--OPINION REPORT-- Japanese Investors Greatly Overcharged in Purchasing Rare United States Coins from Tokyo Coin Dealer Mr.

Mark Ferguson 920-233-6777 Mark Ferguson Rare Coins, LLC mark@mfrarecoins.com P.O. Box 177 www.mfrarecoins.com Oshkosh, WI 54903-0177 www.1804dollar.com USA January 1, 2015 --OPINION REPORT-- Japanese Investors Greatly Overcharged in Purchasing Rare United States Coins from Tokyo Coin Dealer Mr. Hideyuki Wada By Mark Ferguson, Professional Numismatist Background of this Report As an expert in rare United States coins, I have been asked by Australian Solicitor Mr. Shoichi Kaneshiro to write an opinion report regarding transactions in which Japanese investors have purchased rare United States coins from Tokyo coin dealer Mr. Hideyuki Wada. The buyers of the coins claim Mr. Wada misrepresented customary coin market practices in the United States as well as the collector grades of the rare coins they purchased from him, made false appreciation claims, and greatly exaggerated the market values of those coins. Mr. Wada s misrepresentations resulted in the buyers paying approximately two to six times the actual market values that those same rare coins would trade for in the United States, or more. Mr. Wada claims, according to a translation of his website supplied by Mr. Kaneshiro, that his sales of United States coins have reached over $150 million during the past 14 years. 1

Accepted Coin Grading Systems in the United States Grading rare coins is a very important component of market value. A minor difference in a rare coin s grade can mean a large difference in market value. The highest priced rare coin to sell at public auction in the United States sold for more than $10 million (USD) in January, 2013 and rare coins regularly trade for prices ranging from hundreds of dollars to millions of dollars. United States rare coins are graded on a scale of 1 to 70. A coin that grades 1 is a coin that is so worn that it is barely identifiable. A coin that grades 70 is one that is perfect in all respects, just as it left the dies after striking at the United States Mint. Investment quality rare coins are customarily considered to be those that grade higher than 65 those that are high grade Mint condition coins. The grading terminology used in grading investment quality coins is Mint State. The grade of a coin is abbreviated as MS. Therefore, investment quality coins would be graded as MS 66 or MS 67, for example. Proof coins are labelled the same way, such as Proof 66 or Proof 67 (see below for a description of Proof coins). In the United States there are only three coin grading services that are universally recognized and accepted by the majority of collectors and investors: PCGS Professional Coin Grading Service NGC Numismatic Guaranty Corporation CAC Certified Acceptance Corporation These coin grading services are unbiased, third-party grading services that offer a buy-back guarantee if a coin is determined to be over-graded, resulting in it being over-valued. The CAC buy-back system varies from those of PCGS and NGC in that it is not a guarantee of grade, but rather a purchase price CAC guarantees to pay for a specific coin issue and grade for those coins that have been approved and stickered by CAC, as follows. PCGS and NGC grade and then encapsulate coins in tamper-resistant plastic holders that contain labels stating the grades of the coins and are given unique serial numbers. CAC is a grading service that approves PCGS and NGC graded and encapsulated coins that meet CAC s strict grading standards. CAC does this by affixing a tamper-evident oval green hologram logo sticker on the PCGS and NGC holders. CAC was established by a founder of both PCGS and NGC. CAC makes a market in rare coins by posting on a rare coin trading exchange prices that it will pay on a sight-unseen basis for CAC-approved coins. CAC evaluates PCGS and NGC grades of rare coins and ranks them on an A, B, C scale. In CAC s opinion there are coins graded by PCGS and NGC that (1) barely meet the standards of a grade and are considered substandard C grade coins; (2) those that are solid-for-the-grade, considered B quality coins; and (3) those that exceed the standards for a grade, almost meeting the standards of the next higher grade those are considered A grade or premium quality coins. CAC only approves and stickers what it deems to be A and B quality coins. All the major rare coin auction companies and coin dealers in the United States recognize CACapproved coins. The auction companies state in their catalog descriptions whether or not a coin has been approved and stickered by CAC, and coin dealers do the same in their advertisements and catalog listings. 2

