Ponzi Scheme: The Modern-Day Gold Rush

Ponzi Scheme Gold Rush? In the last couple of years, many media outlets have reported Californians migrating to other states, including Texas. It was only a matter of time before Texas, Waco in this case, added a citizen at the heart of a California Ponzi scheme. Over a three-year period 120 customers invested $21 million with California’s Regal Assets LLC, Tyler Gallagher and Leah Donoso. Gallagher and Donoso misappropriated the investors’ savings that were intended to be invested in precious metals. CFTC’s Press Release Not since the Gold Rush days have Americans experienced the amount of commodities fraud as they have in recent years. With the ability to invest retirement savings into precious metals like gold and silver, the investment fraudsters are circling like land sharks. Regal Assets is but one player, but their methods are familiar. How the Precious Metals Investment is Supposed to Work Regal Assets was a precious metals retailer, focusing primarily on people with retirement accounts, although they did have customers with non-retirement accounts as well. The Ponzi scheme works particularly well with people with large retirement accounts. Once a customer agreed to the sales terms of the deal of purchasing gold and silver, Regal emailed customers a confirmation email claiming to have secured the precious metals at an agreed-upon price. For compliance purposes, customers must open (or already have) a Self-Directed IRA account (SDIRA). Regal prepared the application on the customer’s behalf and sent it to them for signature. The customer’s application included instructions to liquidate their retirement accounts and send the proceeds to the new third-party SDIRA custodian. The SDIRA custodian in turn transferred the money to Regal’s bank account. At that point Regal was supposed to pay for precious metals on behalf of their customer. Now it gets sticky. To keep the tax-deferred status of a retirement account, the customer cannot take possession of the precious metals. What could possibly go wrong? Regal was to instruct the precious metals wholesaler to ship the gold and silver to a metals depository to be held in the investor’s name and SDIRA account number. The depository was to provide confirmation to the SDIRA custodian when they took possession of the precious metals. CFTC Complaint For non-retirement accounts, the process was a little more straight-forward. Since the vast majority of investors scammed in this case involved retirement accounts, we’ll focus on those investors. What Happened to the Money? Gallagher and Donoso decided they had other ways to use their customers’ $21 million than to honor the investment contracts. In addition to Ponzi payments, the two enriched their own lives. A few details were provided in the CFTC Complaint. Over one million dollars was paid to several PayPal accounts related to Gallaher’s video-gaming business. Gallagher used $800,000 to make mortgage payments on his Beverly Hills home. Gallagher settled a lawsuit for $170,000 relating to box seats at a sports arena. Gallagher’s girlfriend received $150,000, along with $146,000 for an apartment. Gallager paid for a driver and housekeeper with another $150,000. A Cadillac Escalade and a Tesla ate another $146,000. Gallagher and Donoso both raked in large salaries and bonuses, along with $469,000 to Donoso’s husband. Total payroll during the scheme was $4.1 million. Donoso took $868,000 of precious metals as a bonus in addition to salary and bonus. Regal paid $1.6 million to credit cards and $1.1 million for legal fees. The Ponzi scheme was well-documented. One example is from November 2021. Regal Assets owed customers $7 million in precious metals, but had less than $350,000 in its bank accounts. When five new customers invested $2.7 million, Defendants purchased precious metals for earlier customers. Only one of the five customers ever saw any of their investment. CFTC Complaint Lies and More Lies Donoso seemed to develop a pattern of lying to customers via email. When people inquired why metals were not showing up in their accounts, Donoso would say things like “it takes three days to show up” or she often blamed the depository. Donoso told one customer’s attorney, “The Vault was told Friday to get everything keyed in immediately. . . I hope and pray these will be keyed in his account by late tomorrow. . . . If I have to fly in person and stand in front [sic] of someone to see that this is done, I will.” By spring of 2022, the Ponzi Scheme was unravelling. When the SDIRA custodian decided to review the accounts associated with Regal Assets, they found many accounts never received precious metals. SDIRA notified the customers in writing, and that was the beginning of the end. How to Avoid the Precious Metals Scam Just like other Ponzi schemes in oil and gas and investment fraud in digital currency, your due diligence can save your assets. Check to see if the company and the sales person is registered with the state and/or the federal government. Most states have a commodity trading commission. In California, it’s the Department of Financial Protection and Innovation. For the federal government, it’s the Commodity Futures Trading Commission at cftc.gov . Neither Gallagher nor Regal were registered. Check as many references as you can before signing on the dotted line. Verify receipt with the SDIRA custodian. Don’t rely on the broker or the broker’s reports. Make sure you have a relationship with the custodian independent of the broker. Check criminal history and even Better Business Bureau. Although in this particular case, that may not have yielded much information. Act quickly. At the first sign of trouble, jump on it. Push until you have solid answers. Commodities fraud is growing, and it’s an area that is ripe for fraud. We hope all your real estate, commodities, crypto-currency and oil and gas investments are safe and profitable. But if you find yourself searching for an experienced oil and gas litigation lawyer or a commercial litigation lawyer, we are here to help.