Do dealers who unabashedly look favorably upon the “well-managed promotion”, breach a fiduciary duty

Longacre · February 28, 2007 1:13AM

I think my views on the “well-managed promotion” have been clearly stated in the past. I simply do not like the market manipulation practiced by dealers who engage in this type of behavior. Something needs to be done about this carcinoma of the numismatic world, and it should be done sooner rather than later. What bothers me the most is that dealers treat the well-managed promotion as their birthright, and have no misgivings about unduly influencing an easily manipulated, unregulated, extremely small market.

Today I read about a matter dealing with another type of promotion-- tax shelters. Oddly enough, the tax shelter promoted was called “COINS” (for those that don’t know, tax lawyers come up with cute names for various tax transactions). Without going into detail, this shelter worked as follows: COINS investors bought and sold offsetting pairs of options related to foreign currency exchange rates on given future dates. The investments were designed to ensure that the gain to the investors from the first option was matched by the loss to the investors from the second option, resulting in zero actual profit or loss. The investors then transferred the options to a partnership, increasing the basis of their partnership interest by the value of the option purchased but not decreasing it by the value of the option sold. After the expiration of the options, the investors asked to be redeemed out of the partnership in exchange for stock. They then sold the stock and claimed the resulting drop in basis as a capital loss.

In evaluating the motion to dismiss, the Court touched on various concepts, which can be applicable to the coin promotion world. In particular:

(1) Breach of fiduciary duty. The court stated, “the Second Claim alleges that Defendants breached a fiduciary duty to Plaintiffs. In New York, a cause of action for breach of fiduciary duty has three elements: (1) breach by a fiduciary of a duty owed to plaintiff, (2) defendant's knowing participation in the breach, and (3) damages. The test for whether parties enjoyed a fiduciary relationship is fact specific, but the main question is whether "a party reposed confidence in another and reasonably relied on the other's superior expertise or knowledge." However, under New York law, "the requisite high degree of dominance and reliance must have existed prior to the transaction giving rise to the alleged wrong, and not as a result of it."”

(2) Fraud. The court stated, “the Third Claim alleges that Defendants' purported misrepresentations and omissions constituted fraud. To recover damages for fraud, a plaintiff must prove (1) a misrepresentation or an omission of material fact which was false and known to be false by the defendant, (2) the misrepresentation was made for the purpose of inducing the plaintiff to rely upon it, (3) justifiable reliance of the plaintiff on the misrepresentation or material omission, and (4) injury." In addition, a cause of action to recover damages for fraudulent concealment requires . . . an allegation that the defendant had a duty to disclose material information,", although "such a showing is not required where in addition to nondisclosure of material facts, [one] uses artifice, wiles, or deceptive conduct designed to throw the other party off his guard and lull him into a false sense of security," A duty to disclose may arise either from a fiduciary relationship or from one party's superior knowledge of essential facts whose nondisclosure would render a transaction inherently unfair.”

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Because well-managed promotions are so prevalent in the coin world, do you think that promoters breach a fiduciary duty to their clients when they entice their clients to purchase particular coins, based on the fiduciary duty definition above? Do collectors, by default, rely on the coin dealer’s superior expertise and knowledge?

Regarding fraud, does the fact that the dealer is cornering the market and omitting that in his discussions with a client, meet at least one of the elements of fraud? Does the nondisclosure of the occurrence of a well-managed promotion render the coin sale to a collector inherently unfair?

Something needs to be done with these well-managed promotions, in my opinion.

kranky · February 28, 2007 1:26AM

Longacre, I agree that these "promotions" are nothing more than market manipulation and do not serve the collector. But...

Dealers owe no fiduciary duty to the collector with respect to pricing. Caveat emptor. Now if the dealer is offering to manage an investment portfolio of coins, that would be different, Noe?

And regarding fraud, that's also a high bar to hurdle. I can't expect dealers to reveal their inventory position. And even if they had to, it would be so trivially easy to manipulate as well - I could honestly say I have only one of the items in stock, but I can conveniently neglect to mention I can buy another immediately with a two-minute phone call. Someone else can sit on the accumulation so I can be up front in saying I only have the one item.

And when you come right down to it, the only harm done is someone paid more than they could have for a coin, had they bought it earlier. The item is going to be genuine and as described. The promotions do not get people to pay $5,000 for a $50 coin like an outright swindler would.

I'm sure there are as many people who can see the signs of the accumulation phase and use that knowledge to profit as there are people who end up spending more than they could have.

RYK · February 28, 2007 1:49AM

Dealers owe no fiduciary duty to the collector with respect to pricing.

I agree with kranky. No fiduciary duty whatsoever. If they are selling coins as investments, which many dealers do, there may be an argument for such a responsibility.

bidask · February 28, 2007 2:13AM

Do you think regulated versus non regulatd markets should be part of this discussion. I view the collectibles coin industry as unregulated and therefore a dealer who unabashedly promotes may not necessarily be breaking a fiduciary responsibility . Especially when there is so much disagreement over grading ( even with the evolution of TPG's.)

