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Coin Rarities & Related Topics: The PCGS Lawsuit Against Alleged Coin Doctors
Posted By Greg Reynolds On June 2, 2010 @ 10:21 am In Coins and the Law, Column: Coin Rarities, Commentary and Opinion | 6 Comments
News and Analysis regarding scarce coins, coin markets, and the coin collecting community #3
A Weekly Column by Greg Reynolds
Welcome to the third installment of my column. I had planned to write more about auctions and about current demand for rare Liberty Seated coins. I was pleasantly surprised, however, by the most important lawsuit in the history of coin collecting: The PCGS lawsuit against six named individuals and other not yet named individuals regarding coin doctoring is pathbreaking and earth shattering.
Even if the PCGS does not prevail on all points or against all defendants, the educational value of this suit, and the impact that it will have on coin doctors, goes way beyond the fate of these defendants. For legal reasons, I will not comment on the defendants in this suit. I am asserting that a significant number of coin doctors who are not defendants will be discouraged by this lawsuit from doctoring coins.
The PCGS SecurePlus™ program, which was inaugurated in March 2010, also discourages coin doctoring. For some discussion of the ‘plus’ aspect of the program and my idea as to how the NGC can discourage coin doctoring, please see last week’s column.
Under the SecurePlus™ program, submitted coins are scanned, for purposes of identification, with CoinAnalyzer devices. The PCGS will be able to identify each scanned coin if it is submitted to the PCGS again in the future, and, when a match is found, the submitted coin will be closely compared to an image of the same coin that was taken when it was previously submitted. Changes in the appearance of each matched coin will be investigated. The positive effects of the SecurePlus program, though, will build very gradually over a period of many years. This lawsuit will be extremely effective at discouraging coin doctoring in the near future.
Four years ago, when coin doctoring was rampant in the dealer community, had PCGS officials threatened a coin doctor with a lawsuit, the coin doctor probably would have figured that PCGS officials were bluffing. I am almost certain that this is the first time that a grading service has sued some of its dealer-members for submitting coins that are allegedly doctored and misrepresented.
Now, if PCGS officials threaten a coin doctor with a lawsuit unless he stops submitting doctored coins to the PCGS, the threatened individual is likely to take the threat very seriously and believe that the PCGS might actually follow through with a suit. Yes, I realize that not every coin doctor will be deterred by the threat of a lawsuit. Most will be deterred, at least to an extent.
The costs of coin doctoring in terms of the risks involved are now much greater than they were before this lawsuit, even if it is never proven in court that these six defendants are involved in coin doctoring conspiracies. It is very expensive and emotionally painful to defend oneself against such a lawsuit, which here includes allegations of breach of contract, fraud, unfair business practices, and racketeering. ‘Win, Lose, or Draw,’ this lawsuit will be tremendously beneficial to coin collectors and will result in much fewer coins being doctored than would have otherwise been doctored.
This lawsuit “is about winning the hearts and minds of collectors,” John Albanese exclaims. Further, the “PCGS had to protect their shareholders, they had to protect collectors, and they had to protect themselves.” It cost “a lot of money” for the PCGS to “buy back doctored coins.” Consider “$90,000 for a 1918-S dime,” which is specifically itemized in the suit. Additionally, “PCGS has become embarrassed by doctored coins in PCGS holders,” Albanese suggests. “They have a right to protect their reputation.”
How serious a problem is coin doctoring? Of the pre-1934 coins in PCGS or NGC holders that are submitted to the CAC, John Albanese states that “a significant percentage have been doctored.”
At lot viewing sessions for major or semi-major auctions, and on the bourse floor of major conventions, I often see coins with waxes, films, gels, putties and sort of paint-like substances. Among pre-1934 absolute or condition rarities, I find far too many that have been ‘doctored,’ and, undoubtedly, Albanese catches doctored coins that I have missed or would miss.
