Case 1:22-cv-01266-RGA Document 2 Filed 09/27/22 Page 1 of 33 PageID #: 10
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF DELAWARE
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`Plaintiff,
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`COMMODITY FUTURES TRADING COMMISSION,
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`FIRST STATE DEPOSITORY COMPANY, LLC,
`ARGENT ASSET GROUP LLC, AND
`ROBERT LEROY HIGGINS,
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`Case No.
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`COMPLAINT FOR
`INJUNCTIVE RELIEF,
`RESTITUTION, CIVIL
`MONETARY PENALTIES,
`AND OTHER EQUITABLE
`RELIEF UNDER THE
`COMMODITY EXCHANGE
`ACT AND COMMISSION
`REGULATIONS
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`v.
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`Defendants.
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`Plaintiff Commodity Futures Trading Commission (“Commission”), by its attorneys,
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`alleges as follows:
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`I.
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`INTRODUCTION
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`1.
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`From at least January 2014 through the present (the “Relevant Period”),
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`Defendants First State Depository Company, LLC (“FSD”), Argent Asset Group LLC
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`(“Argent”), both by and through their employees and agents, including Robert Leroy Higgins
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`(“Higgins”), and Higgins directly (collectively, “Defendants”) engaged in a fraudulent and
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`deceptive scheme (the “Scheme”) in connection with the purchase and sale of precious metals,
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`including but not limited to the purchase and sale of silver coins as part of a fraudulent silver
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`leasing program known as the “Maximus Program.”
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`2.
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`In the course of operating the Maximus Program, Defendants deceived
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`participants in the Maximus Program (“Maximus Customers”) and participants in a parallel lease
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`program called the Silver Lease Program (“Silver Lease Customers”) that was primarily operated
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`1
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`by a non-party referred to herein as Metals Dealer 1, and its CEO, Individual 1.1 Although all of
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`the silver involved in the Silver Lease Program became part of the Maximus Program, the
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`Maximus Program was not limited to metal owned by Silver Lease Customers.
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`3.
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`In carrying out the Scheme, Defendants:
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`a. misappropriated Customer funds and assets;
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`b. led Customers to believe that their metal was held at FSD, when in fact it was
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`not;
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`c. led Customers to believe that Defendants had obtained silver for Customers,
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`when in fact they had not;
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`d. misappropriated funds and assets belonging to certain non-Customer clients
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`(“Clients”), and deceived those Clients when they asked FSD to return their
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`assets; and
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`e. deceived Customers and Clients regarding the insurance coverage that FSD
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`maintained for Customers and Client assets, including by leading Customers
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`and Clients to believe their assets were fully insured for 100% of their value,
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`when in fact they were not.
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`4.
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`Through this Scheme, Defendants fraudulently solicited and obtained at least
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`$7,000,000 in cash, silver, and other assets from at least 200 Customers in the Programs, and a
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`substantial amount of cash, silver, gold, and assets from other Clients.
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`5.
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`By virtue of this conduct, Defendants violated Section 6(c)(1) of the Commodity
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`Exchange (the “Act’), 7 U.S.C. § 9(1), and Commission Regulation 180.1, 17 C.F.R. §
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`180.1(a)(1)-(3) (2021).
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`1 The Complaint uses the term the “Programs” to refer to the Maximus Program and the Silver Lease Program
`together, and the term “Customers” to apply to either Maximus Customers or Silver Lease Customers.
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`2
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`6.
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`Higgins is directly liable for acts and omissions he committed in furtherance of
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`the Scheme. Under Section 13(b) of the Act, 7 U.S.C. § 13c(b), Higgins is also liable for FSD
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`and Argent’s violations of Section 6(c)(1) and Commission Regulation 180.1(a)(1)-(3) because
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`he controlled FSD and Argent, directly or indirectly, and because he either did not act in good
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`faith or knowingly induced their acts or omissions.
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`7.
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`The acts, omissions, and failures of Argent’s employees and agents alleged
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`herein, including Higgins, occurred within the scope of their employment, agency, or office with
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`Argent. Therefore, Argent is liable pursuant to Section 2(a)(1)(B) of the Act, 7 U.S.C. §
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`2(a)(1)(B), and Commission Regulation 1.2, 17 C.F.R. § 1.2 (2021), as principal for the violative
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`actions and omissions of Argent’s employees and agents, including Higgins.
