The recent announcement that federal authorities have returned nearly $12 million in recovered losses to more than 1,000 victims of an elaborate fraud scheme represents still another cautionary reminder “that all that glitters is not gold,” according to an announcement just out from the Federal Bureau of Investigation.

For nearly seven years, Goldfinger Coin and Bullion operated a Website that purported to provide an easy way for customers to invest in precious metals, according to the federal law enforcement agency. Users could buy, hold and transfer gold and silver on the California company’s online platform, e-Bullion.com, and convert their holdings to cash at ATMs around the world.

With gold’s market value steadily rising, the operation seemed like a lucrative bet. But as investigators discovered in 2008, the company was doing much more than trading in precious metals.

Goldfinger was operating almost solely as a money-transmitter, without a license, earning owners Jim and Pamela Fayed millions from fees on users’ transactions. The e-Bullion website touted no fees for establishing or funding an account, but there was a cost for converting virtual holdings back into real money.

FBI and IRS investigators determined that about $35 million per month funneled through Goldfinger and e-Bullion in the company’s heyday. Very little of it came from trading precious metals.

Charles Ponzi: Public Domain
Ponzi schemes promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artists pay “dividends” to initial investors using the funds of subsequent investors. The schemes generally fall apart when the operators flee with the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.”
This type of fraud is named after Charles Ponzi (seen above in 1920) of Boston, Massachusetts. In the early 1900s, Ponzi launched a scheme that guaranteed investors a 50 percent return on their investment in postal coupons. Although he was able to pay his initial backers, the scheme dissolved when he was unable to pay later investors.
Tips for Avoiding Ponzi Schemes
– Be careful of any investment opportunity that makes exaggerated earnings claims.
– Exercise due diligence in selecting investments and the people with whom you invest—in other words, do your homework.
– Consult an unbiased third party—like an unconnected broker or licensed financial adviser—before investing.

“That’s how we knew it wasn’t a gold dealer,” said Special Agent Maura Kelley, who worked in the FBI’s Ventura County office (before retiring last year) and investigated the case jointly with the IRS and the U.S. Attorney’s Office for the Central District of California. “Typically, if you’re a gold dealer, you buy it and you hold it. You don’t buy and sell, because there’s no money to be made. There should have been a lot of money coming in and little going out, unless it was to buy gold. And that wasn’t happening.”

Instead, investigators said, e-Bullion — with more than one million users — was reaping huge profits on transaction fees, mostly related to illegal activities like Ponzi schemes. Had the company been properly licensed, it would have had to comply with strict reporting requirements, such as filing suspicious activity reports on sketchy transactions and so-called high-yield investment programs.

Not only was the company circumventing the rules, investigators say, it was scooping up money left behind in e-Bullion accounts when the Ponzi schemes collapsed and the operators disappeared.

“He just pocketed the money from all these high-yield investment programs after they ran,” Kelley said, referring to Jim Fayed. “And the money continued to come in because the word didn’t get out right away that they weren’t paying. And people were still investing.”

The FBI and IRS shut down the company in 2008 following the murder of co-founder Pamela Fayed and the subsequent arrest of Jim Fayed, who had hired the hitmen who killed her. He is currently on death row in California.

Investigators spent months following the digital money trail and tracking down the company’s gold holdings in Los Angeles and Perth, Australia.

The government returned $1.8 million in 2015 to more than 300 victims of one particular illegal scheme called Kum Ventures that was run through e-Bullion. In November, $11.7 million in civilly forfeited proceeds was distributed back to victims in the U.S., Canada and Australia.

Another $12 million in precious metals in Australia that belonged to Fayed is pending repatriation to the U.S. to be returned to e-Bullion victims.

Kelley spent nearly 30 years working white-collar crime cases for the FBI, including many like the Ponzi schemes that led back to e-Bullion. Ponzi schemes — named for an early practitioner, Charles Ponzi — appear in different forms, but they always make the same promise of quick returns. And they always end with a crash, according to the FBI.

“They take the money and run,” Kelley said. “They don’t look back.”