Fraud > Treasury
Scams & Forgeries > Exhibit:
Historical Bond Fraud
Reprinted from: http://www.treasuryscams.gov/cc/ccphony1.htm
How Marketable Treasury Securities
Historical bonds -- bonds that were once valid obligations
of American entities but are now worthless as securities and only
collected and traded as memorabilia -- are quickly becoming a favorite
tool of scam artists. Here are several things that you should know
(1) the types of historical bonds used for fraud,
(2) the lies used to perpetrate historical bond
(3) the true values of historical bonds,
(4) how scam artists use bogus third party
valuations to trick investors,
(5) bonds issued by the Chicago, Saginaw and
Canada Railroad Co. are a favorite tool of scam artists everywhere,
(6) who to contact if you believe that
historical bonds are being offered or sold fraudulently for investment
Types of Historical Bonds Used for Fraud
Although all sorts of historical bonds are collected and traded,
historical railroad bonds comprise the majority of the bonds used
to perpetrate fraud. Historical railroad bonds commonly used by
scam artists include those issued by the Chicago, Saginaw and Canada
Railroad Co., the East Alabama and Cincinnati Railroad Co., the
Mad River and Lake Erie Railroad Co., the Galveston, Houston &
Henderson Railroad Co. and the Richmond and York River Railroad
Co. These railroad bonds are but a few of the 12,000 to 15,000 varieties
of historical railroad bonds that are known to exist. Non-railroad
historical bonds commonly used by scam artists include bonds issued
by the Noonday Mining Co.
Lies Used to Perpetrate Historical Bond Fraud
Lie: Historical bonds are payable in gold.
Fact: Historical bonds are not payable, and they are certainly
not payable in gold. Historical bonds are not valid obligations,
and they have no value as investment securities. Moreover, even
if they were valid obligations, they would not be payable in gold
because gold clauses in bonds issued before 1977 are unenforceable
in U.S. courts. Adams
v. Burlington Northern R.R. Co., 80 F.3d 1377, 1380 (9th Cir.
1996) (26K TXT file, uploaded 9/28/98); 31
U.S.C. § 5118(d)(2) (2.5K TXT file, uploaded 9/28/98).
Lie: Historical bonds are backed by the Treasury Department.
Fact: Historical bonds are not and have never been backed by
us. While historical bonds often have the words "United
States of America" printed on them, these references were merely
to identify the bonds as issued by entities located within the United
States. Nowhere on historical bonds are there any statements that
the bonds are issued or backed by us or any other part of the United
States Government. Only in very limited and quite well-known circumstances
has the U.S. Treasury guaranteed obligations issued by private parties,
e.g., the bonds issued by the Chrysler Corporation in the early
Lie: The Treasury Department has established a federal sinking
fund to retire historical bonds.
Fact: There is no federal sinking fund to retire historical
As these historical bonds were neither issued nor backed by us
or any other part of the United States Government, it would be patently
absurd to suggest that the U.S. Treasury would establish a sinking
fund to retire these historical bonds.
Lie: Historical bonds can be used in high-yield investment "trading
programs" sanctioned by any, some, or all of the following
entities: the International Chamber of Commerce ("ICC"),
the IMF, the World Bank, the United Nations, the Federal Reserve
Board, a Federal Reserve Bank, and the Treasury Department.
Fact: There are no such "trading programs," and none
of these entities ever sanctions or regulates such private investment
For example, the IMF has issued a warning
about financial schemes misusing its name.
Lie: Funds in, or some proceeds from, these high-yield trading
programs go to humanitarian purposes or infrastructure development
projects that are approved by the United Nations, the World Bank,
and/or the Treasury Department.
Fact: There are no such "trading programs" or "high-yield
investment programs." The scam artist's use of humanitarian
or infrastructure development theme is a trick to (1) make the investor
want to believe that the trading programs are real and (2) make
the investor believe that he could be helping some Third World country
by forking over his money.
Lie: Historical bond trading programs yield high rates of return
through the buying and selling of "debentures" or "medium
term notes" supposedly issued by "prime" or "top"
European or "World" banks.
Fact: Officials of leading European banks, including Barclays
Bank, have denied any participation in such programs and there is
no evidence that the market for such instruments exists as described
by the scam artists.
This appears to be a recycling of the "prime bank" schemes
that have long been labeled as bogus by countless domestic and foreign
banking authorities. See, for example, the warnings issued about
"prime bank" scams by the Federal
Reserve Board, the Federal
Reserve Bank of New York and the SEC.
Courts have repeatedly held that prime bank trading programs, including
those purporting to generate profits through the use of historical
railroad bonds, are fictitious. See, e.g., SEC
v. The Infinity Group, 993 F. Supp. 324 (E.D. Pa. 1998) (prime
bank instruments described as "fantasy securities") (28K
TXT file, uploaded 9/28/98); SEC
v. Lauer, 52 F.3d 667, 670 (7th Cir. 1995) (such instruments
"do not exist") (12K TXT file, uploaded 10/5/98); SEC
v. Daniel E. Schneider et al., No. 98-CV-14-D (D. Wyo. February
13, 1998) (order granting preliminary injunction; "prime bank
trading schemes are fictitious according to readily available information")
(22K TXT file, uploaded 9/25/98).
