Nickeled, Dimed and Screwed

The 2004 magazine ad for Silver American Eagles that caught Maureen O'Neill's eye included a thumbnail history and some mumbo jumbo about the coins being "certified gem brilliant uncirculated" and "sonically sealed in a tamper-evident holder." But the 74-year-old widow and retired nurse didn't understand or care about any of that.

Two weeks later, O'Neill received a phone call from the Beaumont-based company that sold her the silver. The salesman was extremely personable, eager to hear all about her newly adopted grandson. The salesman also learned that she lived alone in Connecticut and her family resided out of state. It seemed he had all day just to chitchat. She enjoyed the attention.

So, what the heck, she bought some more coins. "I spent a couple thousand here, a few thousand there." And her phone kept ringing.

O'Neill would return home from shopping to several urgent messages on her answering machine. "I told them I didn't want any more, I wasn't a collector," she says. "I cried on the phone, I hung up, but they just kept pushing."

Following the salesman's advice, O'Neill eventually moved her money out of stocks, bonds and IRA accounts and put it all into rare coins. She maxed out her credit cards and took out a $50,000 home equity loan, all for coins she knew next to nothing about. Only that the salesman assured her they were safe, stellar investments. And that she needed to buy them—now.

During the next 15 months, O'Neill invested more than $180,000 in coins—her entire life savings. Appraisers later revealed her collection had been overvalued by about 50 percent, she says.

Today O'Neill is a plaintiff in a lawsuit against several related Beaumont-based companies with very official-sounding names: 1st National Reserve, 1st American Reserve, First Fidelity Reserve and Universal Coin & Bullion. The rare-coin companies gross more than $100 million a year, almost exclusively in phone sales. All operate out of the same nondescript property.

Many of the salesmen and managers are young, former fraternity brothers from Lamar University netting six figures a year. They call themselves brokers, though they are unlicensed. And they claim to operate from a trading floor, though their offices have been described as classic boiler rooms.

"This stuff is straight from a movie," says Jason Gibson, a Houston-based plaintiffs' attorney who represents O'Neill and more than 50 other former customers from across the country. Many are 70 to 90 years old, and some suffer from serious health problems such as epilepsy, Alzheimer's disease and other forms of dementia. Collectively, they claim to have spent more than $10 million on grossly overvalued coins and allege a laundry list of abuses against the companies, including:

· using high-pressure sales tactics

· targeting the elderly

· selling coins with 100 percent markups

as investments

· using religion to gain trust with customers

· fabricating stories about the origins of coins

· misrepresenting the value of coins

· making unauthorized charges to credit cards

The lawsuit, one of several currently pending against the companies, represents the latest black eye for an industry that remains unregulated despite its centuries-old association with fraud. There is no governmental agency that oversees the highly speculative rare-coin market. The Federal Trade Commission, which can take action only under truth-in-advertising laws, has not prosecuted a case against a dealer in 15 years.

The lawsuit has sent shock waves through the coin industry since it specifically targets Michael Fuljenz, a veteran numismatist—or coin expert—and award-winning author and occasional CNBC pundit. Fuljenz, a named defendant, has denied all charges made against the companies, claiming he is the victim of an overzealous attorney.

But Gibson says when he filed information requests with the FTC and state attorneys general offices throughout the country seeking consumer complaints against coin companies, he discovered a pattern: "All roads led back to Beaumont."

His staff of several dozen salespeople, who call thousands of people across the country every day, are taught to overcome these obstacles by "isolating objections" and "finding out where the money is."

They receive packets with sales tips such as, "To be successful you must have good acting skills and you must be sincere when you apologize."

Another pointer: "Create urgency, be aggressive."

According to depositions given by several former employees, the salespeople also learn to "mind-screw" customers, or deliberately confuse and berate them into making purchases (see "To Coin a Phrase").

But Fuljenz is uncomfortable with the notion that he promotes high-pressure sales. He prefers to call his employees by another name: enthusiastic.

"What is high-pressure?" he asks rhetorically. "It really depends on the individual."

For centuries, the unscrupulous corner dealer was the scourge of the rare-coin industry. Today that role has been filled by take-no-prisoners phone solicitors, according to Bill Haynes, president for 30 years of Arizona-based CMI Gold & Silver.

"I know about the dark side of our industry, where people pay double what coins are really worth," Haynes says. "I have heard absolute horror stories."