DeusExMachina · February 28, 2007 2:44AM

2) defendant's knowing participation in the breach, and (3) damages. The test for whether parties enjoyed a fiduciary relationship is fact specific, but the main question is whether "a party reposed confidence in another and reasonably relied on the other's superior expertise or knowledge."

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I don't believe you can assume a dealer has superior expertise especially if the coin is graded by a TPG. And I agree with RYK, about the investment side of the coin business. I would assume the investor and dealer have some sort of agreement--an exchange of goods/services for his/her coin expertise. Under that scenario, the fiduciary duty is much clearer and well defined.

Sorry dealers, please don't take my comments out of context.

Longacre · February 28, 2007 2:54AM

<< 2) defendant's knowing participation in the breach, and (3) damages. The test for whether parties enjoyed a fiduciary relationship is fact specific, but the main question is whether "a party reposed confidence in another and reasonably relied on the other's superior expertise or knowledge."

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I don't believe you can assume a dealer has superior expertise especially if the coin is graded by a TPG. And I agree with RYK, about the investment side of the coin business. I would assume the investor and dealer have some sort of agreement--an exchange of goods/services for his/her coin expertise. Under that scenario, the fiduciary duty is much clearer and well defined.

Sorry dealers, please don't take my comments out of context.

>>

I think that someone who holds himself out to be a numismatic professional should be deemed to have superior knowledge as compared to a regular Joe collector. The fact that a coin is graded by a TPG should not absolve a dealer from his professional duties and responsibilities. I agree with your investor/dealer/exchange point.

Longacre · February 28, 2007 2:55AM

<< Do you think regulated versus non regulatd markets should be part of this discussion. I view the collectibles coin industry as unregulated and therefore a dealer who unabashedly promotes may not necessarily be breaking a fiduciary responsibility . Especially when there is so much disagreement over grading ( even with the evolution of TPG's.) >>

The fiduciary duty should transcend the regulated/non-regulated question.

TwoSides2aCoin · February 28, 2007 2:58AM

Somedays it makes me happy to be a plain old roofer. Thanks for reminding me how happy I am in my field, Longacre.

Ya'll go through too much B.S. in the legal field. I asked my niece yesterday what she was doing (she's a lawyer). Her answer : "i'm bankrupting someone".

Two things came to mind : "you are getting paid to keep someone from paying someone else" or, "you are screwing them so bad they will be broke when you get done"....

I thought to myself : " Gee, Lisa could be a coin dealer".

RedTiger · February 28, 2007 4:00AM

It's a hobby. Only if the vendor uses the "i" word [investment] does any kind of fiduciary stuff come into play. Most firms are smart enough to put a boilerplate disclaimer on all their literature and websites so any lawsuit would be dismissed without merit.

Promotion is part and parcel of selling. Where does a person draw the line? Is a dealer supposed to say, my coins are garbage and sure to go down in value? Another example to me, of unrealistic collector expectations. Again, it is a hobby. If a customer shows up with money and ready to buy, the dealer sells. To my mind, denying a potential customer acess is more of a thorny issue than promotion. No one knows a person's finances, and dealers should not have any duty to find that out before selling.

In practice, how could they? A person at a big show walks up and asks to look at an expensive coin. Does the dealer ask the customer to fill out ten pages of forms like they would if buying stocks or bonds? Of course not, that would be silly. If the customer has the money to buy, the dealer that denies the customer access is doing a lot more wrong than the dealer that says, thank you for your purchase and rings up the sale.

secondrepublic · February 28, 2007 4:18AM

I think you would be stretching the concept of fiduciary duty too far if you made every "expert" (e.g., coin dealer, rare art dealer) who sells to the public into a fiduciary. I don't see any fiduciary relationship between coin dealers and collectors, except in the very rare case where an "investor" gives the dealer money to buy coins on his behalf as part of an investment strategy, thus perhaps making the dealer into an investment adviser of sorts. Even in that rare case, I don't think there would be a breach unless there was flagrant self-dealing involved. I just don't think the concept of fiduciary duty is at all applicable except in the most unusual of cases. However, I think the concept of fraud may be applicable much more often.

DeusExMachina · February 28, 2007 4:55AM

"I think that someone who holds himself out to be a numismatic professional should be deemed to have superior knowledge as compared to a regular Joe collector. The fact that a coin is graded by a TPG should not absolve a dealer from his professional duties and responsibilities.

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Interesting, I see a lot of dealers that have deferred to the TPGs. (Of course, I mean the top 3-4). They sell the plastic not the coin. Can you define "numismatic professoinal" please? What then is the role of the TPGs if they are not independent numismatic experts?

Sorry Longacre, just giving your some of your own medicine.

Ronyahski · February 28, 2007 4:56AM

<< Regarding fraud, does the fact that the dealer is cornering the market and omitting that in his discussions with a client, meet at least one of the elements of fraud? >>

Labelling the activity as a "well-managed promotion" does not mean any more to me than labelling the COINS transaction a tax shelter. A tax shelter is nothing more than a transaction that has been registered with the IRS. So you seem to be using the term in the boogie man way that many interpret the term, that tax shelters are inherently illegal or evil.