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`8.
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`The acts, omissions, and failures of FSD’s employees and agents alleged herein,
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`including Higgins, occurred within the scope of their employment, agency, or office with FSD.
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`Therefore, FSD is liable pursuant to Section 2(a)(1)(B) of the Act and Commission Regulation
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`1.2, as principal for the violative actions and omissions of FSD’s employees and agents,
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`including Higgins.
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`9.
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`Furthermore, FSD and Argent did not conduct business separately and at arm’s
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`length, but rather operated as a common enterprise with each other. Higgins was the control
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`person of that common enterprise. Higgins owned both FSD and Argent and had ultimate
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`decision-making authority over the business of both companies.
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`10.
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`The Commission brings this action pursuant to Section 6c of the Act, 7 U.S.C.
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`§ 13a-1, to enjoin Defendants’ unlawful acts and practices and to compel their compliance with
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`the Act and the Regulations promulgated thereunder. In addition, the Commission seeks civil
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`monetary penalties, restitution, and remedial ancillary relief, including, but not limited to, trading
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`3
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`and registration bans, disgorgement, rescission, pre- and post-judgment interest, and such other
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`and further relief as the Court may deem necessary or appropriate.
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`11.
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`Unless restrained and enjoined by this Court, Defendants will likely continue to
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`engage in acts and practices alleged in this Complaint and similar acts and practices, as described
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`below.
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`II.
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`JURISDICTION AND VENUE
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`12.
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`Section 6c(a) of the Act, 7 U.S.C. § 13a-1(a), authorizes the Commission to seek
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`injunctive and other relief in United States district court against any person whenever it shall
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`appear to the Commission that such person has engaged, is engaging, or is about to engage in
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`any act or practice constituting a violation of any provision of the Act, or any rule, regulation, or
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`order thereunder, and provides that district courts “shall have jurisdiction to entertain such
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`actions.” This Court also has jurisdiction pursuant to 28 U.S.C. § 1331 (federal question) and 28
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`U.S.C. § 1345 (United States as plaintiff).
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`13.
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`Venue lies properly with this Court pursuant to Section 6c(e) of the Act because
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`Defendants can be found in this District, transacted business in this District, and certain
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`transactions, acts, practices, and courses of business alleged in this Complaint occurred, are
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`occurring, or are about to occur in this District.
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`III. THE PARTIES
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`14.
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`Plaintiff Commission is an independent federal regulatory agency charged by
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`Congress with the administration and enforcement of the Act, 7 U.S.C. §§ 1-26, and the
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`Regulations promulgated thereunder, 17 C.F.R. pt. 1–190 (2021).
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`15.
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`Defendant Robert Leroy Higgins is the owner, operator, principal, and control
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`person for FSD and Argent. Higgins holds himself out as, and in fact is, the owner and manager
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`of both FSD and Argent. Higgins controls and is the signatory on the bank accounts of FSD and
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`4
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`Argent. Higgins communicates extensively with Customers, Clients, and business partners on
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`behalf of both FSD and Argent. Higgins employs or employed his sons, the fiancée of one of his
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`sons, his sister, and his wife in the business of FSD and Argent. Higgins never been registered
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`with the Commission in any capacity.
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`16.
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`Defendant First State Depository Company, LLC is a Delaware limited
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`liability company, organized on or about January 25, 2006, with an address of 100 Todds Lane,
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`Wilmington, Delaware. FSD’s website describes itself as a “private depository” that offers “a
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`full range of precious metals custody, shipping and accounting services to both commercial and
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`individual participants in the rare coin and precious metals markets.” FSD provides depository
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`storage services to Customers, but also stores precious metals and valuables for a number of
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`Clients whose assets are not part of the Programs. FSD has never been registered with the
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`Commission in any capacity.
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`17.
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`Defendant Argent Asset Group LLC is a Delaware limited liability company,
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`organized on or about September 24, 2013, with an address of 100 Todds Lane, Wilmington,
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`Delaware. Argent engages in the business of buying, selling, and leasing coins, bullion, bars,
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`and other precious metals, and touts itself as a “leading numismatic and precious metals trading
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`firm.” Argent has never been registered with the Commission in any capacity.
