These words, usually attributed to Mark Twain, sum up the experience of many investors who have lost money in dubious mining projects.
In Arizona, more than elsewhere, a good portion of the money invested in mining has gone to promoters and projects of dubious quality. Some historians suspect that, before the days of the copper mines, more money was lost to mining scams than was produced as income from mining operations. For more than a century, the state has tried to educate the public about mining swindles, and these efforts continue today.
A mining scam is a money-raising scheme whose alleged potential profit is based on mineral exploration and/or development but which does not conform to generally accepted geological or metallurgical industry practices. Such scams do not profitably produce precious metals, and they are subject to civil, criminal or administrative enforcement action by state or federal government. An “unassayable” project features assaying methods that do not conform to generally accepted industry practices, ostensibly because such methods are not capable of recovering the “precious metals” believed to exist in the samples.
Although some of the cited cases are more than a few decades old, most correspond to the high gold prices of the mid-1980s and the stock market declines of the late 1980s. Organizers of fraudulent schemes look for a way to fuel their activities; their use of mining will often correspond to economic events.
Gold prices jumped to US$672 per oz. in 1980 from US$227 at the beginning of 1979. They fell and rose through the 1980s, peaking at US$476 in 1988. The price then generally declined to US$285 in 2000.
Black Monday struck the U.S. on Oct. 19, 1987. The stock market crashed, dropping more than 500 points in the worst one-day loss in its history. The crash affected the way people invested their money.
Ripples from the crash showed up immediately in Arizona mining scams. The situation was so bad that state authorities intensified their efforts to educate the public about the dangers of investing in mining.
“We want to stop the ‘fool’s gold rush of 1988’ before it reaches epidemic proportions in Arizona,” said Matthew Zale, director of the securities division of the Arizona Corporation Commission (ACC). “This new breed of fraud has spread like wildfire across the nation since [the 1988] market crash and is now the fastest-growing investor fraud threat of 1988.”
The phenomenon was nationwide and caused alarm in both public and private circles. In an investor alert issued in September 1988, state securities regulators and the Council of Better Business Bureaus claimed that phony gold mine schemes would cost Americans an estimated US$250 million that year.
By July 1988, the Arizona Corporation Commission was investigating 19 operations in Arizona. Project “Goldbrick,” a multi-state task force co-ordinating efforts against phony gold mines in the western states, investigated eight potential cases in 1987. The number had increased to 52 cases by September 1988.
Many of the 1980s mining scams utilized similar sales techniques.
The ACC says victims typically paid $5,000 for title to a 100-ton unit of unprocessed dirt “guaranteed” by the promoters to contain 20 ounces of gold.
Investors learned too late that the dirt was just that — a worthless pile somewhere in the desert regions of the southwest.
Boiler rooms, using high-pressure telephone sales tactics, offer ore, stock or royalties for sale. Sometimes promoters use similar tactics on friends and associates.
The number of phony gold schemes has declined since its heyday in the late 1980s, but the scams continue, using techniques similar to those used in the late 19th century. One of the state’s early con artists was Doc Flowers, promoter of the Spenazuma mine in Graham County, advertised as nothing less than “the greatest mine in the world.” For one group of dude investors, Flowers hired cowboys to stage a fake holdup. The Easterners foiled the robbery with a hail of lead, and felt so much a part of the Wild West that they opened their wallets for Flowers.
The Spenazuma mine was reported in eastern newspapers in early 1899 as a fabulous gold, silver and copper strike. The prospectus of the Spenazuma Gold Mining & Milling Co. of New York, N.Y., gave greater detail: “Running through the center of this property is a vein of ore one-half mile in width and two miles in length, every foot of it rich in gold, copper and silver. It is said this is the richest and largest continuous vein of ore ever discovered.”
The prospectus also described how the deposit was originally found by Spenazuma, the son of Aztec Emperor Montezuma, and relocated by the entirely fictitious professor T.A. Halchu of Longhorn, Mont. Apparently, the professor learned of the riches from an old, dying Mexican who said the secret to finding the wealth was unearthing the profile of the lost Spenazuma. Almost US$3 million in stock was sold to easterners who knew nothing of mines and mining before the Arizona Republican (predecessor to the Arizona Republic) uncovered the scam.
A front-page story in an 1899 edition of the Republican stated: “The Spenazuma company is committing a crime against Arizona, which its people should punish. They are obtaining money under false pretenses and, at the same time, injuring the mining interest of the entire territory.”
