The US derivatives regulator Commodity Futures Trading Commission (CFTC) announced that Judge R. Gary Klausner of the US District Court for the Central District of California entered a consent order against Red Rock Secured, LLC (Red Rock), Sean L .Kelly f/k/a Shade L. Kelly-Johnson and Anthony “Tony” Spencer on April 23rd. The judgment finds the defendants liable for fraudulent misrepresentations to clients and providing illegal investment advice in connection with the purchase and sale of precious metals.
The order requires the defendants to collectively pay $38,984,313.90 in restitution to those defrauded, disgorge $5.1 million in ill-gotten gains and pay $12.25 million in civil monetary penalties. In addition, the order enjoins the defendants from further violations of the Commodity Exchange Act (CEA), CFTC regulations and state law provisions, as charged, and imposes permanent trading bans on any CFTC-regulated markets as well as registration bans against defendants. It also bars Spencer and Kelly from acting as investment advisers, broker-dealers or commodity advisers in California and Hawaii.
The decision resolves the lawsuit filed on May 15, 2023 by the CFTC and its co-plaintiffs, the California Department of Financial Protection & Innovation (DFPI) and the State of Hawaii Department of Commerce and Consumer Affairs Securities Enforcement Branch (SEB).
“The defendants attempted to take elderly victims out of their retirement savings to invest in a precious metals scam,” said director of enforcement Ian McGinley. “The CFTC remains steadfast in ridding the precious metals industry of fraud. this important resolution announced in conjunction with state partners in California and Hawaii is another example of the results.”
Red Rock Secured Case Background
The order finds that the defendants ran a nationwide fraud, from November 2019 to about June 2022, in which the defendants convinced at least 950 people to pay more than $69 million for Canadian Red-Tailed silver and gold coins Hawk (RTH) worth only $30 million. , reflecting markups of between 91.89% and 129.97% over Red Rock’s cost to acquire the coins. Most of these customers used tax-deferred funds or other retirement funds to purchase the RTH coins from Red Rock.
The order finds that Red Rock did not disclose these markups to customers, but rather that Spencer (and other Red Rock salespeople) effectively engaged in bait-and-switch behavior: Spencer negotiated the lowest markup on a product category offered by Red Rock (ie, 1% to 5% markup on common gold products), but then sold customers the supposedly “premium” RTH coins, which had exponentially higher markups.
According to the order, Red Rock sales staff, including Spencer, a senior salesperson, told customers that because Red Rock had a “direct relationship” with the Royal Canadian Mint (RCM) that produced the RTH coins, Red Rock she was able to buy the coins “wholesale” and “pass the savings” on to her customers.
In fact, the order finds that Red Rock had no direct relationship with RCM, but bought all of its RTH coins from a wholesaler. The order also finds that Red Rock held the RTH coins as a “limited quantity” when there was no mintage limit on the RTH coins. The order further finds that Kelly, as CEO of Red Rock, controlled the company’s operations and was responsible for the actions of its agents, including Spencer.
Parallel Political Education
On May 15, 2023, the US Securities and Exchange Commission (SEC) filed suit against the defendants and another individual for violations arising from the fraudulent precious metals scheme and providing illegal investment advice.
The CFTC said it appreciates and acknowledges the SEC’s assistance. The CFTC also thanks its co-plaintiffs, DFPI of California and SEB of Hawaii, for their assistance.
The CFTC warns that orders requiring the payment of funds to victims may not result in the recovery of any lost money because the offenders may not have sufficient funds or assets. The CFTC will continue to fight vigorously to protect customers and to ensure that violators are held accountable.