Gold first caught Ron Barbala’s eye in 2008. With the housing values plummeting and the stock market cratering, the Phoenix engineer felt betrayed by the economy, which increasingly he considered little more than a mirage. “The standard American method of investing, all of it,” he said. “I’d had it.”
Desperate for something of value he literally could put his hands on, he began acquiring gold and silver bullion. “Its value is in its physicality,” Barbala said. “It just is.”
Over the next several years, Barbala bought more than $100,000 worth of precious metals through a little-known downtown Austin company. Started in 1999, Bullion Direct began as an online virtual trading floor where thousands of customers could buy and sell precious metals to each other, with the company taking a cut of each sale.
Later, it began selling the metals to customers directly. It also stored the commodities for those who requested it — such as Barbala — with the glittering coins and bars kept safely in individual piles for each investor in an old bank vault in its Lavaca Street offices.
At least that’s what everyone thought.
By the time auditors and lawyers got access to Bullion Direct’s 14th-floor offices six weeks ago, there were only a handful of gold and silver coins in an office safe. A second vault it had recently rented held only slightly more.
An estimated $30 million in cash, metal bullion and valuable coins, meanwhile, had vanished.
Can’t print metal out of thin air
The cumulative weight of the unaccounted for metal is the equivalent of dozens of standard-sized gold bullion bars and hundreds of silver ones. Also missing are an estimated 1,400 ounces of platinum and palladium.
In recent weeks, as thousands of investors in Texas and across the country have absorbed their bad fortune, there has been no shortage of theories where the precious commodities went — including whether they ever existed at all.
The one person who knows for sure, company founder and owner Charles McAllister, recently moved from Wimberley to Alabama. Officials say that while he is being cooperative, many basic questions about the missing fortune remain unanswered.
McAllister’s Austin attorney, Randy Leavitt, declined to make him available for an interview.
“We are cooperating with the investigations,” Leavitt said.
Emails obtained by the American-Statesman show state and local prosecutors have met to discuss the company. Leavitt confirmed the U.S. attorney’s office also has begun investigating Bullion Direct.
What is clear is that the news has devastated those who believed the company was safekeeping the futures they’d bet on the rounds and bricks of gold and silver. Some lost hundreds of thousands of dollars’ worth of the precious metal with little apparent prospect of regaining it. Jesse Moore, an attorney representing several creditors, predicted that investors can hope to recover 2 or 3 percent of their money, at best.
Bullion Direct filed for bankruptcy protection on July 20, several days after the company abruptly shuttered its operations and let go its dozen or so employees. The company’s new lawyer, Joe Martinec, has hired a local turn-around specialist to try to squeeze whatever value remains out of it.
Several weeks into the job, he has described the company’s finances as a mess. Bullion Direct hadn’t filed a tax return since 2010. What little has been unearthed suggests it was losing money almost from the day it opened its doors. Records also indicate McAllister paid himself hundreds of thousands of dollars in annual compensation.
Philosophically, the disappearance of their precious metal has left many Bullion Direct customers, who turned to gold as a safe port in a turbulent financial world, with a crisis of confidence. Attracted to an investment specifically because of its detachment from a government and financial system they didn’t believe in, now that their treasure has disappeared they find themselves wondering what, really, is permanent.
“What’s safer than some bars of metal in a vault?” said Kenneth Burns, a South Carolina physician. “They can’t print metal out of thin air. It can lose value. But it can’t get to zero. At least that’s what I thought.”
“A lot of the people who invest in gold and silver either distrust the financial system, or they’re convinced the world as we know it will collapse, and gold and silver will be used for barter. A lot of survivalists,” said Joshua Gibbons, who follows the industry from Massachusetts on his website, about.ag. (Ag is the chemical designation for silver.)
Some advocate a return to the gold standard — tying the value of currency to the existing gold supply, a system the U.S. hasn’t used for half a century. Precious metal forums host animated debates over the legality of the Federal Reserve, which controls the country’s money supply.
Sam Painter of Augusta, Ga., said he became a Bullion Direct customer after reading “The Creature from Jekyll Island,” a book that blames the Federal Reserve for everything from economic policy failures to wars. “It really opened my eyes,” he said. “The dollar is just out there without anything to support it. You believe it’s worth a dollar, and I believe it’s a dollar. But it’s really just paper.”
Austin machinist David Kirschner said he started buying metals from Bullion Direct in 2010 to protect himself against the inevitable collapse of the financial system. “Somebody’s going to get a big haircut, and I didn’t want it to be me,” he said.
Yet it’s simplistic to dismiss gold bugs as financial conspiracy theorists. Collectors accrue gold and silver coins as a hobby. Many large investors buy bullion as a hedge to protect against the decline of other investments. Former Texas congressman and presidential candidate Ron Paul, among others, has advocated for the gold standard.
The Legislature also has succumbed the lure of physically possessing precious metals. Lawmakers this year passed a law creating a Texas bullion depository in preparation for accepting hundreds of millions of dollars in gold owned by University of Texas Investment Management Co., which manages the university system’s investments. The approximately 5,500 gold bars are currently held in a New York bank.