Another prospectus, circulated among eastern investors, for the dubious Prescott mine in Arizona even resorted to doggerel:
“Come, little brother, and sit on my knee,
And both of us wealthy will grow, you see;
If you will invest your dollars with me,
I will show you where money grows on the tree.”
The scams have been based on whatever will catch an investor’s interest. One of the oddest and most audacious salting schemes was dubbed the “Great Diamond Swindle.”
In 1872, one Mr. Arnold and one Mr. Slack excited investors in New York, N.Y., and San Francisco, Calif., with displays of some splendid rough diamonds and top-grade rubies. The men said the gems were from an extensive diamond field north of Ft. Defiance in the Arizona Navajoland.
Not to be gulled so easily, experienced San Francisco investors dispatched a team of investigators. They returned, sure enough, with more diamonds they said they plucked from the Ft. Defiance locations. The hoax was uncovered by Clarence King, famed western geologist, who visited the alleged discovery and concluded that the gems resembled stones from African and Brazilian diamond mines.
History also shows that not only investors have been swindled: both the federal and Arizona governments have fallen prey to outlandish claims of mineral wealth.
In the 1960s, the Arizona Board of Land Management (BLM) was victimized by one of the biggest gold salting hoaxes in recent history. BLM manages 19% of the surface and 45% of the subsurface of Arizona. It is also responsible for enforcing federal mining laws on those lands.
In the early 1960s, the Desert Gold Mining Co. claimed discovery of a large and easily accessible gold deposit north of the city limits of Phoenix, Ariz. In 1961, the U.S. issued eight mineral patents for 8,200 acres of public land to that company and others, based on their claims of gold discovery. The land stretched between Morristown and Beardsley, east of U.S. Hwy. 93 and spanned the Castle Hot Springs Road.
A mineral patent, usually issued by BLM if the land contains valuable mineral deposits, is the outright ownership of the land for all purposes, after payment of a US$2.50 per acre fee. The actual value of the land, with or without gold, far exceeded the US$2.50 per acre fee. The patented land clearly had speculative residential potential, as well as commercial development potential.
Prior to issuance of the patents, BLM examiners collected hundreds of samples of gravel deposits, some of which weighed more than 30 pounds — all in an effort to check Desert Gold’s claims of vast mineral wealth. The sacks containing the samples were placed
in a pile on the 8,200 acres, covered with a canvas tarpaulin and left unguarded for several days before being processed with Desert Gold’s own equipment.
Desert Gold then became careless and greedy. Mining activities on the 8,200 acres stopped four months after the patents were issued. The people behind Desert Gold formed other companies, which applied for patents to 13,320 acres of federal lands closer to Sun City, Ariz. The BLM became suspicious of Desert Gold and declared its intent to re-sample the 13,320 acres, as well as obtain a court order to re-examine the original 8,200 acres. The application for the additional 13,320 acres was suddenly withdrawn after BLM’s announcement. However, the results from resampling the 8,200 acres caused considerable confusion at BLM.
Each day, only the first sample showed any evidence of gold — and this happened with unfailing regularity. It seemed that someone was salting the equipment during the night.
To prove this, the research group meticulously cleaned all of its digging and processing equipment before leaving it at the claim site on Feb. 28, 1963.
The following morning, the crew examined the equipment and found gold dust sprinkled over the bed of a utility trailer used to haul ore samples from test holes to the nearby processing plant.
The “free gold,” which was typical of the type found in placer deposits, was carefully covered with a fine layer of sand.
BLM then tightened security and concluded there was only a smattering of gold in the same places that, only a few years before, held fabulously rich deposits.
Efforts were made to catch the individuals who had salted the samples. On April 4, 1963, agents of the Federal Bureau of Investigation observed Dale Moran, a Phoenix contractor and principal in the companies, handling government ore samples. Moran was indicted for gold salting. He pleaded guilty to a charge of deception of a prospective purchaser on Dec. 21, 1964, and was sentenced to six months in jail. The sentence was suspended and Moran was placed on probation.
In 1963, BLM determined that the patents had been obtained by fraud or mistake and referred the case to the U.S. Department of Justice. A judgment was rendered in favour of the U.S. The patents were rescinded and a mortgage removed from the land on the basis that the pertinent loan was usurious.
— The preceding is the first in a series of columns examining the history of mining scams in Arizona. The author is a lawyer in Phoenix, Ariz.
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