Opinion ID: 410420
Heading Depth: 2
Heading Rank: 2

Heading: Basis of Criminal Charges

Text: 13 The indictment alleged that from January 1978 to September 1979 the defendants conspired to defraud customers of FGS and that they committed 14 acts of mail fraud in the process. The essence of the mail-fraud and conspiracy charges was that the defendants, either personally or through salesmen they hired, trained, and supervised, misled customers as to how FGS would protect the customers' investments. The defendants and their salesmen told customers that the leverage contracts were covered in one, if not both, of the following ways: (1) that FGS would go into the metals market and purchase the physical gold or silver, and then store it in a vault at the Shelard Bank for the customers, 7 or (2) that FGS would purchase a futures contract on a commodities exchange for the amount of the metal the customer had purchased. However, neither of these representations was true. The actual amount of gold or silver coins, or physicals as they were called, on hand at FGS was very small. Certainly the inventory of physicals represented an insignificant percentage of the company's obligations to its customers. 14 As for hedging or covering in the futures market, there was testimony by Lloyd Kadish, an attorney who represented FGS during the latter part of 1979, to the effect that hedging is a ministerial task that could be accomplished by a clerical employee. FGS needed only to place orders in the futures market on a daily basis as sales were made. In this manner a concern like FGS, properly managed, would have had no interest in the price level of gold or silver, and the entire risk of price fluctuations would be transferred to the customer. The profit to be made in such a business would come from commissions on sales and the interest that customers agreed to pay on the outstanding balance of their accounts. 15 FGS, of course, was not properly managed. From its very inception it was undercapitalized. As of February 4, 1977, $20,000 had been invested as capital by Mount, Ulrich, and Swalinkavich. Also on February 4, $5,000 was paid to Kaminski as a consulting fee. Then on March 1, $10,000 was paid to Central Coin Exchange, Ulrich's corporation, and on March 2, another $5,000 was paid to Kaminski as a consulting fee. Thus, within four months of the corporation's birth the initial capital was gone. 8 This scarcity of operating funds created an immediate cash-flow problem. Apparently Kaminski and Mount chose to solve the problem by using the funds from customer accounts to keep FGS afloat. 16 It appears that for the first six months of 1977 FGS's customer accounts were fully covered. But by August of 1977 the level of coverage was at a deficit of over $2,000,000, and serious attempts to cover customer obligations fully ceased. From this time up until FGS was closed in September of 1979 the general approach to sales involved assurances to prospective clients that their investments were fully covered, though they surely were not. And through this time FGS went deeper and deeper into debt through mismanagement and misapplication of company funds. From all indications those who had active accounts with FGS at the time of its closing lost their entire out-of-pocket investment, not to mention the enhanced value their investment would have had if FGS had handled their money properly and lived up to its commitments.