Ariz. rich in mining scams -Commission warns of possible fraud as metal prices rise
Max Jarman - The Arizona Republic - May. 25, 2007
Arizona's mineral-rich geography and long-standing mining tradition have made the state fertile ground for con artists selling shares in supposedly rich mines that turn out to be busts.
With gold approaching $700 per ounce and the prices of other metals at near-record highs, the Arizona landscape is particularly ripe for such schemes.
Earlier this month, the Arizona Corporation Commission's securities division issued a warning about the potential for scams relating to mines and precious metals.
Commission spokeswoman Heather Murphy said the agency investigates two to three such scams a year and is concerned the number will rise because of the increases in prices for precious metals.
Such a move is not new for the commission. It also stepped in during the last boom in mining scams after the stock market dive in 1987. Investors turned to precious metals and gold stocks for security, which fueled a spate of questionable mining ventures.
"We want to stop the 'fool's gold rush of 1988' before it reaches epidemic proportions in Arizona," said Matt Zale, who at the time was director of the commission's securities division.
In a recent investigation, the commission late last year obtained a temporary restraining order against Agra-Technologies Inc., a Flagstaff firm that claims to be able to extract platinum from a deposit of volcanic cinders the company controls in Coconino County. Proponents told prospective investors the operation eventually would show profits of $100 million per year.
Murphy said a hearing on Agra's alleged sale of unregistered securities and the merits of its offer likely will be held at the commission in October.
In 2005, the commission shut down an operation headed by Timothy Watt, 67, of Scottsdale. He was selling stock over the Internet in Centenarios Gold Inc., a gold-mining venture in Mexico. Watt was fined $5,000.
100 years of scams
Arizona has a long tradition of mining scams and frauds going back more than 100 years.
"Arizona is an easy place to base a fraudulent scheme based on minerals because of the backdrop of real live mining activities," said W. Scott Donaldson, a Phoenix mining attorney who has studied mining scams.
The state has been home to spectacular mining scams in the past.
For instance, in 1899, Doc Flowers bilked scores of East Coast investors with his Spenazuma Mine in Graham County that purportedly was discovered by the son of Aztec Emperor Montezuma, then lost and rediscovered by Flowers.
Donaldson agreed that the current high metals prices could lead to more scams.
"The high prices have created a particularly attractive market for schemes based on metals," he said.
The Internet factor
The Internet has added a new dimension because of the ability to market to vast numbers of people, and because it is difficult for investigators to trace the scams.
Donaldson noted that many mining scams don't get reported because the victims are embarrassed. Others victims are obsessed with punishing the perpetrators.
Investors in the failed Seven Stars Mining Co. took their case to the U.S. Supreme Court in 1903. Seven Stars purchased the Hillside mine near Bagdad, Ariz., from John Lawler in 1892 and quickly began selling stock in the mine renamed the Seven Stars. But Lawler took the $450,000 mine back after Seven Stars failed to make payments beyond a $20,000 down payment. Investors sued Lawler and ultimately lost their case in the nation's highest court.
Scam protection
Murphy said mining scams generally fall into two categories: ones involving new mineral discoveries or rediscovered lost mines and those that involve new ways to extract valuable minerals from sources previously thought to have little value.
"People need to know these scams are out there," Murphy said.
Donaldson noted that red flags to watch for include ore that cannot be assayed by conventional means, supposedly rich deposits that have been overlooked by major mining companies and unconventional methods for recovering the precious metals.
"People need to exercise extreme caution and consult with experts not attached to the property," Donaldson added.
Corporation Commissioner Gary Pierce suggested that investors first should make sure that both the salesperson and the investment are licensed and registered in Arizona by calling (602) 542-4242.
"Our staff can tell you whether the person is properly registered and also provide insight into his or her disciplinary history," he said.
