State, Feds Eyeing Hampton Gold Dealer
By Michael Kitch
New Hampshire Business Review, October 16-31, 1985
Vol. 8, No. 2
State and federal officials suspect Wynwood Mercantile Corp., a precious metals dealer with headquarters in Fort Lauderdale, Fla.,and an office in Hampton, N.H., may be violating commodities and securites regulations through its sales practices.
Authorities in South Dakota and Minnesota have already barred Wynwood from trading, while their counterparts in Iowa and Florida have place the company under investigation. And the Commodity Futures Trading Commission, the federal agency that regulates commodities markets, has issued a cease-and-desist order and levied a $100,000 fine against Richard "Dutch" Schulze, president of Wynwood, for aiding and abetting fraud and failing to supervise his employees while president of Atlantic Futures Inc., a Wynwood sister company.
Meanwhile, James Cahill, assistant attorney general in the N. H. Consumer Protection Division, can neither confirm nor deny that the state of New Hampshire has taken any official action against Wynwood Mercantile Corp., he said. "We have received inquiries about the company, and we have been in contact with federal authorities and the Florida Office of the Comptroller."
As described by a former employee, Wynwood's Hampton office is what regulators call a "boiler-room" operation, where two or more sales people make unsolicited telephone calls to prospective clients using a "very high-pressure" sales pitch, said the former employee.
Wynwood features an "extended delivery program" for investors in gold, silver and platinum. Investors secure their purchases by making a down payment of 14 percent and paying administrative fees of 13 percent — all told, 27 percent of the purchase price of the metal. The purchase agreement runs for two years, but may be extended for five years by paying additional annual administrative fees. The investor must take delivery when the agreement expires and may take delivery sooner by paying the outstanding balance along with shipping and storage costs.
Wynwood may arrange for a third-party agent to take delivery and resell metals on behalf of its clients. The agent pays the balance due Wynwood, takes delivery of the metal, sells to another dealer, then collects and distributes the proceeds. Schulze said the Merrimack Bullion Co., formed by three attorneys — Matthew Epstein of Concord, Joe Hamilton of Salem and Steve Goldman of Concord — acts as Wynwood's agent in New Hampshire. "We have no relationship with Wynwood. We are designed to serve their customers," said Epstein.
Schulze insists his program is neither a futures nor a securities contract and consequently need not be registered with federal or state authorities. "In each case, we've been able to show why we shouldn't register our instruments," he said.
But regulators class Wynwood's "extended delivery program" among a species of instruments called "off-exchange future delivery contracts" requiring registration. Although mere failure to register may be a violation, regulators are especially concerned that Wynwood's program — and others like it — provides no assurance to investors that the firm has secured their positions by purchasing the metal itself, entering a futures contract or maintaining a sound hedge.
At the smae time, firms selling "off-exchange future delivery contracts" commonly seek to persuade clients to increase their investment by preaching the virtues of leverage. For instance, a client with $10,000 to invest may be encouraged to take a position worth several times more by using his initial investment as a down payment. To take delivery of the metal and collect any profits earned, the client must finance the difference between his original down payment and the full purchase price.
"I'm wary of companies seeking to avoid registration," said Deborah Bollinger, deputy director of the South Dakota Securities Division, which issued a cease-and-desist order against Wynwood. "They're usually trying to rip people off." Gary Levasser, deputy commissioner of the Minnesota Department of Commerce, also acted against Wynwood, "We administer a pro-active enforcement program," he said, "designed to stop victimization before it starts."
Iowa vacated its cease-and-desist order against Wynwood in May after six months. "Agents of Wynwood made unauthorized representations," said Greg Russell of the Securities Division, "but we could not attach the violations to the company or its principals." He added, "However, I don't think our investigation of Wynwood is closed."
"Wynwood is under investigation in Florida," said Larry Fuchs of the Office of the Comptroller. Florida, where many precious metals and other commodity scams have originated, stiffened its Investor Protection Act and launched a cooperative enforcement program with the CFTC. In September, Florida and federal officials brought action against Precious Metals International Inc. and First International Metals Inc., charging their "credit line program" and physical deferred payment contract" violated both federal and state laws.
Fuchs likened Wynwood's "extended delivery program" to these "off-exchange future delivery contracts," explaining "the allegation in the state of Florida's investigation is that it does not differ substantially from them."
Schulze insists Wynwood's clients are protected by what the firm calls its "Omnibus Hedge Account." Described by Wynwood's literature as an accomplished economist and mathematician, he claims to have fashioned the "computer algorithms" underpinning the account. Epstein, after two meetings with Schulze, called him "an intellectual genius, one of the few people in the country who understands the extended delivery contract and omnibus hedge account." Schulze said simply, "I'm not in the position of having to guess in the futures market."
The hedge account is presented on a fly sheet accompanying Wynwood's literature. The firm's daily assets are divided by its daily liabilities to yield a percentage "as a relative measure of the general efficiency of the Omnibus Hedge Account." Stating the goal is to achieve "an efficiency factor of 100 percent," the fly sheet displays graphs plotting the hedge account day by day, month by month from July 1984 to June 1985. The line never drops below 100 percent.