Dr. Steven Duckor, a prominent collector for decades, is a renowned expert in early 20th century gold coins and in Barber coins. He has attended many major auctions and privately viewed thousands of choice gold coins and Barber coins. Dr. Duckor learned a great deal from David Akers, who is frequently regarded as the nation’s foremost expert in U.S. gold coins. Duckor declares that, of “uncirculated better-date Saint Gaudens Double Eagles, in PCGS or NGC holders, 15% have been doctored.”
For an explanation as to why natural toning is highly favored by sophisticated collectors and as to why ‘coin doctoring’ is so terrible, please see my three part series on this topic, Part 1, Part 2, Part 3. (As usual, throughout the text, clickable links are in blue.) It may suffice to say, at this moment, that doctored coins are often ruined.
Rarities that have been ruined now cannot be effectively collected, appreciated and understood by collectors in the near or far future. It is a big disappointment for a collector to travel hundreds of miles to a coin show or an auction in order to find out that some of the coins in which he is interested have been surgically altered or puttied. Besides, in almost all instances when a doctored coin, in a PCGS or NGC holder, is sold, the doctoring is not disclosed, and the buyer is often very hurt, emotionally and/or financially, when he or she finds out that the coin has been doctored.
John Albanese asserts that “coin doctoring is [ultimately] defrauding the consumer. It is illegal to pass off a doctored coin as a high quality coin or as a coin with no serious problems. If you buy a house,” John explains, “then the problems with the house should be disclosed. Realtors are bound to tell you. It is fraud not to disclose serious problems that relate to the value of the item. Coin doctoring [typically] involves an intent to deceive,” Albanese declares.
Coins that have been doctored often ‘turn’ over time; putties and other foreign substances chemically react or just ‘fall off’! Before citing two definitions of ‘coin doctoring’ in section three below, it makes sense to put forth some basic information for the benefit of beginning collectors. Knowledgeable collectors may wish to jump to the third section.
Although it became widely publicized when it was posted on CoinLink on Sat. May 29, this suit was filed a day or two earlier. Officially, the plaintiff is Collectors Universe, Inc., of which the Professional Coin Grading Service (PCGS) is a subsidiary. As the PCGS is the largest and most significant part of Collectors Universe, and is known to coin collectors throughout the world, I will here refer to the plaintiff as the PCGS, though this is not completely correct.
The defendants in this suit are alleged to have conspired in efforts, many times successful, to get the PCGS to assign numerical grades to doctored coins that are higher than the grades that were previously assigned or would have been assigned had the coins in question not been doctored. In the suit, the PCGS provides a list of a dozen coins that are said to be just a “few examples” (Section 14). Each of the named defendants is alleged to be either a dealer-submitter of doctored coins and/or a coin doctor who acted in concert with at least one dealer-submitter. (Click here to read the complaint filed by Collectors Universe-PCGS, or here to read the brief announcement on CoinLink.)
The PCGS and the NGC are the two leading grading services of U.S. coins. They each place coins in sealed, hard plastic holders and assign numerical grades to submitted coins that qualify for numerical grades. John Albanese was involved in the founding of the PCGS in 1986 and he was the sole founder of the NGC in 1987. He is no longer a shareholder of either.
David Hall was the primary founder of the PCGS. Hall and relatively new PCGS President Don Willis are the driving forces behind the bold new policies that the PCGS has implemented in 2010.
In 2007, Albanese founded the CAC. Coins that are already graded by the PCGS or the NGC are accepted by the CAC for examination. A coin receives a CAC sticker of approval if the CAC finds that its grade is in the middle to ‘high end’ of the respective grade range. One of the purposes of the CAC is to filter doctored coins that the PCGS or the NGC erroneously graded. Coin grading is very difficult and no one, not even Albanese, can ‘bat near one thousand.’ (For definitions of low end, mid range and high end, please see my article on The Widening Gap. For more discussion of the CAC, please see my articles on CoinFest, Jay Brahin’s Coins, the “MS-68+” 1901-S, and Dr. Duckor’s quarters.)
