The Texas Bullion Depository, sold as a gold mine for taxpayers, could end up costing millions

The Texas Bullion Depository, sold as a gold mine for taxpayers, could end up costing millions

Citizens, too, were clamoring for an independent-minded location they could trust with their valuables. “When I first presented this, to be honest with you, we got hundreds and hundreds of people from all over the world, really, who wanted to be able to put their gold in something that has the Texas banner above it,” said Rep. Giovanni Capriglione, R-Southlake, the bill’s author. “This doesn’t work in Wisconsin, it doesn’t work in Idaho.”

Best of all, because the state would find a private partner to build and own the physical depository, it would cost taxpayers nothing. The enterprise would even reap a big profit for Texas. “We estimate that we could raise tens of millions of dollars in fees,” Capriglione testified.

More than three years after the depository opened, none of those things has happened. Yet earlier this year state lawmakers quietly voted to let the state borrow millions of dollars to bail out a project created to fix a problem that didn’t exist, and which they had vowed would cost nothing.

“It’s ridiculous,” said Sen. Kel Seliger, R-Amarillo, one of only two senators to oppose the bill. “I don’t think the State of Texas should be in the commercial real estate business, or the gold bullion business.”

The UT/A&M investment company liquidated its gold more than a year ago without moving any bullion back to Texas. A spokeswoman said the agency currently owns no precious metals and so has no need for storage. No other state entity has metal at the Texas depository.

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In the time since state leaders created the Texas facility, two large private competing depositories have also opened, in Shiner and Dallas. Officials said Texas Bullion Depository is currently less than 10 percent full. Taxpayers, meanwhile, have yet to see a penny from the enterprise.

Worse, the state’s partner, Lone Star Tangible Assets, recently revealed it is looking to sell the new facility, placing the state at risk of losing control of the entire enterprise. In response, two months ago legislators gave Comptroller Glenn Hegar permission to borrow up to $20 million to buy it.

How a project touted as a golden opportunity for taxpayers devolved into a bait-and-switch that could instead cost millions is a classic tale of government mission creep. It also raises new questions about the odd-couple partnership between the State of Texas and the high-volume precious metals sales industry, a sector that has inspired numerous warnings and enforcement actions from federal and state regulators, including the Texas attorney general.

“When I saw this, I thought, ‘This is going to be embarrassing for the State of Texas,’” said Paul Montgomery, a precious metals dealer and appraiser who has worked with regulators to bring cases against coin dealers who scam investors.

State Rep. Brooks Landgraf and State Rep. Giovanni Capriglione listen to testimony presented before the Texas House Committee on Mass Violence Prevention and Community Safety on Thursday, Nov. 7, 2019 in the Zant Community Room in Odessa College in Odessa.

‘A big trading floor’

Several weeks ago, Seliger informed his Capitol staff they were taking a field trip to Leander, a 30-minute drive north of Austin. “I’m sure they thought I was crazy,” he said. The senator wanted to take a personal look at the fortified real estate Texas taxpayers were on the verge of buying.

What he saw surprised him, he said. Despite its grand promise of safeguarding piles of gleaming metal, the physical Texas Bullion Depository was relatively small — a vault-doored room lined with what appeared to be safe deposit boxes, as in a bank.

The majority of the 40,000 square-foot facility was taken up by the state’s partner company. At a large mailing area, Lone Star Tangible Assets and its subsidiaries — US Gold Bureau is one — appeared to be packaging up and shipping coins. Another big section was filled with dozens of phone solicitors sitting at desks making sales calls, “with big screens on the wall showing who sold what,” Seliger said. “Like a big trading floor.”

Consumer advocates said the state’s bullion depository arrangement was odd from the beginning. One partner was the Texas government. The other was from a largely unregulated industry that elder advocates, in particular, have long cautioned citizens about patronizing.

In 2014, a Congressional committee heard testimony from seniors – including from Texas — who thought they were making a solid gold investment only to learn they had lost hundreds of thousands of dollars. Both federal and Texas regulators have issued advisories about precious metal investing.

In 2019, the Texas State Securities Board pressured a metals company to return $10 million to dozens of elderly Texas investors, some of whom had liquidated their retirement accounts to buy it. Several weeks ago, the securities agency demanded a Florida dealer cease and desist selling coins to Texas customers at huge mark-ups.

Montgomery said the typical case involves an elderly customer who responds to an advertisement promoting bullion — metal whose worth is based on its weight — as a hedge against economic turmoil. Because salesmen usually earn much more selling coins, the customer is pressured into buying so-called collectible, or investment coins whose price is based on perceived scarcity. But in many cases, Montgomery said, the coin’s supposed rarity is a tale, based on as little as a former U.S. Mint director’s autograph.

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Lone Star Tangible Asset Chairman Matthew Ferris acknowledged that, as an under-regulated business, the precious metal industry has had problem players. But “We are one of the good guys,” he said. Unlike some, his company doesn’t make cold calls, posts its prices on its website and “We’re up-front about the risks and rewards,” he said.