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`IV. RELEVANT NON-PARTIES
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`18. Metals Dealer 1 is a company based in Kansas that specializes, among other
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`things, in the sale and promotion of precious metals as an investment vehicle, including for
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`individuals wishing to invest in precious metals individual retirement accounts (“IRAs”). Many
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`of Metals Dealer 1’s customers entered the Silver Lease Program so that they could obtain
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`monthly income from metal they deposited in an IRA.
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`5
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`19.
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`Individual 1 is the owner, chief executive officer, and control person of Metals
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`Dealer 1.
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`A.
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`20.
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`V.
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`FACTS
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`Defendants Operated as a Common Enterprise
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`FSD and Argent did not conduct business at arm’s length or observe corporate
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`formalities, but rather were commonly controlled by Higgins.
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`21.
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`Higgins owns both companies, and he serves as the managing member, president,
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`or chief executive officer of both companies.
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`22.
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`Although Higgins on occasion told counterparties that the companies were
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`separate and that he had no control over FSD, that was not true. In other communications
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`Higgins held himself out to third parties as owner, manager, President, or CEO of FSD.
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`23.
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`Higgins also conducted business on FSD’s behalf throughout the Relevant Period.
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`Higgins communicated with Customers, Clients, and other counterparties on FSD’s behalf,
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`including, for example, by communicating with Customers regarding the return or distribution of
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`assets stored at FSD, and communicating with FSD’s insurance brokers and underwriters
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`regarding FSD’s insurance policies.
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`24.
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`In addition, Higgins was the primary or an authorized signer on FSD’s and
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`Argent’s bank accounts, and the primary credentials for online access to FSD’s and Argent’s
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`bank accounts were in his name.
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`25.
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`FSD and Argent commingled corporate funds—on various occasions throughout
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`the Relevant Period, Argent paid bills for FSD or wired money to FSD in order to ensure its bank
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`account balance remained positive. FSD and Argent also transferred Customer funds between
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`them.
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`26.
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`FSD and Argent shared the same address and office at 100 Todds Lane.
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`27.
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`FSD and Argent also shared employees, consultants, or agents, including Higgins,
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`who owned, operated, and controlled both entities. Higgins installed one of his sons (“Son No.
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`1”) as nominal operational head of FSD and another son (“Son No. 2”) as nominal operational
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`head of Argent. Higgins’ sister performed services on behalf of both FSD and Argent, and
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`another of his sons (“Son No. 3”) and Higgins’ wife worked for FSD and/or Argent at various
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`points during the Relevant Period.
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`B.
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`28.
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`Argent’s Maximus Program
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`Starting in or around November 2013, Argent and Higgins promoted an
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`investment program called the Maximus Program and solicited individuals to participate in it.
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`The Maximus Program purported to offer Customers guaranteed monthly payments in exchange
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`for their agreement to lease to Argent silver that the Customers purchased or owned. Maximus
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`Customers were supposed to receive a monthly “lease” payment based on a sliding scale that in
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`part depended on the amount of silver the Maximus Customers leased to Argent.
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`29.
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`All of the leased silver in the Maximus Program was in the form of American
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`Silver Eagles (“ASEs”).2 The ASE, also referred to as a “Silver Eagle” or “SAE,” is the
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`official silver bullion coin issued by the United States Mint. Each coin weighs one ounce and is
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`a minimum of 99.9% pure silver. The weight and purity of ASEs is guaranteed by the United
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`States government.
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`30.
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`Prospective Maximus Customers could join the Maximus Program by either:
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`(1) transferring funds to Argent in order to purchase ASEs that could then be pledged to the
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`Maximus Program, (2) transferring ASEs the prospective Customer already owned to Argent or
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`FSD to be pledged to the Maximus Program, or (3) transferring coins, bullion, or other assets to
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`2 This complaint uses the term “Leased Silver” to refer to the ASEs that were part of either the Maximus Program
`or the Silver Lease Program.
