Telephone Pitches Tar Reputations of Coin Dealers

Joel Rettew shuddered when he read the news.

The Federal Trade Commission raided and shut down a Costa Mesa coin seller Aug. 18, charging in a civil complaint that the company defrauded customers by misrepresenting the quality and value of coins it peddled by telephone.

It was the fourth time in 10 months that the FTC had filed civil charges against a company marketing rare coins for investment purposes and the first such action on the West Coast.

But it won’t be the last.

Orange County, land of liquid assets and high-rolling investors, also is home to more than half a dozen coin telemarketing operations that are being scrutinized by law enforcement agents who believe that, while telephone marketing is a legitimate sales technique, some coin sellers are abusing it by fraudulently relieving investors of their bankrolls.

And that has Rettew and other legitimate rare coin dealers in the county concerned--about the image of their profession and about the business the bad publicity is sure to cost them.

“Whenever someone who calls himself a coin dealer gets into trouble, the general public is suspicious of all dealers,” said Rettew, owner of Rare Coin Investments in Newport Beach, one of the three largest and oldest of the handful of county coin dealerships specializing in rare, investment-quality coins.

And in a county where legitimate coin transactions total more than $125 million a year, a slump in business--or heavy competition from often-unscrupulous telephone marketing operations--takes a lot of dollars out of dealers’ tills.

The boiler-room coin sales operations are believed to be taking in an average of $1 million a month each, said Kathryn Holguin, an investigator assigned to the state boiler-room task force in Los Angeles. At least 10 of the 150 telephone marketing operations being watched by the task force are heavily involved in coin sales, she said, and “most of them” are in Orange County. That adds up to more than $100 million a year in coin sales by Southern California-based telemarketers.

And because of a recent surge in the popularity of rare coins as an investment vehicle, the market is being crowded with eager buyers who know little or nothing about coins and how they are graded and priced. They are simply looking for appreciation.

At Numis Group, the Costa Mesa telemarketing operation placed in receivership by the FTC earlier this month, salesmen were allegedly quite successfully selling old Spanish pieces of eight for $850 each. A customer at Rettew can buy the same type of coin for about $85--and Rettew said he buys them wholesale for about $60 apiece.

Numis customers also were buying ancient Roman gold dinars coins, sight unseen, for $400 per coin, according to customer complaints that prompted the FTC investigation and subsequent raid, said FTC attorney Robert Friedman, who supervised the case.

Within a few days, the price had jumped to $750 per coin with no shortage of customers, said Holguin, citing records seized during the raid. The company’s records showed that Numis was paying only $35 each for its dinarii coins, and the FTC closed down the company because it was representing that the coins were worth far more than that, Holguin said.

Numis has been placed under the control of a receiver, and its former officers could not be reached for comment. The receiver would not comment on the case, and the documents filed by the FTC in federal court in Los Angeles have been sealed at the request of the commission.

An FTC official in Los Angeles said a temporary restraining order that prevents the company from doing business has been issued. Further proceedings in the case have not yet been scheduled, and clients are being told that no information will be available until Sept. 18.

Although some novice investors have been paying grossly inflated prices for old coins, there are ways to avoid being victimized, and most legitimate dealers make an effort to establish their credentials and satisfy customers that they are in business to stay.

Investing in coins has long been popular among the very wealthy. Many investment counselors urge clients to place up to 20% of their assets in rare coins or precious metals, or a combination of both, as a hedge against inflation.

But coin investing really blossomed two years ago, when an annual Salomon Brothers survey of 15 investment vehicles ranked rare coins as the top investment for the previous 10-year and 15-year periods.

And the Salomon report for 1987, issued in June, again showed rare coins as one of the best investments around, ranking sixth for the year with a 10.7% compounded rate of return and first for both the past 10 years--a 16.6% annualized rate of return--and 15 years--an 18.8% return.

By comparison, oil was a distant second for the long term, with a compounded rate of return of 13.9% for 15 years. U.S. stamps ranked third at 13.6% for 15 years, while gold at 11.9% and silver at 10.3% finished fourth and fifth for the 15-year investment period.

The Salomon report was quickly seized on by legitimate coin dealers and con men alike and has since become a routine selling tool for coin telemarketers, Holguin said.

And coins--of the right grade and price--can be a rewarding investment.

Coin World, a weekly numismatic newspaper published in Ohio, has a sophisticated computer program that tracks the actual trading prices of 16,576 types and grades of U.S. coins.

Over the 44 months from December, 1983, through July, 1987, the newspaper recently reported, the coin market as a whole stayed relatively flat, appreciating only 4.45%.

At the same time, however, top-quality coins graded as Mint State-65, appreciated 39.96%.

MS-60, the lowest grade of mint state, or uncirculated coins, actually depreciated, losing 1.3% in value over the 44 months. And coins in a middle grade, MS-63, rose in value by only 10.24% for the period--less appreciation than a passbook savings account would provide.

To the untrained eye, the difference between an MS-60 and an MS-65 coin of the same mint, denomination and year is minuscule. But a single grade can mean a difference of hundreds, even thousands, of dollars in market value. And there are 11 grades in the MS scale, beginning with MS-60 and ending with MS-70--a perfect, unblemished, uncirculated coin.