Among pre-1934 U.S. coins, it is not unusual for one grade increment to reflect a tremendous difference in price, often many thousands of dollars. So, if a coin is PCGS certified as Proof or MS-65, the owner of the coin may try to get the PCGS to grade it as 66. Sometimes, if a coin is repeatedly submitted, it will eventually upgrade. In other instances, coin doctors tamper with a coin to deliberately hide imperfections and/or to give it false additional characteristics and thus try to ‘trick’ the PCGS or NGC graders into awarding it a higher grade as a consequence of deliberately falsified characteristics.
How is ‘coin doctoring’ different from ‘conservation’? I have never felt comfortable with the definition that most often floats about the coin collecting community. Nonetheless, it has some merit and is widely accepted: ‘Taking something off a coin is conservation; adding something to a coin is doctoring.’ So, removing dirt, grime, toning, organic matter, or even a layer of metal via dipping, is ‘conservation,’ according to this definition. Adding metal, plastics, auto body putty, colored substances, gels, films, and a variety of other things, constitutes doctoring.
In my view, some so called conservation practices damage coins, sometimes irreparably. I admit, however, that a majority of influential dealers (though perhaps not most knowledgeable collectors) view a wide range of conservation practices as being legitimate. From my inquiries, however, I conclude that more than 95% of knowledgeable collectors and leading dealers, agree that coin doctoring, as defined above or below, is damaging and usually fraudulent.
The following is the definition of ‘coin doctoring’ put forth by the PCGS in this lawsuit, in Section 9B, and seems to stem from the agreement that dealer-members sign in order to be dealer-submitters of coins for PCGS grading. I have here removed the phrase ‘among other things,’ which appears repeatedly and is distracting. The parentheses and the words inside them appear in the PCGS definition as stated in this lawsuit.
According to the PCGS, coin doctoring “involves the alteration of the appearance of a coin to attempt to increase its value, and may involve: adding substances to coins (such as putty, wax, facial oils, petroleum jelly or varnish); treating coins with chemicals (such as potash, sulfur, cyanide, iodine or bleach); heat treating coins in any way to alter their appearance; re-matting (“skinning”) Proof gold; ‘tapping’ and ’spooning’ (i.e. physically moving surface metal to hide marks); filing rim nicks; or repairing coins (re-tooling metal).
Though there is no perfect definition of coin doctoring, and this PCGS lawsuit states that coin doctoring may also involve actions not listed above, this is a very good definition, not just in my opinion. It is strongly consistent with viewpoints expressed to me, over a period of years, by leading dealers and collectors.
It is not clear whether coin doctoring is a crime. This is the first such civil suit. I am not aware of any criminal charges that are relevant to this case.
Since the modifications of a doctored coin are rarely disclosed, coin doctoring is usually fraudulent, largely because the intent is to deceive and to ‘counterfeit’ not an entire coin, but some desirable characteristics of a coin. Coin doctors are ‘counterfeiting’ positive characteristics of a coin. For example, a doctored coin may appear to be free of contact marks and hairlines in the right obverse (front) field, yet these are really there but are masked by added substances. A choice quality right obverse field is being counterfeited. Likewise, attractive blue, purple and green toning is often counterfeited.
“We as owners of rare coins are caretakers of history,” Dr. Duckor exclaims. “When you doctor a coin, you destroy history. If coin doctoring is not a crime now, it should be,” in Duckor’s view.
The PCGS lawsuit does assert that doctoring U.S. or foreign “legal tender” coins “is a federal crime under 18 U.S.C §331,” which is abbreviated in the lawsuit as follows, “Whoever fraudulently alters, defaces, mutilates, impairs, diminishes, falsifies, scales or lightens any of the coins minted at the mints of the United States … [or] … Whoever fraudulently possesses, passes, utters, publishes, or sells, or attempts to pass, utter, publish or sell … any such coin, knowing the same to be altered, defaced, mutilated, impaired, diminished, falsified, scaled or lightened … Shall be fined under this title or imprisoned not more than five years or both.”
It is thus argued in the lawsuit that someone who doctors a coin and/or someone who knowingly submits a doctored coin to the PCGS for grading is committing a crime, which is much more than a civil offense. It is not necessary for this argument to be accepted in order for the PCGS to win. Indeed, the PCGS does not have to prevail on all counts in order to win this civil suit.