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`Argent or FSD to be exchanged for ASEs that would be pledged to the Maximus Program. In
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`marketing materials, internal memoranda, and on Higgins’ LinkedIn, Argent described the
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`Maximus Program as follows:
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`Investors who own physical silver or have a desire to purchase silver and hold the
`investment over a medium to longer term, can obtain an added benefit by
`participating in our Maximus Silver Program. In this program investors can enter
`into a leasing agreement with The Argent Group in monthly intervals. During
`each month you participate in the program, investors will benefit a minimum
`fixed rate on the number of ounces utilized by The Argent Group. Over 12
`months, utilizing the minimum 5000 ounces required to sign up for this program,
`an additional annual income of $4,500 would result, regardless of any price
`movement in Silver. . . A storage agreement at [FSD] is the only other
`requirement.
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`31. Maximus Customers signed an agreement with Argent that was known and
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`referred to as the “Maximus Agreement” or “Maximus Silver Agreement.” The Maximus
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`Agreements set forth the terms and conditions of the leasing relationship and included various
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`representations and warranties. Maximus Customers also entered into a Depository Account
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`Agreement with FSD regarding the purported storage of assets at FSD.
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`C. Metals Dealer 1’s Silver Lease Program
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`32.
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`In February 2014, Argent entered into a Maximus Agreement with Metals Dealer
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`1, an entity owned and controlled by Individual 1. Pursuant to the Maximus Agreement between
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`Argent and Metals Dealer 1, Argent agreed to pay Metals Dealer 1 twenty cents ($0.20) per
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`month for each ASE that Metals Dealer 1 pledged to the Maximus Program. Higgins told Metals
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`Dealer 1 that Argent used the Leased Silver to fulfill short-term sales of ASEs to third parties as
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`needed, and that if Leased Silver was sold, an equivalent amount of ASEs would promptly be
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`returned to the account.
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`33.
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`At or around the same time, Metals Dealer 1 began soliciting prospective
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`Customers for a silver leasing program of its own that operated in parallel to Argent’s Maximus
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`Program. Metals Dealer 1’s program was typically referred to as the Silver Lease Program, but
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`was on occasion referred to as the Silver Deposit Account. The result of this arrangement was a
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`set of back-to-back leases, through which Metals Dealer 1’s customers leased ASEs to Metals
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`Dealer 1, and Metals Dealer 1 exclusively leased those ASEs to Argent.
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`34.
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`35.
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`The Silver Lease Program mirrored the Maximus Program in several ways.
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`First, in order to participate in the Silver Lease Program, Customers were
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`required to sign a lease agreement with Metals Dealer 1 (“Lease Agreement”), which provided
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`that the Customers would lease to Metals Dealer 1 the silver described in the Lease Agreement.
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`Customers also signed a Depository Account Agreement with FSD regarding the purported
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`storage of assets at FSD.
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`36.
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`Second, all of the silver pledged to the Silver Lease Program was in the form of
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`ASEs.
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`37.
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`Third, prospective Silver Lease Customers could join the Silver Lease Program by
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`either: (1) sending money to Metals Dealer 1 to purchase ASEs; (2) sending ASEs they already
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`owned to FSD and pledging them to the Silver Lease Program; or (3) exchanging other coins,
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`bullion, or assets for ASEs and pledging those ASEs to the Silver Lease Program.
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`38.
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`Some Silver Lease Customers invested through self-directed IRAs. Metals
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`Dealer 1 utilized a designated IRA custodian (“IRA Custodian”) to administer Silver Lease
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`Customers’ IRA accounts. Although the IRA Custodians technically administered the IRAs,
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`their role was limited to overseeing and authorizing transactions into and out of the accounts.
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`The IRA Custodians did not physically possess or hold the assets that were in the IRAs
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`(including the ASEs that were part of the Silver Lease Program). For most of the Relevant
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`Period, one IRA Custodian (“IRA Custodian 1”) served as the sole IRA Custodian for the Silver
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`Lease Program.
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`39.
