There are good ways to avoid common abuses in rare coins

A few years ago, it was commodities. Now it's rare coins. While the American Eagle, the first general-circulation United States gold coin to be minted in more than 50 years, went on sale this week, it's old coins that are getting much of the attention these days from dealers, financial planners -- and now, the law.

``All the financial planners who used to sell commodities are now selling coins,'' observes one Boston planner who does not deal in rare coins.

But planners who recommend rare coins to clients, as well as individuals who buy coins, are finding some tarnish on the rare-coin business.

The latest problem came up recently when the Federal Trade Commission and the United States Postal Service accused Rare Coin Galleries of America, a Boston firm, of attempting to defraud customers of up to $28 million by selling overvalued coins.

The firm, which denies the charges, has filed for Chapter 11 bankruptcy to protect it from creditors while it fights the case, a lawyer for the company says.

This isn't the first incident of alleged abuse in the rare-coin business. Investigators in Florida and California have closed down ``boiler room'' operations in those states, where telephone representatives were selling coins -- often overvalued coins -- by telephone.

One reason financial planners have gone into the coin business is commissions. When a planner sells a coin portfolio, the commissions can run as much as 15 to 18 percent of the value of that portfolio. But the planners often don't know any more about coins than their clients, and they have to accept a dealer's word on a coin portfolio's value. If a dealer is offering a high commission, a planner might be tempted to forgo checking out the dealer carefully, or might not have the coins independently appraised.

The Boston case grew out of a year-long investigation into what has become a growing problem, says Phoebe D. Morse, the FTC's regional director, in Boston.

``We'd had a number of complaints of companies selling rare coins that were overgraded, which substantially inflated their price,'' she says. ``Or companies did not follow through on guaranteed promises to buy them back.''

Grading is one of the stickiest problems in the coin business. Coins are rated on a 70-point scale, with most of the best investment-grade coins carrying a mint state, or MS, rating of 60 through 65. A difference of just one level, say from MS-63 to MS-64, can mean hundreds of dollars in value. If you think the coin you bought is an MS-64, and you find out 10 years later it's really a 62, any expected gains will evaporate.

Besides the general condition, appraisers look at often-minute differences in the way the coin was struck at the mint, its shine or luster, and overall eye appeal.

With so many subjective factors at work, even honest appraisers can disagree about a grading.

Several attempts have been made to standardize the grading process, the latest being the Professional Coin Grading Service, a consortium of 50 dealers around the country. For $22 per coin, an expert will certify the grade, which other dealers in the group will accept.

But many other coin dealers say it's not possible to standardize the subjective art of grading coins. While there are some 10,000 numismatic dealers in the country, only 50 have joined the grading network.

So how can you keep from getting rolled in the coin market?

Like the maxim about real estate and location, the best advice about coins, whether you're buying or selling, seems to be summed up in three words: reputation, reputation, reputation.

``Check the vendor very carefully,'' Ms. Morse says. Unlike most investments, the coin business is almost completely unregulated.

Longevity also helps. Look for coin dealers who have been in business for a few decades, not just a few years. The Boston firm in question had been operating just four years.

There is one industry group that can help, Morse says. The Professional Numismatists Guild has some of the toughest standards of any numismatic society.

There are 203 members, says guild executive director Paul Koppenhaver. These are individuals, not firms. ``It has to be an individual, so nobody can hide behind the corporate veil,'' Mr. Koppenhaver says.

The individuals must have been in the full-time coin business at lest five years. Applicants are screened by a panel of members, and all existing members vote on the entrant.

Most important, Morse notes, is that all members must agree to submit any unresolved disagreements between a dealer and a customer to binding arbitration.

You can get a free listing of members by writing to the Professional Numismatists Guild, PO Box 430, Van Nuys, CA 91408.

Whether listed in the guild or not, any dealer should agree to buy back coins when an immediate, independent appraisal finds they are worth less than you paid, and you should not buy any coins on the first visit. Read about numismatics first, and talk to several dealers.

Finally, don't put more than 5 to 10 percent of your investment assets into rare coins. Numismatics can be interesting, and a properly graded portfolio will hold its value over time, but with a few exceptions, you won't see your coins multiplying many times in value.