Almost all grading judgments, said Beth Deisher, editor of Coin World, “are subjective . . . made by humans with different eyesight, seeing things in different lighting situations and under differing degrees of magnification.”

There has been an increasing awareness of the problem in recent years, resulting in an industry-wide effort to tighten and standardize grading criteria, she said, “but I can’t really say that there is one national standard.”

Most coin scams, said FTC attorney Friedman, take advantage of that fact. By exploiting their targets’ relative ignorance of the coin market, they peddle lower-grade investment coins at top-grade prices.

The concern over grading standards has given birth to a new industry--professional coin-grading services--and the newest and biggest is located in Irvine, founded by seven coin dealers who hope soon to become the national arbiters of coin grading.

The company, Professional Coin Grading Service, began operating in January, 1986. As of mid-August, it had graded 363,560 individual coins with a stated value of $341.5 million.

The company, which gives each coin to four or more experts and requires that at least three of them agree on a grade before one is assigned, has become the nation’s biggest, surpassing the American Numismatic Assn. Certification Service in Colorado and the Numismatic Certification Institute in Texas, according to Paul Koppenhaver, executive director of the Professional Numismatic Guild.

A major reason for PCGS’ success, said Coin World’s Deisher, is that a nationwide network of dealers has agreed to use only PCGS for the coins they sell and has agreed to honor the grade on any PCGS-graded coins they purchase.

So far, said PCGS co-founder David Hall, a Costa Mesa rare coin dealer, 156 dealers have joined the company’s network, providing a large national market for the coins that PCGS grades.

And PCGS guarantees to repurchase, at the current market price for the grade it issued, any coin that is subsequently shown to be of a lower grade.

Hall’s coin company, Numismatic Investment Group, is one of three major investment-oriented coin dealerships in the county. Another is Hannes Tulving Rare Coin Investments in Newport Beach. The third is Rettew’s Rare Coin Investments.

There are about 50 coin shops of all types in Orange County, but most cater to collectors rather than well-heeled investors. Fewer than half a dozen of the shops are investment-oriented, and the three major dealers--Rettew, Hall and Tulving--claim to do at least $55 million a year in business. In terms of volume and proximity--all three dealerships are within walking distance of one another--they make up the largest concentration of rare, investment-quality coin shops on the West Coast, a spokesman for Tulving claims.

All three are active in numismatic circles and voiced deep concern about the rise in fraudulent coin-marketing programs.

The FTC takes the coin con situation so seriously, Friedman said, that it is preparing a brochure on coin-investing safety tips for distribution nationally.

“It is clear to us,” he said, “that coins are one of the burgeoning areas of telemarketing fraud.”

Southern California is especially vulnerable to coin fraud because there is a lot of liquid wealth concentrated in Los Angeles, Orange and San Diego counties and because many fortunes here were built on risky real estate deals and their owners aren’t put off by a whispered promise of a 30% return in six months. In addition, many con men simply like it here and tend to congregate in areas like Newport Beach, where they can more readily enjoy the cash brought in by their boiler rooms.

Thus, the first rule in avoiding being taken in a coin deal is to never, ever, buy coins over the telephone from someone promising big returns in a hurry.

“If it sounds too good to be true, it is,” said Coin World editor Deisher, echoing the credo of every fraud investigator in the country.

“And if you are not going to take the time to read books and learn yourself,” she counsels, “then know your dealer.”

That advice, said Chris Link, a Newport Beach businessman and coin investor, can save investors a lot of heartache--and money.

Link, who declined to be further identified because of concerns about his security, said he was “a small collector until about two years ago, when I began investing for appreciation” at about the time the Salomon Brothers index showed how well coins had been doing.

Coins now “are a significant portion of my investment portfolio, probably about 50%,” said Link, who buys “only Morgan dollars and walking Liberty half-dollars, because I think they are the most beautiful coins the government has ever issued--and because there is a big market for them.”

But when he began investing, Link said, “I was not very knowledgeable . . . and I was disappointed in quite a few of my early deals. You have to become knowledgeable about prices and grades before you do any serious investing,” he cautions, “and you also have to find reputable dealers.”

To do that, says Rettew, “ask for his bank references. A bank will tell you how long he’s been in business and how reliable he is.”

Rettew also suggests asking a dealer for a list of his professional affiliations and publications. Members of the 32-year-old Professional Numismatic Guild, for example, must have a certified minimum net worth of $100,000 in their inventories, must have been professional dealers for at least five years and must meet a number of other qualifications, including a proven level of service to the numismatic world. Additionally, their financial status and character references are checked by an outside firm, and they agree to submit any disputed dealings with a client to binding arbitration.

Other safety measures, said Allen Ury, a spokesman for Hannes Tulving, include doing business with dealers who guarantee to buy back coins--at the originally assigned grade--if a customer becomes dissatisfied.

“Coins are safe, and can be a good investment,” said Holguin, the boiler-room task force investigator. “But you have to get the right grade at the right price.

“It amazes me that people will shop around for weeks when they are looking for a car but don’t shop when they are going to invest their life savings.”