REGIONAL POLICE/COURTSThe "new gold rush" sweeping Nevada and other Western states provided a glittery, yet plausible, script. The stock market crash in late 1987 provided an eager, susceptible audience.
That was all it took for professional con artists operating out of "boiler rooms" in Southern California and Las Vegas to give a modern twist to an ancient mining swindle and turn it into one of the the most profitable frauds in recent decades.The "dirt-pile" gold scams of the late 1980s bilked small investors out of at least $21 million documented by state securities agencies in 38 states, according to a new survey. Experts, however, estimate actual losses ran into the hundreds of millions of dollars.
"It just sold itself," said Scott Stapf, an investment education adviser for the North American Securities Administrators Association in Washington.
Authorities have dubbed these bogus investments "dirt-pile" schemes because of the way they work.
Promoters contact their victims by telephone and, using high-pressure sales pitches, solicit them to purchase a large quantity of unprocessed ore, typically 100 tons, guaranteed to contain 20 ounces of microscopic "no-see-um" gold.
The potential investor is offered the gold at a price far below the going market value for refined bullion and is told the discount is possible because the gold is still in the ground.
For an additional fee, the fast-talking swindlers promise to extract the gold from the ore and refine it for the investor using a "secret" new process.
The delivery date for the gold is then set 15 or 18 months in the future, allowing "time to take investors' money and get out before the investors realize what's happened," said Judith Allen of the Nevada Securities Division.
"Sometimes they'll even set it up so that investors make monthly payments," she said.
Adding credibility to the scams are slick brochures, prospectus sheets and, in some cases, documents to validate actual mining claims. Such documents are relatively easy to obtain from the government under federal mining laws, which allow private citizens or businesses to freely prospect on public land.
Like most convincing forms of fraud, the dirt-pile scheme is rooted in truth.
Its success was largely an outgrowth of the new gold rush of the West, where advanced mining techniques have made possible the extraction of minute quantities of gold and silver from previously worthless ore, Stapf said.
This technology has been an economic boon for Nevada, where annual gold production has increased nearly 10-fold during the past decade - from 525,000 ounces in 1981 to 5.05 million ounces last year.
Nevada, traditionally known as the Silver State, now accounts for 60 percent of domestic gold production, making the United States the world's third largest producer after South Africa and the Soviet Union, said Russell Fields of the Nevada Department of Minerals.
Other states prospering from the new gold extraction methods are California, Oregon, Idaho, Utah, Colorado, New Mexico, Montana and Alaska.
Compared with other "boiler room" schemes - so named because they traditionally operate out of low-rent office space - the dirt-pile scam was "one of the more successful we've seen," Stapf said.
The basic attraction was "the traditional lure of gold," but its real success was fueled by the Wall Street crash in October 1987, which shook confidence in "paper investments," he said.
"People who left the market after 1987 fled right into the arms of these con artists . . . It just hit investor psychology perfectly," Stapf said.
He added, "The fact that the market crashed gave them (swindlers) a national audience, rather than just a regional audience" in the West.
Indeed, investors in all 50 states got stung, Stapf said.
"One case promoted out of California had victims in 41 states and three foreign countries," he said.
The boiler rooms, he said, were operated mostly out of Southern California, Las Vegas and Phoenix, with the alleged mines usually located in Nevada, California, New Mexico and northern Texas.
The scheme reached its zenith in July 1988, when Project Goldbrick, a multistate program to track the scams and break them up, identified nearly 100 dirt-pile operations, said Jack Hiatt, director of the New Mexico securities division and founder of the project.
Based on information developed on those cases, Hiatt estimated they posed a collective potential risk to investors of $250 million at that time.
In a study completed this year, the most comprehensive survey to date of dirt-pile fraud around the country, Hiatt found 954 investors in 38 states were bilked out of $21 million between January 1988 and January 1990.
Hiatt stressed these figures represent only the known losses reported by state securities agencies, which have led the effort to crack down on gold mining schemes.
He and Stapf agreed, however, that all losses from such swindles during the past several years have likely run into the hundreds of millions of dollars.
The number of gold-in-the-ground operations has declined since last year, due to a coordinated enforcement and public awareness effort by the states, Hiatt said.
New state laws requiring promoters of mining investments to be licensed as commodity brokers also have helped drive many schemes out of business, Hiatt said.
However, the first line of defense against boiler-room con artists is common sense on the part of the public, said Allen of the Nevada Securities Division.
"If it sounds too good to be true, it probably is."