True Values of Historical Bonds
Once again, historical bonds are worthless as securities. For instance,
none of the historical United States railroad bonds are payable
by today's successor railroads such as CSX, Norfolk Southern and
Union Pacific. Instead, historical bonds only have value as collector's
items. A 1995 publication, Stocks and Bonds of North American
Railroads: Collectors Guide with Values (one of many available
publications) assessed the collector's value of the historical railroad
bonds listed above at between $25 and $700 each. Moreover, there
are many sites on the Internet, such as Herzog Hollender Phillips
& Co. and the Western
Mountain Stamp and Coin Shop, that you can visit in order to
evaluate the collector's value of any particular bond. These sites
are operated by private entities and our reference to these sites
is not an endorsement either of these entities or of the values
listed on their sites.
How Scam Artists Use Bogus Third-Party Valuations to Trick Investors
Scam artists are selling historical bonds to unsophisticated investors
at inflated prices far exceeding their fair value as collectibles.
They often use third-party valuations, which state that the bonds
are worth million or billions of dollars each, to do so. These valuations
or authentications, which are often referred to as "hypothecated"
or "hypothetical," are completely bogus. A typical
valuation (104K JPG file, file uploaded 1/24/98) will falsely
overstate the value of these bonds by assuming erroneously that,
notwithstanding the unenforceability of the gold clauses contained
in the bonds, as well as the defunct and bankrupt status of most
of the bonds' issuers, some person or entity is obligated to redeem
the bonds in gold bullion. See SEC
v. Gerald A. Dobbins et al., No. 98-229 (C.D. Cal. May 19, 1998)
(findings on order to show cause re: preliminary injunction; valuations
of historical bonds held to be "misstatements") (8.5K
TXT file, uploaded 9/25/98). Scam artists using such valuations
may also make the false assertion that while perhaps not payable
today in gold or in money, the bonds are used in high-yield trading
programs in the United States, offshore and in Europe. As stated
above, there are no such trading programs. In several cases, the
third parties issuing the valuations appear to be working in conjunction
with the scam artists. All of these false assertions have been used
to defraud investors into paying as much as $150,000 for historical
bonds that regularly trade for $25.
Chicago, Saginaw and Canada Railroad Co. Bonds
historical bond fraud case in point involves bonds issued by the
Chicago, Saginaw and Canada Railroad Co. (CS&C). It has been
alleged that these securities are payable by us in gold. These bonds
were neither issued by us, nor are they payable in gold, or backed
or guaranteed, by us or any other part of the United States Government.
In 1873, CS&C issued 5,500 thirty-year gold-backed bearer bonds,
paying seven percent interest to finance construction of a proposed
railroad. Click on the thumbnail image at left to view
a full-size image of a CS&C bond (99K JPG file, uploaded 1/24/98).
CS&C's creditors forced it into bankruptcy in 1876 and its
assets were purchased by a predecessor of CSX Transportation, Inc.
("CSX"). CSX's predecessor did not assume any of CS&C's
outstanding debt, including the railroad bonds. All claims to money
due under the bonds, which had a face value of $1,000 each, were
resolved 112 years ago in the 1876 bankruptcy proceeding. At that
time, investors presented their bonds for payment out of funds from
the foreclosure sale and received a distribution amounting to less
than 25 cents on the dollar. After the bankruptcy proceeding, the
bonds remained in court archives until they were discovered in the
basement of a federal building. Thereafter, a museum in Grand Rapids,
Michigan, packaged the bonds with other historical information about
this railroad for sale as collector's items for $29.95 each. Despite
what a bogus
valuation (104K JPG file, file uploaded 1/24/98) might claim
about CS&C bonds, the bonds have no value other than as collectible
memorabilia, as CSX has disclaimed any liability for redemption
of these bonds, and they are most certainly not payable in gold.
(26K TXT file, uploaded 9/28/98); 31
U.S.C. § 5118(d)(2)(2.5K TXT file, uploaded 9/28/98).
Courts have held that the CS&C bonds have only nominal value
as collectibles. See Schneider
(22K TXT file, uploaded 9/25/98) (preliminary injunction entered
against defendants; bonds have "no value, other than that of
a collectible"). Similarly, other courts have found that bonds
issued in the 1800's by the East Alabama & Cincinnati Railroad
Co. and the Marietta & Northern Georgia Railway lack any investment
value. See SEC v. Dobbins
(C.D. Cal. March 9, 1998) (complaint) (13K TXT file, uploaded 9/25/98);
SEC v. Dobbins (C.D.
Cal. May 19, 1998) (8.5K TXT file, uploaded 9/25/98) (findings on
order to show cause re: preliminary injunction); SEC
v. Dobbins (C.D. Cal. May 19, 1998) (preliminary injunction)
(7.6K TXT file, uploaded 9/25/98); Infinity
Group, 993 F.Supp. at 330 (28K TXT file, uploaded 9/28/98).
Who to Contact
Investors should beware of the prevalent fraud in the area of historical
bonds. As fraud artists have made considerable sums of money in
this fraud, it is one of the largest growing areas of fraud involving
stocks or bonds. We suggest that you contact the Office of the Chief
Counsel, Bureau of the Public Debt, Department of the Treasury at
304-480-8555 for further information.