By Summer M. Bosse
On February 1, 2022, the Department of Financial Protection and Innovation (DFPI) announced that it, in partnership with the federal Commodity Futures Trading Commission (CFTC) and 26 other state regulators, has filed a federal lawsuit in the United States District Court for the Central District of California (Case No. 2:22-cv-00691) against Safeguard Metals LLC and its principal and owner, Jeffrey Santulan, also known as Jeffrey Hill, for perpetrating a $68 million fraudulent scheme that targeted the elderly population. The defendants’ alleged conduct began in October 2017 and continued through July 2021. The Securities and Exchange Commission (SEC) filed a civil enforcement action against the same defendants alleging violations of federal Securities Laws.
The complaint alleges that Safeguard Metals and Santulan perpetrated an ongoing fraud to solicit approximately $68 million from over 450 individuals nationwide to purchase precious metals and coins, including that Safeguard Metals made false statements on its website, inflated its assets by billions, and used fear tactics to motivate senior citizens to purchase the precious metals and coins. Specifically, the complaint alleges that defendants made the following false and misleading claims:
- Safeguard Metals is rated number one among wealth protection firms (with no basis for this assertion);
- Safeguard Metals oversees more than $11 billion in assets under its management (when in reality the firm has sold substantially less than $75 million in precious metals and silver coins since it has been in business);
- Safeguard metals has been in business for over twenty years (the startup formed in 2017, but did not appear to have significant operations until 2019).
According to the complaint, Safeguard Metals charged an average mark up of 71% and more recently a 51% mark up on the precious metals. The company disclosed the markups to consumers by referring to them as “operating margins” or the cost incurred from Safeguard Metal’s purchase of the precious metals and coins from the original seller. The complaint alleges that 97% of the company’s sales stem from mostly inexperienced investors’ purchase of silver coins. Out of the $68 million involved in the allegedly fraudulent scheme, $66 million was derived from the purchase of the silver coins, with $26 million solely from mark ups.
The complaint further alleges the defendant instructed sales representatives or other agents to concentrate their fraudulent solicitations on elderly or retirement aged persons to secure access to their retirement savings. Safeguard Metals sales representatives and other agents allegedly recommended that customers form Self-Directed Individual Retirement Accounts (SDIRA) and hold the precious metals at a depository instead of taking delivery of the metals themselves. Customers were informed this was the safest way to store precious metals as the depository was purportedly federally insured and individuals could be frozen out of traditional retirement accounts if the stock market were to crash.
Once a customer opened an SDIRA, often through a custodian and depository recommended by Safeguard Metals, Safeguard Metals was then partly authorized to buy or sell precious metals in the customer’s SDIRA. Unless the customer knew how to remove Safeguard Metals as the designated representative of their SDIRA, the customer could not liquidate their precious metal holdings without going through Safeguard Metals to unwind their investment.
Accordingly, plaintiffs seek equitable and injunctive relief pursuant to section 2(a)(1)(B) of the Commodity Exchange Act (CEA), 7 U.S.C. §2(a)(1)(B), and CFTC regulation 1.2, 17 C.F.R. §1.2. The complaint seeks a permanent injunction to stop the practices, as well as disgorgement, full restitution, recission, and civil monetary penalties.
In the DFPI press release announcing the lawsuit, Commissioner Clothilde V. Hewlett said, “Brazen attempts to target senior citizens or other vulnerable populations will not be tolerated in California. We hope the message is coming across loud and clear to the precious metals industry: we will not tolerate deception and fraud in the commodities industry and are committed to holding bad actors accountable for their actions.”