The strongest arguments by the plaintiff may relate to the ‘breach of contract’ accusation, as each dealer-submitter agreed, in a contract with the PCGS, not to submit any doctored coins for PCGS grading. “Dealer and PCGS agree that PCGS would suffer irreparable damages if Dealer were to engage in coin ‘doctoring’ and that PCGS shall be entitled to not only compensatory damage but also [other legal measures against the Dealer] for any breach of the Dealer’s obligation not to ‘doctor’ coins or knowingly submit doctored coins to PCGS.”
Suppose, hypothetically, that an expert dealer submitted a substantial number of doctored coins to the PCGS for grading. Would much (if any) additional evidence be needed to prove that such an expert-submitter ‘knowingly’ submitted doctored coins?
So far, I have reported that the PCGS has claimed that the defendants have committed fraud and ‘breach of contract.’ The PCGS has made addition allegations, including “willfully, fraudulently, [and] maliciously” violating provisions in the California Business & Professions Code, and forming conspiracies, which I take to refer to allegations that the defendants worked in pairs or teams.
As it is widely recognized in the coin collecting community that coin doctoring constitutes fraud (except perhaps in the very rare instances where such doctoring is fairly disclosed), the two most curious and potentially explosive allegations are the first two counts. The PCGS alleges that the defendants “acts constitute an actionable wrong” under the Lanham Act, and the PCGS alleges racketeering under RICO statutes. I will probably discuss these two allegations next week.
I strongly believe that the coin doctoring problem can be contained. It can never be entirely abolished. The number of choice and rare pre-1934 U.S. coins that are doctored can be limited to a very small number each year.
Dr. Duckor “applaud[s] PCGS efforts and CAC efforts to control the coin doctoring problem. The hobby will be better off because of this lawsuit.” In Duckor’s view, the five most important advances in the history of coin collecting are: the founding of the PCGS in 1986, the founding of the CAC in 2007, the introduction of the PCGS SecurePlus™ program in March 2010, the filing of this lawsuit a few days ago, and the development of the PCGS CoinSniffer technology to detect some kinds of coin doctoring. “These five steps have revolutionized coin collecting,” Duckor exclaims.
The influential collector Jay Brahin remarks that this lawsuit is “long overdue. You can’t stop coin doctoring unless you expose coin doctors and their associates. Their greatest tool is secrecy. Many coin doctors [and their supporters] are in cahoots with each other. They work together,” Brahin has learned.
I hypothesize that there are fewer than seventy-five coin doctors who have the skills to often deceive graders at the PCGS and the NGC. As for coin doctors who can effectively laser the fields of Proof gold coins or build the heads on Standing Liberty Quarters, as mentioned in this lawsuit, Albanese estimates that “there are definitely less than ten, probably not even six who could do this.” I am glad to hear that there are so few. The PCGS should sue most or all of them now.
There are more coin doctors who are able to add putty and other substances, to disguise imperfections, and then get such doctored coins in PCGS or NGC holders. Albanese suggests that there are “twenty to thirty,” which, honestly, was my estimate before all the words even came out of his mouth. I finished his sentence. I could guess the identities of ten to fifteen of them.
With a few more lawsuits, similar to this one, the PCGS may be able to deliver many ‘knockout punches.’ Jay Brahin asserts that such lawsuits “would be great for the coin business. When you remove more doctored coins with counterfeit [characteristics], everyone will feel more comfortable.” Further, Brahin points out that, if “the cancer” of coin doctoring “spreads more” over the next several years, “it will become harder to cure.” It is best to “go after the coin doctors now and put them out of the coin doctoring business,” Brahin suggests.
Even if the PCGS does not soon file any additional lawsuits, this one will accomplish a great deal. Regardless of the fate of these six defendants, others will be discouraged from doctoring coins. The mere filing of this suit will save many rare coins from being damaged and will enhance the credibility of the PCGS. Plus, it will greatly contribute to the education of collectors.
©2010 Greg Reynolds
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