PCGS and NGC use a similar system of designating premium quality coins by adding a plus sign (+) after a coin s grade on the coin holder s label. Auction companies and coin dealers note this as well, however the CAC brand has become more widely accepted in the United States rare coin market than plus grade coins. There are many other coin grading services that operate in the United States, but they are not accepted by the majority of collector/investors. In fact, many collectors, investors and dealers will not even consider purchasing rare United States coins that have been graded and encapsulated by any service other than PCGS, NGC or CAC. Some of those systems are unbiased, third-party coin grading systems, but others are biased systems operated by coin dealers who grade and encapsulate the coins they sell, mimicking third-party grading services. Mr. Wada s Invented Coin Grading System Mr. Wada has invented his own self-serving coin grading system patterned after the CAC system. He created an oval sticker that he affixes to the holders of PCGS and NGC graded coins in the same way the CAC stickers of approval are affixed. Mr. Wada s stickers state AAA. No one that I know of who is involved in rare coins in the United States, except those who are familiar with this case, has ever heard of Mr. Wada s system. It is unknown and is simply not recognized or accepted. The value of a rare coin is determined by its grade and rarity. It may be relevant to note here that grading by PCGS and NGC already includes such factors as overall appearance and eye appeal, the factors Mr. Wada s AAA-ranking system seems to rely on. Fraudulent sellers, according to the Federal Trade Commission in the USA, often intentionally inflate the grades of the coins they sell, charging prices many times the coins actual value. According to the sales records found in Mr. Wada s website (compiled and translated by Mr. Kaneshiro), Mr. Wada s customers are paying 200% to 600% premiums (sometimes even more) over the actual values. Furthermore, the Federal Trade Commission warns buyers that Certification services provided by dishonest coin dealers too often are part of fraudulent sales schemes and are intended to mislead consumers. Mr. Wada s AAA certification system appears to be exactly one of those systems the FTC warning refers to. Using the following definition Mr. Wada created, he is using his AAA stickering system to deceive buyers of the values of accurately graded PCGS and NGC coins. An FTC statement points out that False claims about value are becoming increasingly common in rare coin fraud. Mr. Wada s definition of his AAA grading standards found on his website, as supplied by a translation from Mr. Kaneshiro, is: Both surfaces of the coins are in 100% perfect conditions, with absolutely no stains/dirt. For every 100 coins, only 4 or 5 are given this rank, making them more than 20 times rarer than coins of B rank but their prices are only two or three times higher than B rank coins. B- ranked coins, according to a translation of Mr. Wada s website from Mr. Kaneshiro, are: So-called common or standard coin (that are graded by PCGS/NGC), surface of B-rank coin is blemished with dirt and or mould. According to Mr. Kaneshiro, Mr. Wada has told the Japanese investors that there are no more AAA-ranked coins left in the United States because he has bought them all. If one considers that there never were AAA-ranked coins in the United States in the first place, because that system is not 3

recognized in the U.S. and Mr. Wada invented it in Japan, he is misstating the facts. When considering whether premium-quality rare coins still exist in the United States, there are a very large number of them. While CAC grading approvals are from an unbiased, third-party coin grading service, Mr. Wada s system is his own self-serving, biased grading system for the rare coins that he sells. According to Mr. Kaneshiro, Mr. Wada has told the Japanese investors that the PCGS and NGC grades are for B grade coins, yet Mr. Wada stickers PCGS and NGC graded coins with his AAA stickers and then sells them to his clients as finer coins. As verified by Mr. Kaneshiro, 39 coins from the Japanese investors were sold in March, 2014 at auction in the U.S. in Baltimore, Maryland through the firm of Stack s Bowers Galleries. Those 39 coins were sold as the Cherry Blossom Collection, and prior to cataloging and selling they were all submitted to CAC for review for approval and verification stickering. Out of the 39 coins submitted to CAC, only 6 were approved and stickered as meeting the strict CAC coin grading standards. Those 6 coins can be verified in the published auction catalog descriptions. Because CAC is the highest coin grading standard recognized in the U.S. coin market and the most recognized brand for solid-for-the-grade and premiumquality coins, those coins with the CAC sticker of approval normally receive the highest prices at auction and in the private market relative to like-kind coins graded the same, but without the CAC verification sticker. An important issue in coin grading is that collectors prefer, and many insist on, coins that have original, untampered with surfaces. In other words, collectors do not want coins that have been lightly cleaned or dipped in a cleaning solution, such as a jewelry dip, that brightens them up. Experts in rare coins can identify those coins that have been cleaned because their surfaces do not look natural. However to the novice, those coins look bright and shiny. In fact, I was told by the founder of CAC that the coins from the Cherry Blossom Collection were submitted to CAC prior to cataloging them for the auction and only a few of them met the strict grading standards of CAC while the others did not pass the CAC review because many of them had been dipped in a cleaning solution and therefore did not meet CAC s strict coin grading standards, which exclude obviously cleaned coins. Such cleaning negatively affects market value. Proof Coins Were Sold by the U.S. Mint to Collectors The term Proof is used to identify a method of manufacturing coins. They are presentation quality coins that have been struck by the U.S. Mint from specially prepared blanks and dies that are highly polished. The coins are then given more than one impression from the dies, resulting in crisp, sharp details. The surfaces of Proof coins are also highly reflective, like those of a mirror. According to Mr. Kaneshiro, Mr. Wada claims in his blog site that 2009 Ultra High Relief Mint State coins are likely to be upgraded as Proof coins and the price may therefore double in the future. Also, Mr. Wada is said to claim that proof-like Morgan design silver dollar coins, with reflective mirrorlike surfaces, are likely to be graded as Proof coins in the future and prices may be upgraded accordingly. These are false statements. Mint State or proof-like coins will not be graded as Proof coins because they have distinctly different characteristics and different methods were used to manufacture 4