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`Fourth, Metals Dealer 1 agreed to provide Silver Lease Customers with
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`consideration in exchange for their agreement to lease ASEs to Metals Dealer 1. In the original
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`iterations of Metals Dealer 1’s Lease Agreements, Metals Dealer 1 agreed to pay any storage,
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`shipping and IRA custodial fees that Silver Lease Customers incurred, but did not agree to make
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`a monthly payment. At some point thereafter, however, Metals Dealer 1 agreed to provide Silver
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`Lease Customers with a monthly payment of between one cent and ten cents per ASE invested in
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`the Silver Lease Program, with the rate set in tiers based on the quantity of the ASEs leased to
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`Metals Dealer 1 (the “Silver Lease Payment”). For example, a Silver Lease Customer who
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`pledged between 1,000 and 1,999 ASEs received a monthly payment of $0.01 per coin; a Silver
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`Lease Customer who pledged between 9,000 and 9,999 ASEs received a monthly payment of
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`$0.09 per coin, and a Silver Lease Customer who pledged more than 10,000 ASEs received a
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`monthly payment of $0.10 per coin. Silver Lease Customers had the option to receive this
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`monthly payment in cash, or instead to have additional ASEs put into their account.
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`40.
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`From 2014 to present, Silver Lease Customers collectively sent millions of dollars
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`of money, silver, or other assets to Metals Dealer 1 or FSD to join the Silver Lease Program.
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`There are presently more than 200 Silver Lease Customers who collectively have more than
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`600,000 ASEs in the Silver Lease Program, worth more than $10 million at present market
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`prices.
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`41.
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`Although certain iterations of the Lease Agreements were silent as to what Metals
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`Dealer 1 intended do with the Leased Silver, and others permitted Metals Dealer 1 to transfer the
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`Leased Silver to non-specified “customers desiring to purchase silver,” in every case and without
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`fail, Metals Dealer 1 pledged the Leased Silver to the Maximus Program.
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`42.
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`In other words, Metals Dealer 1 essentially served as a vehicle for directing ASEs
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`to Argent’s Maximus Program. Consequently, a large majority of the ASEs in the Maximus
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`Program came from Metals Dealer 1 and Silver Lease Customers. In light of Argent’s agreement
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`to pay Metals Dealer 1 $0.20 for each ASE pledged to the Maximus Program, Metals Dealer 1’s
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`Silver Lease Payments to Customers were essentially a pass-through arrangement in which
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`Argent paid $0.20 to Metals Dealer 1 for each ASE that Silver Lease Customers held, and Metals
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`Dealer 1 paid up to $0.10 per ASE to Silver Lease Customers, keeping the rest as profit.
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`43.
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`The way this worked in practice was that in instances where a Silver Lease
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`Customer possessed ASEs it wanted to pledge to the Silver Lease Program, the ASEs were
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`physically shipped to FSD and pledged to the Programs. In other instances, Customers delivered
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`precious metals directly to FSD, who released the metal to Argent to nominally be exchanged for
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`ASEs that would be pledged to the Programs. For Customers who joined the Silver Lease
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`Program by purportedly purchasing ASEs with money, the Customers sent their funds to Metals
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`Dealer 1, which forwarded money to Argent for the purpose of purchasing ASEs. These
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`Customers were provided with invoices and other documents indicating that Metals Dealer 1
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`purchased silver on their behalf and that their Leased Silver was stored at FSD.
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`44.
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`Upon information and belief, Silver Lease Customers were not typically aware
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`that all of their Leased Silver had been pledged by Metals Dealer 1 to the Maximus Program. If
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`Silver Lease Customers asked how leasing of the Leased Silver worked, Metals Dealer 1 told
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`them the same thing that Higgins told Metals Dealer 1—that the Leased Silver was used to fulfill
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`short-term sales of ASEs as needed, but that if this occurred, an equivalent amount of ASEs
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`would promptly be returned to their account. Based on representations by Defendants, Metals
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`Dealer 1 also told Silver Lease Customers that their ASEs were insured for 100% of their value
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`and stored in physically segregated storage at FSD.
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`D.
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`45.
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`Defendants’ Scheme
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`Throughout the Relevant Period, Defendants engaged in a fraudulent and
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`deceptive scheme that involved misappropriation of Customer and Client assets, false and
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`misleading representations to Customers and Clients, and other deceptive conduct. Defendants
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`falsely led Customers to believe their ASEs were securely stored at FSD and falsely led certain
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`Customers to believe that Defendants had obtained ASEs for those Customers. Defendants also
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`failed to sufficiently insure the assets that FSD held in order to protect them from risk of loss,
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`and in doing so deceived Customers and Clients about FSD’s insurance coverage. In at least one
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`instance, Defendants misappropriated a Client’s assets, and deceived that Client when it
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`attempted to remove its assets from FSD. All of these deceptions were material. As FSD itself
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`said in marketing materials:
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`We know that asset safety, transaction accuracy and expeditious fulfillment are of
`paramount importance to every depository customer, whether they are
`commercial enterprises conducting frequent, high volume business transactions or
`individuals simply seeking a highly secure facility to hold their personal coin and
`bullion investments.
