CFTC Tags Goldline

Goldline, Inc. recently entered into a settlement with the CFTC.  The settlement was reduced to an Order.  Here are some key takeaways from that Order:

According to the CFTC Order, in June 2017, A-Mark purchased all of Goldline, LLC’s assets, and created Goldline, Inc. After A-Mark acquired Goldline, it replaced Goldline’s management and installed its own management as Goldline’s senior management. The new Goldline management changed some of Goldline’s prior policies and procedures with respect to the metals that Goldline offered, as well as representations concerning those metals. Specifically, two key areas changed. First, Goldline began to solicit, accept orders for, and otherwise deal in leveraged, margined, or financed, off-exchange retail commodity transactions in metals with members of the general public. Second, Goldline made certain misrepresentations in its customer account agreements and other solicitation materials.

Goldline offered what it called the Collateral Finance Program (“CFP”). Under the CFP, Goldline customers could use their currently-owned or newly-purchased metals to secure loans of up to 75% of the current ask price of those metals, which could then be used to purchase additional metals from Goldline. Until the loans were satisfied, the financed metal purchases never changed hands between Goldline and the customers and were subject to Goldline’s exclusive control. None of the customers who purchased metals through the CFP took delivery of their metals within 28 days of their transactions. Over 230 Goldline customers financed metal purchases through the CFP, and Goldline received net income from the program totaling $627,801.78.

Moreover, new Goldline management amended its prior customer account agreements and other solicitation materials concerning the concept of “break-even” (i.e., the percentage by which Goldline’s bid price would have to increase before the customers would break-even on their transactions). The break-even concept is an important element in the risk calculus performed by customers when deciding to buy metals. Prior to its acquisition by A-Mark, Goldline’s customer account agreements and other solicitation materials explained the concept of break-even by way of two examples of sales of its metals to customers. Both of those examples correctly calculated the percentage by which Goldline’s bid price would have to increase before a customer could break-even. However, after its acquisition by A-Mark, Goldline changed the explanation of the breakeven point in the customer account agreements and other solicitation materials. This new explanation misrepresented the percentage by which Goldline’s bid price would have to increase before a customer could break even.

Finally, Before A-Mark’s acquisition of Goldline, Goldline’s customer account agreements and other solicitation materials stated that if customers wanted to sell metals originally purchased from Goldline at some point in the future, Goldline would buy back those metals from customers at Goldline’s then-current buyback price (i.e., Goldline’s bid price) for the metals. This buyback policy provided customers with the comfort of knowing that Goldline would provide a market to repurchase customers’ metals in the future.  However, new Goldline management decided to change the buyback policy. Specifically, Goldline entered into an outsourcing agreement with the Metals Dealer. Pursuant to this agreement, the Metals Dealer would replace Goldline as the buyback entity for Goldline customers. However, the Metals Dealer was under no obligation to continue the Goldline buyback policy as set forth in the customer agreement. It had sole discretion to set its own price, regardless of the Goldline buyback price. Despite this significant change in the buyback policy, Goldline did not change its representations in the customer agreement or other solicitation materials that: (1) Goldline would be the re-purchaser; and (2) that a customer would receive the Goldline buyback price. The agreement between Goldline and the Metals Dealer also contained a provision under which the Metals Dealer would represent itself as Goldline at all times when engaging in buyback services for Goldline customers. Consequently, while representing itself as Goldline, the Metals Dealer offered to buyback Goldline’s customers’ metals at the Metal Dealer’s current bid price rather than, as stated in the customer agreement and other solicitation materials, at Goldline’s buyback price (or bid price).

Goldline’s retail-financed precious metals transactions that it executed with its customers did not result in actual delivery to the customer within 28 days from the date of the agreement, the contract, or when transaction was confirmed. Therefore, Goldline’s transactions were not excepted from the Commission’s jurisdiction.

Sections 4b(a)(2)(A) and (C) of the Act make it unlawful for any person to “(A) cheat or defraud or attempt to cheat or defraud the other person” or “(C) willfully to deceive or attempt to deceive the other person by any means whatsoever in regard to any order or contract or the disposition or execution of any order or contract.”  “To establish liability for fraud, the Commission must prove: ‘(1) the making of a misrepresentation, misleading statement, or a deceptive omission; (2) scienter; and (3) materiality.’” Materiality is defined as any fact that “a reasonable investor would consider… important in making an investment decision.” (“[M]isrepresentations regarding profit potential and risk go to the heart of a customer’s investment decision and are therefore material as a matter of law.” …recklessness is sufficient to satisfy the scienter requirement.

According to the CFTC, Goldline intentionally and/or recklessly made materially false representations of the break-even concept and its buyback policy. Moreover, Goldline’s statements concerning the break-even point were false because Goldline misrepresented the percentage by which its bid price would have to increase before customers could break even on their investment. These misrepresentations were material in terms of their negative impact upon customers’ ability to properly evaluate their risks associated with the transactions. The misrepresentations pertaining to the buyback policy were material as the change made by Goldline actively deceived customers and distorted their ability to properly evaluate the risks associated with the transactions.