Rhyne Closure Serves As Warning -- Precious-Metals Investors Reminded Of Risks Involved

Precious metals were supposed to be safe. At least that's what Patrick Brennen thought. Even if paper money totally lost its worth, his silver and platinum would still have value.

But for the past 10 days, since he found out that his dealer, Rhyne Precious Metals, had abruptly shut down, Brennen - along with hundreds of other investors - has been waiting and worrying that his once-golden dreams have turned to dust.

Rhyne's closure, due to as-yet-undisclosed "financial irregularities," surprised many in the close-knit precious-metals industry. And the losses expected among Rhyne's customers will serve as an unfortunate wake-up call to investors.

"Hindsight's 20-20," said Brennen, the owner of a Redmond printing company who had bought $7,000 worth of silver and platinum coins from Rhyne and stored them with the dealer. "I just figured it would be safer to have them in his vault. It never crossed my mind that anything would go sideways."

But in an industry loaded with risk and lacking regulation, there have been more than a few occasions when investors were left in the cold.

"The history of our industry is replete with dealers who have gone out of business and have taken their customers' coins down with them," said Todd Imhof. His Lakewood-based company, Pinnacle Rarities, deals mostly in rare coins.

When a dealer goes under, customers typically can face a long wait as officials go over the company's assets and figure out how to divide them among creditors. Those can include everyone from wholesalers to lawyers, not just the people who purchased metals.

So Brennen, along with 150 to 250 other investors, is waiting to find out what the court-appointed receiver, Scott Henrie of the law firm Williams Kastner & Gibbs, finds as he examines Rhyne's assets. He is waiting to find out what officials at the U.S. Attorney's office and the Federal Bureau of Investigation find as Rhyne cooperates with their investigation.

He is waiting for the mystery of Craig Rhyne to unravel.

In business for more than two decades, Rhyne Precious Metals had become one of the most prominent and respected dealers in the Northwest. Rhyne's brochures pictured a clean-cut man who started his business with $19,000 he received as an insurance settlement when he lost his leg in a car accident. They touted investments in gold as insurance against inflation.

As a man, as a businessman, his reputation was sterling.

"Craig has been a pillar of the industry for many years," said Eloise Ullman, executive director of the Industry Council of Tangible Assets, a national trade organization for the precious-metals industry. "He's a very good person and a good businessman."

It was Rhyne himself who contacted the U.S. Attorney's office through his lawyer, John Wolfe. Rhyne has been unavailable for comment since his business shut down, issuing statements through Wolfe, and leaving acquaintances and clients to wonder what really happened.

About six months ago, Rhyne and Mary Faith Rhyne, his wife of almost 19 years, were legally separated. Along with her petition for the separation, filed last August in King County Superior Court, Mary Faith Rhyne also filed a request for temporary relief, citing the family's financial and emotional crisis as the reason.

Her filing described her husband as the sole manager of the family business, a closely held corporation, and said Rhyne's management practices had caused disputes because "he leaves our family in continuous high financial risk by his aggressive management of the available funds."

Mary Faith Rhyne could not be reached for comment.

Whatever the "financial irregularities" are that Wolfe cited for the closure - and for which Craig Rhyne has taken responsibility - the demise of Rhyne Precious Metals is a reminder of the risks involved in precious-metals investments.

The federal government regulates transactions involving precious-metals futures on the commodity exchanges in New York and Chicago. And Washington state's commodities act, passed in 1986, regulates some retail sales of precious metals, said Deborah Bortner, securities administrator for the Securities Division of the Department of Financial Institutions.

For instance, the act requires that customers receive their precious metals within 27 days of purchase. Or, if a customer chooses to store the metals with a dealer, the act stipulates that they be kept in a financial institution or a depository approved by the director of the Department of Financial Institutions.

The reality is that precious-metals dealers generally are not monitored any more than anyone would watch a jewelry shop or antique dealer, said Lakewood dealer Imhof.

In Washington state, there have been cases of fraud involving precious-metals dealers, including a 1987 case in which Spokane businessman Steven G. Baldwin was accused of defrauding more than 100 investors of $1.25 million. Investors believed they had purchased silver when there was actually no metal to back up their purchases. In 1991, Baldwin pleaded guilty to mail fraud and was sentenced to five years in prison.

Dealing in precious metals is a risky business. It's hard to get a fix on the true market value of some types of investments - such as coins. Although spot prices for commodities such as gold and silver are set, the premiums charged on coins by dealers can vary.

Adding to that uncertainty are the low profit margins in the precious-metals industry, Imhof said, which he estimated at between 0.5 percent and 3 percent, which means that a company like Rhyne Precious Metals would have to do a tremendous volume of business.

It remains to be seen how much Rhyne investors will actually recoup. Henrie said he and his colleagues have found some coins, silver bars and jewelry in the store. Other business assets include the money from a margin account in New York that Rhyne had recently closed, which Henrie expects to be between $75,000 and $100,000. Rhyne Precious Metals also has a bank account at Seafirst Bank.

"I don't think there's going to be enough there to pay back everybody everything," he said.

All this means that investors should research dealers and make sure they hold on to their metals themselves or store them with a reputable facility, said James DiGeorgia, editor of Silver and Gold Report, an industry newsletter based in Palm Beach Gardens, Fla.

The price of gold, which soared to $850 an ounce in 1980, has been fairly stable recently at about $385. Investors should watch out for companies and telemarketers that promise huge profits, DiGeorgia said.

They must be cautious and careful before investing, DiGeorgia said, because of the lack of checks among dealers.

"It's like the Wild West," he said. "They make up the rules."

------------------ How to file claims ------------------

Rhyne investors should send a letter explaining their transaction and copies of documents supporting their claim to Scott Henrie, Williams Kastner & Gibbs, P.O. Box 21926, Seattle, WA 98111.