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`46.
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`Despite this assurance, Defendants did not report transactions accurately, fulfill
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`transactions expeditiously, or sufficiently insure Customer and Client assets to protect them from
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`risk of loss.
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`1.
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`Fraud and Deception Regarding ASEs Held at FSD
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`47.
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`Defendants led Customers to believe that their ASEs were held securely at FSD.
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`FSD’s website unequivocally states that “your coins and bullion always remain physically stored
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`in our depository, in your account and your legal property at all times.” Metals Dealer 1’s Lease
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`Agreements stated that Customers were leasing “silver coins held on deposit at FSDC,” and
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`certain Lease Agreements stated that Metals Dealer 1 “shall maintain, in FSDC’s possession
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`and/or control, the specific property borrowed or property of similar nature that is fungible with
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`the property borrowed.” The Leased Silver that Metals Dealer 1 pledged to Argent through the
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`Maximus Program was also purportedly stored at FSD, and Argent’s Maximus Agreements (both
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`with Metals Dealer 1 and with other Maximus Customers) required Argent to “maintain, in its
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`possession and/or control, the specific property borrowed or property of similar nature that is
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`fungible with the property borrowed.”
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`48. Metals Dealer 1 appears to have taken these representations at face value.
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`Individual 1 believed that the ASEs in the Silver Lease Program were physically stored at FSD.
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`If a Silver Lease Customer asked where their ASEs were stored, Individual 1 would tell them
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`“they are in a segregated 100 percent insured account in their physical form, and if you wanted to
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`actually go to Wilmington, Delaware to physically see your metal . . . that can be arranged.” As
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`noted above, Higgins led Individual 1 to believe that the Leased Silver might be temporarily
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`removed from a Customer’s account in order for Argent to sell ASEs to a third party, but that if
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`that happened, the Leased Silver would be replaced or replenished shortly thereafter.
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`49.
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`If Argent removed Leased Silver from Customer accounts, that fact should have
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`been disclosed to Customers. In marketing materials, FSD told prospective clients they would
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`receive transaction confirmations that reported the movement of their assets, and account
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`statements that reflected their holdings, so that “the account owner always knows the exact status
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`of all holdings secured at First State.” FSD’s website says that “ALL of our transactions are
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`fully transparent” and that FSD offers “full disclosure, [and] accurate and timely reporting.”
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`Similarly, in its Depository Account Agreements with Metals Dealer 1 and Customers, FSD
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`agreed to provide “monthly statements . . . summarizing . . . account balances by Asset type,”
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`and to “provide Client with written confirmation of transactions that occur in Client’s Account
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`each day.”
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`50.
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`FSD did send Customers weekly or monthly “Holdings Reports” that purported to
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`show each Customer’s account balance and holdings at FSD, and “Activity Reports” that were
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`purportedly distributed every time a transaction occurred in their account (collectively, the
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`“Reports”). These Reports did not show the “temporary” movement of ASEs into and out of the
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`account as they were purportedly leased and returned. Instead, FSD sent Customers Holdings
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`Reports showing ASEs being transferred into a Customer’s account and essentially remaining
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`there permanently. The Activity Reports indicated the same thing. Almost the only activity
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`reflected in the Reports—aside from purchases or sales that Customers themselves initiated—
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`was the monthly addition of ASEs to the accounts of Silver Lease Customers who elected to
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`receive their Silver Lease Payment in the form of additional ASEs, rather than cash.
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`51.
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`FSD represented that it was “fully transparent” in reporting transactions, that it
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`engaged in “full disclosure” and “accurate and timely reporting” and that an account owner could
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`rely on the Reports to know the “exact status of all holdings secured at FSD.” The Reports FSD
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`sent to Customers indicated that their accounts held ASEs at all times. Those representations,
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`taken together, were intended to give Customers the impression that all of their Leased Silver
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`was physically and securely stored in their accounts at FSD at all times, and the impression that
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`the Reports accurately stated the value of assets held in Customers’ accounts.
