IRA Gold Rush Stirs Claim Jump

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When Don Varden founded International Bullion Exchange back in 2009, selling gold to retirement accounts was a tiny sliver of the precious metals industry.

Today, that niche has taken off. The number of competitors has risen and some have seen sales double in the last two years. Advertisements soliciting clients to invest in gold IRAs regularly appear on cable news channels.

Rapid growth could have been expected to lead to more competition. What Varden wasn’t expecting was that some of that competition would come from former contractors he says built their business with information gleaned from his operation and with clients taken from his roster.

The resulting fight highlights the increasing competitiveness of a growing industry. But it also illustrates how much of it still operates on the fringes of mainstream investment, with bit players juggling multiple small-time ventures in a landscape littered with accusations of theft and fraud.

Varden, who also operates two drug and alcohol rehab facilities in Malibu, formed Malibu’s IBX after his previous company was disciplined by a futures trading industry association for misleading sales solicitations. He is accusing former contractors of stealing business from him to fund their own outside ventures, including an unsigned band and a mobile app.

“We’ve seen a whole bunch of people coming out of the woodwork to get a piece of the action,” said Tyler Gallagher, chief executive of Burbank’s Regal Assets, a company that sells gold to IRAs. “A lot will be looking for a quick payout and an exit.”

Companies that sell precious metals to IRA accounts have grown recently, as dealers have learned to tap a new pool of customer assets. Gallagher said that the scare caused by the recession led many individual investors to park large amounts of cash in gold. But as cash purchases dried up, dealers began encouraging investors to roll over IRA accounts into gold. Many customers are baby boomers who have built up investable assets in their retirement accounts.

Varden declined to comment on his claims, made in a complaint filed in Los Angeles Superior Court. Lucas Asher, one of the former contractors named in Varden’s complaint, acknowledged that he worked for IBX but denied the accusations.

How it works

Self-directed IRAs have been legally allowed to hold many different kinds of assets, including real estate and precious metals, ever since Congress approved them in 1974. But it’s only recently that the option has caught on.

When a customer calls a dealer like IBX, they are connected to a third-party custodian – such as Equity Institutional or GoldStar – with whom they can open up a precious metals IRA account, usually by transferring or rolling over an existing IRA account held elsewhere. The customer chooses what he wants to buy for his account, which can include collectible coins as well as bars of gold, silver or platinum. The dealer buys the metals from a mint or a wholesaler and sells it, at a markup, to the customer. The metal itself is then shipped to the third-party custodian, which holds it in a storage vault on the buyer’s behalf. When the buyer wants to retrieve or sell the metal, he must pay taxes as with any other IRA asset.

When Varden, who also goes by Dollar Varden in business filings and court documents, jumped into this market in 2009, he had spotted a growing niche.

He worked for decades in the commodity futures industry, co-founding American National Trading Corp., a Century City futures brokerage, in 1989. But his company was permanently barred by the National Futures Association, a self-regulating body, in 2007.

The NFA found that Varden’s company misled potential clients by exaggerating profit potential, downplaying risks and failing to disclose that more than 80 percent of its clients lost money in a two-year period. Varden, as co-owner and chairman, agreed not to act as principal of any NFA member for 18 months.

Varden defended his record in an email, saying that only one regulatory action was brought against him in his 24 years as a licensed commodities broker, and that he agreed to settle because he had sold the company.

International Bullion Exchange began marketing itself more heavily in 2012, around the time the precious metals IRA market began taking off. That same year, another of Varden’s ventures, rehab center Seasons in Malibu, filed for bankruptcy. Varden opened Seasons and another rehab center, Serenity Malibu, around the same time as IBX.

IBX, which accepts both cash and IRA purchases, found itself in a growing industry. Despite sliding gold prices, sales to IRAs have been rising in recent years. Gallagher, whose Regal Assets specializes in selling precious metals to IRAs, said it is on track to roughly double its revenue this year to about $70 million, from $37 million the year before. Scott Carter, chief executive of West L.A.’s Lear Capital, a general precious metals dealer, said sales to IRAs have roughly doubled in two years, and now comprise between 20 percent and 30 percent of the company’s total precious metal sales.

Los Angeles has become a hub for precious metal IRA dealers, as several established gold dealers, such as Lear and Goldline, have started marketing the practice. A number of other companies have spun off from larger dealers.

The companies say that the investment allows consumers to use IRA accounts, rather than cash on hand, to balance their investment portfolios. But Paul Miller, managing director at the West L.A. office of First Foundation Advisors, said he does not recommend it to investors.

“There have been a number of ads on cable news channels and we have been getting more questions from clients about it,” he said. “But the reason you have an IRA is you’re trying to put money in a tax-deferred account that can grow over time. There is no income stream produced by gold.”

Competition

In International Bullion Exchange’s Los Angeles Superior Court complaint, the company says it hired Asher and another contractor, Candice Bianca Evans, while the market was booming last year.

But it claims that Asher and Evans raided client and account information along with a third person, Simon Batashvili, and started Merrill Mutual, a competing precious metals IRA company. That firm is not related to financial services giant Merrill Lynch. Further, IBX said the proceeds of Merrill Mutual’s ventures were used to fund Asher’s other business ventures, including his unsigned band, Faulkner, and a mobile app for music distribution, Instribution. IBX has sued for more than $1 million.

Reached by phone by the Business Journal, Asher described himself as a former low-level employee of IBX without financial resources. He called the lawsuit a case of “mistaken identity” and vowed to countersue. He said he was not an owner of Merrill but would not answer whether he had any connection to the company.

“I’m a young kid in my 20s. I came out to California to get into art,” he said.

In addition to Instribution and his band, Asher is a director of Street Invasion, a small artist management company, and runs a non-profit museum exhibit.

Merrill Mutual officials did not return requests for comment.

Neither Carter nor Regal’s Gallagher have heard of Merrill. Carter said he has seen a number of new shops open up recently.

“It’s a dynamic and growing market so there are players coming in and out,” he said.

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