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 about them:
(1) the types of historical
bonds used for fraud,
(2) the lies used to perpetrate historical
(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
(6) who to contact if you believe
that historical bonds are being offered or sold fraudulently
for investment purposes.
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
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 have we guaranteed obligations issued by private
parties, e.g., the bonds issued by the Chrysler Corporation in
the early 1980's.
Lie: The Treasury Department has
established a federal sinking fund to retire historical bonds.
Fact: There is no federal sinking fund to retire
historical bonds. 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 we would establish a sinking fund to retire these
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 activity. 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
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
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
True Values of
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 Scripophily.com
and OldPaper.com 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.
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
Chicago, Saginaw and Canada Railroad Co.
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
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. See Adams
(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
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