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`52.
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`In fact, the exact opposite was the case. To the extent Defendants even obtained
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`ASEs for Customers in the first place, Defendants’ typical practice was for FSD to
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`systematically transfer all of the Customers’ ASEs to Argent and Higgins, and for Higgins to sell
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`those ASEs to third parties. This was typically done by moving metal from FSD’s vault to
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`Argent’s offices at FSD, but on occasion it was simply accomplished by having metal delivered
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`directly to Argent without ever being physically placed inside of FSD’s vault.
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`53.
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`After this occurred, neither the Leased Silver, metal similar to the Leased Silver,
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`nor assets roughly equivalent in value to the Leased Silver were returned to the Customers’
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`account at FSD. Very little if any of the Leased Silver was actually stored in Customer accounts
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`at FSD. Similarly, while some Leased Silver was temporarily stored in Argent’s offices before
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`being sold, Argent did not store the Leased Silver in its offices for long periods of time, and its
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`offices did not contain anywhere close to the full number of ASEs pledged to the Programs. In
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`addition, Argent did not maintain a reserve of cash in its bank accounts that would allow it to
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`obtain all of the Leased Silver for Customers if needed.
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`54.
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`In other words, Defendants did not temporarily remove Leased Silver from
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`Customer accounts to satisfy specific orders by third parties, and then replace the Leased Silver
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`with other ASEs shortly thereafter, as Defendants led Customers to believe they were doing.
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`Nor did Defendants replace Customers’ ASEs with other assets of an equivalent value; this much
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`is confirmed by the fact that the Reports FSD sent to Customers indicate that their accounts held
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`ASEs, not other equivalent assets. Instead, Defendants misappropriated the Leased Silver,
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`simply taking it and diverting it to their own use.
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`55.
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`None of this was disclosed to Customers by Defendants, either on the Reports or
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`elsewhere. FSD repeatedly sent Customers false and misleading Holdings Reports showing that
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`the Customers’ ASEs were securely stored in their account at FSD, when in fact no such metal
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`was there. Nothing in Defendants’ contracts, communications, or other dealings with Customers
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`authorized Defendants to misappropriate the Leased Silver, or authorized FSD to send these
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`false, misleading, and deceptive Holdings Reports. FSD’s failure to inform Customers that their
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`metal was not actually stored at FSD was also a deceptive omission, in light of their
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`representations to the contrary on the Holdings Reports.
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`56.
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`The monthly Activity Reports that FSD sent to Customers who elected to receive
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`their Silver Lease Payment in the form of additional ASEs were also false and misleading.
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`Those Activity Reports purported to show ASEs being added to Customers’ accounts for the
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`Silver Lease Payment. In actuality, FSD did not physically transfer ASEs into Customers’
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`accounts or physically move any ASEs at all. Instead, FSD employees simply made electronic
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`entries in FSD’s inventory management system, indicating that ASEs had been moved into
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`Customers’ accounts. These entries were “paper entries” with no corresponding actual
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`transaction, and the Activity Reports sent to Silver Lease Customers were false and misleading.
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`57.
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`Defendants’ knew that the Reports were false and misleading or were reckless as
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`to their truth or falsity. Defendants knew that the Leased Silver was not stored at FSD, and knew
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`that they were nonetheless sending Holdings Reports that gave Customers the contrary
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`impression. As to the Activity Reports, Defendants made fictitious entries in FSD’s inventory
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`management system with the knowledge that no metal had actually been moved to Customers’
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`accounts, and with the knowledge that the Customers would receive an Activity Report that gave
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`them the contrary impression.
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`58.
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`Defendants’ misappropriation and deception was undoubtedly material.
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`Representations regarding the location and actual existence of a Customer’s asset, and its
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`safekeeping by the party to whom it was entrusted, are of fundamental importance. As FSD
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`itself acknowledged, “[w]e know that asset safety [and] transaction accuracy . . . are of
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`paramount importance to every depository customer.”
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`2.
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`Fraud and Deception Regarding the Acquisition of ASEs
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`59.
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`Defendants’ Scheme also involved several occ