Harold First of Laventhol & Horwath of New York is auditing Wynwood's financial statement, including the hedge account, as of October 1984. "As of that date," First said, "Wynwood could honor its obligations to its clients."
He said that his audit assumed reasonable fluctuations in the price of precious metals. At the same time, First explained that he was not auditing the performance of the hedge account over a period of time. "I'm not auditing those graphs." he said.
First added that "I don't believe that what investors think they are buying is what they are buying — that is, contracts backed by other contracts. They are buying contracts backed by Wynwood. The investor is at the risk of the net worth of Wynwood and their ability to do what they say they do." First stressed that he had no reason to question Wynwood's claims about the performance of the hedge account.
Schulze seems better known to regulators than investors. In 1981 he worked as a bookkeeper at Stanford Management Inc. After a raid by the FBI, authorities found Stanford Management worked one of the largest commodity pool scams in Florida's history. Schulze cooperated with the investigation and prosecution of the principals. Then, in May 1982, Schulze hired Philip Gold and Alan Leavitt, former employees of Stanford Management, when he opened Atlantic Futures Inc.
The CFTC named Schulze as a respondent in an action taken against Atlantic Futures stemming from the conduct of Gold and Leavitt. Schulze was charged with aiding and abetting fraud and failing to supervise employees. While Schulze negotiated a settlement with the CFTC, Gold and Leavitt were prosecuted for their part in Stanford Management. Gold is serving a 10-year sentence for mail and wire fraud and Leavitt is appealing a seven-year sentence for the same offenses.
"When you go into business," Schulze said, "you discover to your dismay that you are more of a greenhorn than you thought." Admitting his employees engaged in "irregular business practices," Schulze vowed, "we cleaned our decks as fast as we could. "
Another of Wynwood's employees brought the company to the attention of the New Hampshire Attorney General. Greg Allaire, an account executive in the Hampton office, was convicted of felonious sexual assualt in February after Rochester police discovered a child prostitution ring last winter. Allaire also faces indictments for acting as an accomplice to burglary and receiving stolen property, charges arising from a housebreaking ring revealed by the prostitution investigation. When N.H. Sen. Edward Dupont learned that Allaire worked for Wynwood, he raised the matter with the Attorney General's office. Assistant Attorney General Cahill said that despite some inquiries, he has received no complaints about Wynwood. "Without complaints," he said, "it would not be appropriate to take official action."
Schulze insists Wynwood trades within the bounds of federal and state laws. "We're like the only black man on the block. We have to be cleaner than clean." Ron Sabat, Wynwood's office manager said "This is, and I say this with utmost sincerity, a very good company. I've invested with this company with my own dollars." And Epstein described Wynwood as "squeaky clean. Dutch may be a little naive, if I may criticize the man. He assumes everyone is honest."
Florida: birthplace of metal scams
Precious metal scams have blossomed in southern Florida, particularly in Fort Lauderdale, ever since U.S. citizens were again permitted to buy and own gold as an investment commodity in 1975. But in recent years the Florida legislature has tightened investment statutes and the Office of the Comptroller has strengthened enforcement efforts. "Slowly, in the past two years, we've gone on the offensive and put dealers on the defensive," said Larry Fuchs, chief of the enforcement division in the Office of the Comptroller.
With the crackdown in Florida, companies offering off-exchange programs have begun to trade elsewhere." Given modern telecommunications these firms can locate anywhere," Fuchs said. "They prefer states with favorable business climates and the absence of regulatory authority."
Wynwood Mercantile Corp. of Fort Lauderdale began operating in Hampton, N.H., earlier this year. Matthew Epstein, a Concord attorney, recalled the state's favorable business climate and unique tax structure piqued the interest of Richard "Dutch" Schulze, president of Wynwood. "Wynwood needed a tax-free state," Epstein said, "where neither the company nor its clients would suffer unexpected tax consequences."
State regulators commented that Hampton, with plentiful rented property within easy reach of Boston, has attracted "boiler-room" operations in the past. From its Hampton office Wynwood's sale staff calls clients drawn from computer lists that are compiled from cards completed and mailed by prospective investors. The clients, a former employee remembered, were scattered across New England and the Northeast, not confined to New Hampshire.
The trade in precious metals, especially programs featuring down payments and deferred delivery, is plied in regulatory limbo. Most of these contracts have been carefully designed to avoid registration and regulation by either the Commodity Futures Trading Commission or the Securities Exchange Commission. Jack Field of Alexandria, Va., once chief of enforcement at the commission, inspired many of the instruments now bedevilling his successors.
While applauding the efforts of other states to curb "boiler-room" operations, Fuchs stressed that Florida's program, undertaken with the federal commission, enforced both state and federal laws. "Our enforcement measures can have a nationwide impact," he said.
[Editor's note: The office of Wynwood Mercantile Corp. was located at 1 Park Avenue in Hampton.]