On Monday, May 15, 2023, Commodity Futures Trading Commission (CFTC) and state regulators in California and Hawaii announced they have filed a joint civil enforcement action in the U.S. District Court for the Central District of California against a precious metals dealer, its chief executive officer (CEO), and a senior account executive for perpetrating a $61.8 million USD nationwide fraudulent scheme.
The complaint charges defendants Red Rock Secured LLC (Red Rock), its Owner and CEO, Shade-Johnson Kelly aka Sean Kelly, and Senior Account Executive Anthony Spencer with executing an ongoing nationwide fraud that solicited and received over $61 million in customer funds to purchase silver and gold coins. Red Rock is a Nevada limited liability company with its principal office located in El Segundo, California. Kelly and Spencer both reside in the Los Angeles area.
“Today’s filing is another example of the CFTC and state regulators working cooperatively to protect the investors and root out fraud in the precious metals markets,” CFTC Director of Enforcement Ian McGinley said on Monday. “It illustrates our shared commitment to hold accountable those who would undermine the public’s faith in our markets by taking advantage of often vulnerable victims.”
In the continuing litigation against the defendants, the CFTC, the California Department of Financial Protection and Innovation (DFPI), and the Hawaii Department of Commerce and Consumer Affairs (DCCA) seek disgorgement of ill-gotten gains, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations of the Commodity Exchange Act, CFTC regulations, as well as various provisions of state law.
The complaint alleges that, from at least November 2019 and continuing through at least February 2022, the defendants made knowing or reckless misrepresentations and omissions to prospective and existing customers to induce them to purchase precious metals from Red Rock, in particular silver and gold Canadian Red-Tailed Hawk (RTH) coins.
As alleged in the complaint, the defendants convinced hundreds of customers to transfer funds in their tax-deferred retirement accounts, including individual retirement accounts (IRAs), 401(k) plans, and the U.S. Government Thrift Savings Plan, and use those funds to purchase the RTH coins from Red Rock through self-directed IRAs. The defendants also solicited and accepted funds from hundreds of customers to purchase precious metals from Red Rock using non-retirement funds.
The complaint further alleges the defendants knowingly or recklessly misled these customers into believing that Red Rock’s mark-up on these coins—i.e., the difference between what Red Rock paid to acquire the RTH coins and the price Red Rock charged its customers for those coins—would fall between either 4% to 29% or, in some instances, 1% to 5%. In reality, Red Rock routinely and repeatedly charged mark-ups ranging from approximately 100% to 130% on the RTH coins, and did not tell customers the actual mark-ups charged. In addition, the complaint alleges the defendants made other misrepresentations and omissions about, among other things, Red Rock’s relationship with various mints, in particular the mint which produced the RTH coins; pricing and mintage of the RTH coins; “bonuses” and “discounts” purportedly offered to Red Rock’s customers; and the purported “retail/market value” of the customers’ RTH coins.
In total, according to the complaint, the defendants fraudulently solicited approximately $61.8 million from more than 950 customers to purchase RTH coins. Red Rock charged its customers approximately $34.4 million in mark-ups on those purchases, as part of the defendants’ fraudulent scheme.
Parallel Civil Action
In a simultaneous filing, the Securities and Exchange Commission (SEC) commenced a suit against the defendants and another individual for violations arising from the fraudulent precious metals scheme and rendering unlawful investment advice.
The CFTC thanks and acknowledges the assistance of the SEC. The CFTC also thanks its co-plaintiffs in this action, the DFPI and DCCA, for their assistance.
The CFTC Division of Enforcement staff members responsible for this action are Michael Loconte, James Garcia, Erica Bodin, Daniel Jordan, and Rick Glaser.
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CFTC’s Precious Metals Customer Fraud Advisory
The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Precious Metals Fraud Advisory, which alerts customers to precious metals fraud and lists simple ways to spot precious metals scams.
The CFTC also strongly urges the public to verify a company’s registration with the CFTC before committing funds. If unregistered, a customer should be wary of providing funds to that entity. A company’s registration status can be found at NFA BASIC.
Customers and other individuals can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382), file a tip or complaint online, or contact the Whistleblower Office. Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected paid from the Customer Protection Fund financed through monetary sanctions paid to the CFTC by violators of the CEA.