You Can't Cheat an Honest Man - James Walsh [103]
You start with an initial down payment of as little as $60. As you sell Gold Eagle coin purchase agreements, you can use the commissions you earn to complete your own purchase agreements. Upon completion of each agreement you can receive the coins or, if you choose, have the value of the coins applied toward the initial payment required for the next higher denomination purchase agreement. Of course, your earnings are based solely upon your own efforts and abilities.
Holtzclaw stated that there would be very little risk involved because the “money would be in gold coins or be in a federally audited trust fund.” However, he never explained what federally audited was supposed to mean. He also said that gold was a solid investment because its price always paralleled the price of bread. (This may sound convincingly biblical, but it isn’t even slightly economic.)
Like a character from a Damon Runyon story, one of Holtzclaw’s cronies then proceeded to hand around a gold coin and say, “This is what you’re investing in and that’s your security right there.”
All of this meant very little. The scheme wasn’t about gold, it was about recruiting other suckers. And it was destined to fail. Recruiting four investors at X dollars each in order to receive a commission of 3X dollars is a rotten deal for the participant—and a capital cost so high that the company isn’t likely to have enough money to do anything but slosh proceeds around.
As one lawyer noted: “The Sell America deal could only appeal to a complete cement-head.” The Board of the Matewan Church may not have had cement heads; but it did have blind trust. The church secretary was dispatched to get a check. The agreement was signed. And the $200,000 left Matewan in the hands of Shinn and Holtzclaw.
Shinn, Holtzclaw and their cronies cashed the check and wired the money to Alabama in payment for the bogus “gold contracts.” They took large fees for landing the big check. As one court dryly noted:
The Church lost all of its money. The congregation was shocked. The trustees felt guilty. The pyramid pharaohs in Alabama were prosecuted...and received light sentences.
Finally aware of its folly, the Matewan Church sued everyone involved in the scam. The suits, filed in stages during February and March 1996, alleged that no gold coins were ever purchased.
Criminal charges followed. Shinn, Holtzclaw and several associates were charged with conspiracy, interstate transportation of money taken by fraud, fraudulent sale of securities and fraudulent purchase of securities. Each faced up to 30 years in prison and a fine of up to $1.5 million if convicted of all charges.
Shinn quickly cooperated with federal prosecutors. Holtzclaw and his three cronies were all convicted at trial. But the January 1997 federal court decision United States of America v. John Holtzclaw, et al. overturned those guilty verdicts. It said—in plain language—that greedy investors are not victims.
The critical issue in the decision was whether the pyramid scheme sold by Shinn and Holtzclaw was an “investment contract” and, thus, a security. The prosecutors, arguing that the scheme was an investment contract, asked the court to limit its consideration to the statements made by Shinn at a the second Board meeting. They argued that these promises were a “security” under federal law.
The court disagreed. It had to look further and analyze the transaction “on the basis of the content of the instruments in question, the purposes intended to be served, and the factual setting as a whole.”
In fine print, the Sell America brochure stated that what was being purchased by investors was not gold coins at ridiculously inflated prices but the idea that investors could make money by doing unto others what had been done unto them.
The court concluded that no reasonable juror could conclude that the substance of the transaction was