U.S. Gold Bureau boasts positive online reviews and maintains an ‘A’ rating with the local Better Business Bureau. Yet the consumer organization’s review of the company still warns its “advertising may lead a consumer to believe that their investment in gold products will be safe in the future, which cannot be consistently substantiated as the future value of gold products cannot be guaranteed or predicted.”

U.S. Gold Bureau also hasn’t been immune from claims it upsold clients on coins of questionable value. In 2018, Nevada resident Edward Mugg claimed in a federal lawsuit that thanks to “unlawful, false, misleading and unconscionable misrepresentations and sales tactics,” he had been misled into paying $335,500 for coins later appraised at only $143,300.

The company responded that it supplied Mugg with all the proper disclosures. With hundreds of thousands of customers, Ferris added, “you’re going to have a few who are unhappy, for whatever reason.”

The case was settled in late 2019. Although the terms are confidential, Mugg’s attorney, Lyn Stevens, said his client was “very satisfied” with the outcome.

‘Everybody was shocked’

Capriglione, who did not respond to an interview request, first proposed that Texas create a bullion depository in 2013. Inspired by author James Rickards, a market-crash Cassandra, his bill was expansive, proposing not just a depository but also a gold-based transaction system. With a projected cost of millions and 70 new state employees, however, the idea never took off.

Two years later, Capriglione pared down the proposal into a state-run precious metals storage facility. Teaming up with a private-sector partner that absorbed all the upfront costs ensured the state’s cost would be next to nothing. A dozen companies expressed initial interest in the job. Six submitted bids and four gave oral presentations.

Several were experienced candidates. Texas Precious Metals, which already operated a depository in Shiner, proposed building the State of Texas a 46,000 square-foot safe facility. Dillon Gage Metals, a large precious metal wholesaler, owned and operated two depositories, in Delaware and Canada.

Some applicants paid lobbyists to pitch their cases. Lone Star started contributing money, according to state records and published reports. Although neither the company nor its leaders had made political donations before, between the time Abbott signed the bill creating a depository and Hegar announced the winner, Lone Star’s three top executives donated seven times to the governor and comptroller, for a total of $21,500.

Based on its collaboration with state officials to craft specifications for the project, Dillon Gage fully expected to be selected as the partner, recalled Jimmy McClintock, who worked on the company’s proposal. “We basically gave them all the info on what to do and how to do it,” he said.

So when Hegar announced in June 2017 that Texas had selected Lone Star Tangible Assets, a relative newcomer known primarily as a coin dealer, “It just sucked the air right out of the room when I heard. Everybody was shocked,” said McClintock, who stressed that he no longer spoke on behalf of Dillon Gage, which he left several years ago.

A five-year deal called for Lone Star to build and operate a facility at its own expense. In exchange, it could tout the depository and its State of Texas connection to help its coin and metal business. The new law also called for creation of a statewide network of licensed bullion agents who would accept metals for far-flung customers.

The bullion agent network was scrapped two years ago after no one expressed interest in the work. And despite the promises of big profits, the state hasn’t earned any money because the contract terms call for Lone Star to make back whatever it has spent before the state sees any income. In the meantime, Texas spends about $150,000 a year to cover the salaries of a full-time security worker and a compliance manager assigned to the depository.

Ferris said the depository was steadily accepting more metal and was on its way to profitability for Texas. “It’s a business that grows really slow,” he said. “It may take 5, 10, 20 years to get there.” The comptroller’s office is “satisfied with LSTA’s performance under the contract,” an agency spokesman added.

Still, the arrangement’s vulnerability was highlighted when Lone Star informed the comptroller’s office it intended to sell the 10-acre Leander property—something Ferris said it planned to do from the beginning. The company is obligated to honor the terms of its contract with Texas through the end of next year, and Ferris said his company was staying put so whoever buys the facility could depend on rental income.

Yet a new owner could decide to evict the Texas Bullion Depository. “There’s definitely a risk associated at the end of that contract for us to potentially be required to leave the space,” Macy Douglas, who oversees the facility for the comptroller’s office, told legislators last May.

In its proposal to operate a depository, one applicant, Texas Precious Metals, warned of such an outcome. “The state would be forced into the possible nightmare of relocating billions of dollars in assets from one facility to another, including thousands of segregated client accounts,” the Shiner company wrote, recommending instead that an arm’s-length third party own the physical building.

The public hearing for the law giving Texas permission to borrow millions to buy the depository lasted four minutes. At the floor debate a few days later, Seliger, who recently filed two bills to kill the project, was skeptical of the state’s need to buy a 40,000 square foot building in Leander.

“If the state didn’t have a gold depository, what would the effect be on the State of Texas?” he said. “Absolutely nothing.”

eric.dexheimer@chron.com

This content was originally published here.

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