So a "well-managed promotion" includes a dealer cornering the market. What does that mean? What did he do? Or doesn't it matter and you are just stipulating that whatever he did was illegal or evil.

Longacre · February 28, 2007 5:05AM

<< 

<< Regarding fraud, does the fact that the dealer is cornering the market and omitting that in his discussions with a client, meet at least one of the elements of fraud? >>

Labelling the activity as a "well-managed promotion" does not mean any more to me than labelling the COINS transaction a tax shelter. A tax shelter is nothing more than a transaction that has been registered with the IRS. So you seem to be using the term in the boogie man way that many interpret the term, that tax shelters are inherently illegal or evil.

So a "well-managed promotion" includes a dealer cornering the market. What does that mean? What did he do? Or doesn't it matter and you are just stipulating that whatever he did was illegal or evil. >>

I understand your point and the perspective from which you are speaking (not to get into a lot of detail, given the subject matter of the topic). BTW, will you be attending the TEI conference in DC during the week of March 19th?

ColonialCoinUnion · February 28, 2007 5:43AM

I have several thoughts here:

1) I left my corporate job specifically so I wouldn't have to read things like this anymore, and

2) I read it anyway, and

3) I personally believe there are a whole lot less 'well-managed promotions' than you think there are, and those that do exist often seem to blow-up in the promoters face.

4) In fact, I am aware of as much or more attempted 'manipulation' of the sort you describe perpetrated or attempted to be perpetrated (attempto-perpetrated) by collectors with designs on corning some part of the market or hoarding all the 93-S Dollars. These often blow-up too, by the way.

So, in conclusion, I'd say its not that big a problem, and so I'm not overly concerned about it.

bidask · February 28, 2007 5:55AM

<< 

<< Do you think regulated versus non regulatd markets should be part of this discussion. I view the collectibles coin industry as unregulated and therefore a dealer who unabashedly promotes may not necessarily be breaking a fiduciary responsibility . Especially when there is so much disagreement over grading ( even with the evolution of TPG's.) >>

The fiduciary duty should transcend the regulated/non-regulated question. >>

"the requisite high degree of dominance and reliance must have existed prior to the transaction giving rise to the alleged wrong, and not as a result of it."

What does this mean? Also can you give me an example of a fiduciary relationship. I can understand auction houses having a fiduciary relationship, or hiring a dealer to view and bid on coins. Perhaps others.

But your example seems to suggest that the average bourse transaction where the parties may not have ever met but a transaction occurs due to 'promotion', (not fraud), while ethically questionable, does not seem to suggest a 'fiduciary relationship'.

MrEureka · February 28, 2007 6:12AM

I wonder if threads like this scare people out of buying coins. I also wonder if that would be a good thing or bad.

RichieURich · February 28, 2007 7:44AM

<< I have several thoughts here:

1) I left my corporate job specifically so I wouldn't have to read things like this anymore, and

2) I read it anyway, and

3) I personally believe there are a whole lot less 'well-managed promotions' than you think there are, and those that do exist often seem to blow-up in the promoters face.

4) In fact, I am aware of as much or more attempted 'manipulation' of the sort you describe perpetrated or attempted to be perpetrated (attempto-perpetrated) by collectors with designs on cornering some part of the market or hoarding all the 93-S Dollars. These often blow-up too, by the way.

So, in conclusion, I'd say its not that big a problem, and so I'm not overly concerned about it. >>

I don't think many things qualify as "well-managed promotions". It requires someone to build up a decent sized inventory of the item, somehow create additional demand for that item, and an orderly liquidation of said inventory so that others don't know what's going on. A fairly tall order if a truly rare coin is involved, and if it isn't a rare coin but an artificial scarcity, usually the "create additional demand" part of the equation doesn't work. Plus, a hoard can get too big: for example, the hoard of over 600 1844 Seated dimes that were consigned as one (huge) lot, and the lot didn't sell. The alternative is to sell a few a week until the inventory is liquidated, which could take a few years, and the experts in the series would certainly be aware as to what was going on, and would reduce their bids accordingly.

DaveG · February 28, 2007 9:43AM

Umm, "fiduciary duty"? "client"? "well-managed promotion"?

Somehow I get the feeling you're not really comfortable with an unregulated marketplace.

SanctionII · February 28, 2007 12:50PM

Longacre:

Are you aware of any federal or state court published appellate opinion that holds that a "fiduciary duty" exists between a coin dealer and his/her customer?

If so, that case opinion should be widely circulated in the hobby press and this forum, just so dealers and customers can be "well informed".

DaveG · February 28, 2007 12:59PM

How about for an art dealer or an antique dealer?

(either of which would be relevent to a coin dealer)

farthing · February 28, 2007 1:24PM

Generally speaking I prefer it when things are "well managed". I see more than enough of the other choice at work!

I agree with those that see no fiduciary duty here.

BlindedByEgo · February 28, 2007 3:51PM

It is threads like this that make me grateful that:

a. My business partner is a CPA

and

b. I am not.

Think I'll stick to my widgets and keep my head buried in the sand.

Do dealers who unabashedly look favorably upon the “well-managed promotion”, breach a fiduciary duty

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