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Main | Mississippi Man Gets 20 Years For State's Biggest Ponzi Scheme »
Friday
Nov162018

SEC, CFTC Accuse Utah Man Of $170 Million Silver-Trading Ponzi Scheme

State and Federal regulators have accused a Utah man and his company of scamming hundreds of investors out of up to $170 million on promises that trading in silver could yield annual returns of 20% to 40%.  Gaylen Dean Rust and his company Rust Rare Coin, Inc. were the subjects of enforcement actions filed by the Commodity Futures Trading Commission ("CFTC"), Securities and Exchange Commission ("SEC"), and the State of Utah Division of Securities ("State of Utah") alleging that Rust and Rust Coin operated a massive Ponzi scheme and violated federal securities and commodities laws.

Rust Coin has been in business since 1983, operating as a coin and precious metal dealer in Salt Lake City.  Rush served as Rust Coin's President and sole Director and was assisted by his wife, Denise Rust, and son, Joshua Rust, who served as the Secretary and Manager, respectively, of Rust Coin.  Beginning no later than 2008, Rust and Rust Coin began soliciting potential investors for an exclusive investment opportunity involving the purchase and sale of silver (the "Silver Pool").  Potential investors were told that their money would be pooled with other investors' funds to purchase and store physical silver for investment, and that the physical silver would be stored at one of two Brink's, Incorporated ("Brink's") depositories in Salt Lake City and Los Angeles. 

Those potential investors were told that Rust and Rust Coin were able to buy and sell silver based on market trends that resulted in annual returns ranging from 20% to 25% and at times reaching 40%.  Those investors were not provided with any written agreement, disclosures, or prospectus, but rather received a single-page receipt documenting their investment.  Rust and Rust Coin raised staggering amounts from investors.  The SEC alleges that Rust raised over $85 million from roughly 300 investors from just January 2017 to August 2018.  According to the CFTC, this total increases to over $170 million during the period from May 2013 to August 2018.

As the CFTC states, "the Silver Pool was a sham."  Rust and Rust Coin did not consistently obtain extraordinary annual returns ranging from 20% to 40% from astutely timing the purchase and sale of silver, but instead allegedly used funds from new investors to pay returns to existing investors - the classic hallmark of a Ponzi scheme.  Indeed, many of the representations Rust and Rust Coin made to investors were demonstrably false.  For example, neither Rust nor Rust Coin had any contract with Brink's to store or hold any silver at any of their locations in the United States.  And while Rust claimed that he had an account with HSBC Bank through which he traded silver held in the Silver Pool, neither Rust nor Rust Coin ever had an account with HSBC Bank to trade silver.  

According to authorities, it appears that Rust and Rust Coin instead misappropriated investor funds for personal expenses such as mortgage payments and transfers to other entities controlled by Rust.  For example, over $1 million was transferred to a Rust business that specialized in horse racing while another nearly $10 million was transferred to another Rust-controlled entertainment company where it was used for upkeep for a music and production studio.  From January 2017 to August 2017, over $70 million of the $85 million raised was used to make payments to investors.  

Ironically, one of the investors named in the CFTC and Utah's Complaint may have inadvertently drawn attention to his status as a net winner.  H.H., who was employed by Rust Coin as an IT specialist from July 2017 to July 2018, received a $35,000 share in the Silver Pool as part of his employment and later decided to invest $96,000 of his own funds based on the promises of outsized returns.  This resulted in an initial investment of $129,000.  Yet when H.H. was terminated from Rust Coin in July 2018, he sought to terminate his investment and ultimately received a wire transfer of $171,793.02 representing his initial investment and employment benefit of $129,000 and purported investment gains of approximately $42,793.  Given the appointment of a Receiver and the significant gains that investors have suffered, it is a near certainty that H.H. will be asked - either voluntarily or through litigation - to return the excess "net profits" he received by virtue of his investment that were actually stolen funds from other investors if the operation was a Ponzi scheme.  

At the request of the CFTC and State of Utah, a U.S. District Judge for the District of Utah entered an Order appointing Jonathan O. Hafen as a Temporary Receiver to marshal and secure assets belonging to Rust, Rust Coin, and other defendants and relief defendants.  It is unclear as to whether any assets remain for potential distribution to investors, although the SEC alleges in its complaint that approximately 99% of the funds raised from January 2017 to August 2018 were either paid to investors or misappropriated.  

A copy of the SEC's complaint is here.

A copy of the CFTC's Complaint is here.

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