“A state depository would remove much of the uncertainty and safety concerns associated with the storage of precious metals elsewhere,” according to the analysis of House Bill 483. Yet state Sen. Lois Kolkhorst, R-Brenham, who co-sponsored the bill, said Texas’s superior security was only part of the reason to repatriate the bullion.
“New York will hate this,” she told the Houston Chronicle.
Indeed, for a certain percentage of investors, hoarding gold is as much a political statement as an investment. “The beauty of bullion is that it cannot be tracked; it cannot be accounted for,” said Barbala. “It’s called subversive investing. You are subverting the entire U.S. economy. It’s the only, last investment vehicle outside of government control.”
Bullion Direct promoted such light-handed regulation. The company “is not, nor required to be, registered with the SEC since we are not trading securities,” its website promised. “Furthermore, we are not required to register with any other regulatory body.”
Always paid in full, on time
Some who had assumed their gold and silver was safely under lock and key with Bullion Direct said they learned of the company’s sudden collapse only when they happened to log on to its website this summer to check their holdings and saw a notice it had filed for bankruptcy. Others received an email.
“At first I thought it was spam,” said John Washburn of Wisconsin. (Washburn, a political activist, made Texas headlines four years ago when he wrote a computer program to automatically request Rick Perry’s emails at regular intervals, effectively preventing the governor from deleting any of the correspondence.) Washburn is missing 57 ounces of gold from Bullion Direct’s vault — worth about $65,000 at current prices.
It is an indication of how unregulated the precious metal business is that investors and officials associated with the case say they know little about McAllister. Public records show that before Bullion Direct, he owned a Houston coin store.
Clayton “Sonny” Toupard purchased Royal Precious Metals Co. from McAllister in 1999. “I think he knew the collectibles business was phasing out, and bullion was the future,” Toupard said.
McAllister and a partner, Vivek Katyal, incorporated Bullion Direct in August 1999. (Katyal, who now works for an accounting firm in California, stopped answering his phone after initially agreeing to discuss the company with the American-Statesman.) That same year, McAllister and Katyal also patented software allowing metals customers to buy and sell to each other.
Toupard said he did business with McAllister’s new company. “We would sell to him, mostly bullion. He was always up front; always paid on time and in full” — a track record that made Bullion Direct’s sudden collapse all the more incomprehensible. “I don’t think (McAllister) is the kind of person who would embezzle or take money from the company,” Toupard said. “That’s not him.”
For 15 years, Bullion Direct’s public face was one of success. Customers said their orders were processed without a hitch. Those who requested delivery of gold and silver received it on time.
Painter, the Augusta customer, recalled the company hosted a forum in which customers could connect. “Many posted photos of their metals delivered, all wrapped up like a Christmas present,” he said.
Over the years, Bullion Direct boasted an estimated 60,000 customers and handled transactions worth hundreds of millions of dollars.
A tale of two companies
Beneath the surface, however, financial documents from Bullion Direct’s bankruptcy depict a startlingly different picture. James Hoeffner, an Austin attorney representing a Florida customer missing an estimated $250,000 in cash and metal from the company’s vault, said Bullion Direct filed only a single income tax return, in 2010, covering the previous decade.
It showed the company lost money for all but two of those years. By 2009, the documents show, the company was carrying $17 million in losses — not counting the tens of millions of dollars’ worth in eventually missing money and metal. Records also show McAllister had hired a bankruptcy attorney in 2012, but never filed.
At the same time, he paid himself as much as $365,000 annually, and borrowed an additional half-million dollars from the company, according to the documents.
Officials said they are still trying to reconstruct Bullion Direct’s finances for the past five years. In the meantime, in creditors meetings and online forums, investors have traded theories in about what might have happened to their precious metals.
Barbala — whose 437 ounces of gold, silver, palladium and platinum in Bullion Direct’s safe appears to have evaporated — hypothesized that fraud was part of McAllister’s business plan from the start. “He saw all of us coming a mile away, and played his cards very well,” Barbala said. “If you steal bullion, unless you’re caught in the act, it’s impossible to trace.”
Martinec’s reading of the company documents he’s seen suggests something closer to “a slow-motion Ponzi-like scheme.” McAllister scrambled to keep Bullion Direct afloat by dipping into investors’ precious metals and cash to support newer transactions. The system appears to have collapsed this summer, Martinec said, when investors got spooked by a sudden rash of complaints over tardy deliveries and demanded the company ship their gold and silver immediately.
Yet even if McAllister wasn’t siphoning off customers’ gold and silver for his own use, and was trying to prop up his failing business, “this appears to have been going on 14 years,” said attorney Peter Ruggero, whose California client had at least $344,000 in silver and gold disappear. “When is it reasonable to stop taking people’s money?”
Bullion Direct’s collapse has been life-changing for many. Barbala said his losses represented 2o years of savings. Burns estimated he will have to put off retiring by a decade to replace the worth of his vanished metal.
To some, it has been just as crushing to acknowledge the pieces of metal they thought would shield them from an uncertain world might have been only a glittering illusion. Martinec said he continues to field calls from Bullion Direct customers who can’t grasp their gold and silver doesn’t exist.
“They still think they have some ounces of gold or silver sitting in the vault, and just want to come pick it up,” he said.