CRIMINAL Liability for SUBJECTIVE Grading!

How many of you have heard of U.S. v. Numisgroup Intern. Corp., 170 F.Supp.2d 340 (E.D.N.Y. 2001)? In it, the United States criminally prosecuted -- successfully! -- several corporate defendants and at least one individual, Robert DuParton, for mail and wire fraud (among other counts), all arising from the sale of (under)graded coins at highly inflated prices. The government brought in two witnesses, one of whom was Rick Montgomery, to testify essentially that the defendants were crappy graders, at least by PCGS standards. (Interestingly, at one point in the opinion the judge wrote, "Montgomery has personally graded in excess of 5 million coins." 170 F.Supp.2d at 346.) From the grossly inflated prices the defendants were charging for their overgraded coins, the jury apparently inferred that the defendants *intended* to defraud their clients.

The opinion I cited has as its subject matter a Fed. R. Crim. Pro. 29 motion -- that is, a motion made by the defendant that basically argues that based on the evidence presented, even when viewed most favorably to the government, no crime has or could be proved. The defendants' primary contention was "that there was insufficient evidence to sustain the guilty verdicts returned by the jury because, as the Government's experts conceded, the grading of coins is largely subjective." Id. In other words, "[a]ccording to the [defendants], because coin grading is subject to highly individualistic interpretations within each of these two levels, the jury was precluded from finding that the grade of the coins was intentionally misrepresented." Id. at 347.

In a fascinating opinion, the district court rejected the argument after recounting the evidence presented at trial (including Montgomery's testimony and evidence pertaining to Accugrade's standards). Here's an interesting passage:

"Absent a handful of coins certified by the Accugrade grading service, the Numisgroup Defendants exclusively supplied their own grades on the coins they sold. The Government adduced direct evidence that Dupurton graded and established the selling price of each raw coin. Furthermore, there was evidence that Dupurton would crack open coins that had been certified and encapsulated by other grading services and re-grade the coins applying his own standards. In this review, the Court must determine whether, by applying their own grading standards against the backdrop of a coin industry that has no uniform standard, the Numisgroup Defendants contemplated that a consumer would be deceived by the grade represented to him during sales calls and on shipping invoices and, as a result, would also incur financial injury."

Id.

The court relied in part on Montgomery's testimony regarding his own personal grading of the coins that the defendants had peddled (I guess these are included in that 5,000,000-coins-personally-graded figure):

"Montgomery graded 702 coins that were admitted in evidence. Of the 702 coins he examined, Montgomery arrived at the same grade as the Numisgroup Defendants 67 times. Montgomery graded 397 coins lower than did the Numisgroup Defendants and deemed another 200 coins ungradable because they were either cleaned, altered, or damaged. So that a total of 597 of the 702 coins were either graded lower or could not be graded because of detrimental conditions. The remaining 38 coins were of the type that PCGS did not grade. Montgomery did not grade any of the 702 coins above the grade assigned by the Numisgroup Defendants.

"Furthermore, a survey of the grades determined by Montgomery with respect to the 397 coins that he graded lower demonstrates that Montgomery graded: 39 coins at 1 point lower than did the Numisgroup Defendants; 67 coins at 2 points lower; 45 coins at 3 points lower; 17 coins at 4 points lower; 17 coins at 5 points lower; 46 coins at 6 points lower; 59 coins at 7 points lower; 50 coins at 8 points lower; 20 coins at 9 points lower; and 37 coins were graded by Montgomery at 10 or more points lower than the grade assigned by the Numisgroup Defendants. This numerical breakdown leaves the Court wondering why, if coin grading standards are as inconsistent and inherently subjective as the Numisgroup Defendants contend, not one of the 397 grades assigned by Dupurton was higher than the corresponding grade determined by Montgomery."

Id. at 350-51.

The court concluded that "the massive disparity between the grade the coin customers anticipated receiving and what they actually received for their money expended clearly evinces the harm contemplated by the Numisgroup Defendants in their scheme to defraud." Accordingly, the jury's verdict was reasonable and supported by the evidence.

In reaching its conclusion, the court cited at least two other cases which (it said) were relatively factually similar: U.S. v. Kail, 804 F.2d 441 (8th Cir.1986) and U.S. v. Kayne, 90 F.3d 7 (1st Cir.1996), cert. denied, 519 U.S. 1055, 117 S.Ct. 681, 136 L.Ed.2d 607 (1997). I haven't looked at these, but it's interesting to note that apparently criminal prosecutions relating to grading are not unheard of.

It is my understanding that this case is or will soon be appealed.

FYI, and regards,
--csw