone calls about current or past performance.

             Misrepresenting these violates the telemarketing laws of some states (notably California's Business & Professional Code), and the common law of many other states that do not have a specific provision.

             With this information, you may be able to argue that you were blissfully unaware of the changes in the coin market, and that you didn't have the coins, anyway, because of storage requirements to make the assets pension-approved.

             Or, you may be able to make the claim that the seller's statements lulled you into a false sense of security-- and that they had a fiduciary duty to the buyer, which was seriously breached to the detriment of the coin investor.

             It's important to note that not every telemarketer makes misrepresentations, and not every statement made is considered substantial. Some "salesmanship" is permitted - even encouraged - and you should expect it.

             There are some forums where you can seek redress outside the court system. If the seller is a member of a recognized numismatic organization, sometimes that organization will try and mediate, or otherwise resolve the dispute. Other times, a better business bureau can be of assistance.

             One thing's clear: in the next couple of years, we'll be hearing more about this area.


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    Copyright 2000 by David L Ganz, all rights reserved.

    The publisher is not rendering legal or accounting advice and recommends
    that if you seek such advice that you do so from a competent professional.






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