each type of coin: Mint State business strike coins used for commerce versus presentation style Proof coins. Furthermore, according to Mr. Wada s customers, he told them that Proof coins were made for Presidents and government officials and other people with important titles and positions. But while some of those people may have received Proof coins, those coins were always available for purchase by collectors from the U.S. Mint. However, there were a few presentation sets of coins made, such as the famous King of Siam Proof Set that was coined in 1834 and presented to the King of Siam on a diplomatic trade mission. That was only done in a very few special circumstances and was not the usual practice. Rare Coin Pricing in the United States and Mr. Wada s Sales Prices There are several rare coin price guides that are published in print and online in the United States. They should be used only as guides. Some people also use prices realized from auctions to determine values of rare coins. Those prices should also be used only as guides. There are many factors that determine market values of rare coins. Some are grading characteristics of the coins being appraised and some are grading characteristics of coins that are used to compare their selling prices with the coins being appraised. Other factors involve coin market conditions, market timing, economic factors, etc. The most accurate appraisals are done by qualified, unbiased experts in the rare coin field. United States coins that have been graded and encapsulated by PCGS and NGC and approved and stickered by CAC most often sell for the highest market prices. There is no higher standard in the United States rare coin market. In 2012 I researched and wrote a comprehensive market study that I published in cooperation with CoinWeek.com that compared auction sales prices for coins that were graded by PCGS and NGC and approved by CAC, versus sales prices for coins that were graded by PCGS and NGC but did not have CAC approvals. The sales of 5,545 rare United States coins were studied and the average price premiums of the CAC approved coins over the others by grade were: MS 64 12.98% MS 65 19.75% MS 66 33.84% MS 67 57.98% While those price premiums represent average prices CAC approved coins have been selling for over non-cac stickered coins, Mr. Wada s self-serving AAA system is irrelevant in the market for rare United States coins and in the normal course of business would bring no additional price premiums, unless the coins are approved and stickered by CAC. However, according to Mr. Kaneshiro, premiums charged by Mr. Wada typically range from about 200% to 600%, and sometimes even higher, and those are for non-cac approved coins. That is a serious misrepresentation of the market for rare American coins and in doing so Mr. Wada is deceiving the Japanese investors, especially as the coins are accurately graded by PCGS and NGC, which are unbiased coin grading services. 5

Coin Dealer Profit Margins in the United States The prices Mr. Wada charged his customers, as supplied by Mr. Kaneshiro, showed that Mr. Wada charged about 200% to 600% premiums for those coins. Investment quality rare coins simply do not sell for such high premiums in the United States. Coin dealer markups over cost on rare coins in the U.S. generally range from about 5%, or even less for very high-priced coins, to about 15% to 20%, although some large firms often charge up to 30% or 35%. Currently the major rare coin auction firms in the United States charge a 17.5% buyer s fee on all the coins they sell. Sometimes sellers are charged a fee for consigning the coins to auctions and sometimes they are not charged a fee. That is negotiable. Generally, coin dealers who represent sellers in private transactions by selling coins on consignment may charge from 5% to 10% commission for investment quality coins. That fee is also negotiable. According to Mr. Kaneshiro, Mr. Wada has been advising his Japanese customers verbally and through his blog site, as well, that his profit margins are 10%. This appears to be a false representation as well. Based on the information I was shown from transactions with Mr. Wada s customers, his profit margins appear to regularly range from about 200% to about 600%. Furthermore, a review of auction prices realized in the U.S. market and Mr. Wada s subsequent sales in Japan reveal that Mr. Wada has sold the identical coins (with exactly the same certification numbers) to Japanese investors at multiples of hammer prices achieved in the U.S. auctions. Market Premiums over Certified Coin Dealer Newsletter Prices The Certified Coin Dealer newsletter, referred to as the Bluesheet, reports dealer-to-dealer transactions. It publishes this statement on the front page of its price guide: sight-seen sales may command a substantial premium above Bluesheet Dealer-to-Dealer Bids. According to the publisher, that statement means that the prices published in the Bluesheet are for sight-unseen transactions in which a bidder accepts any coin for that particular grade, even those coins that barely make a grade or are otherwise substandard quality for a grade. I understand from Mr. Kaneshiro that Mr. Wada is using the above disclaimer to justify that his AAA-ranked coins sold on a sight-seen basis command a substantial premium among coin dealers. His statement is simply false: (1) his AAA system is unknown and unrecognized among coin dealers in the U.S. and therefore his AAA-stickered coins are not traded; and (2) most average coins for the grade, graded by NGC and PCGS, trade for higher prices than Bluesheet prices. A review of auction prices realized in the U.S. market proves that Mr. Wada has been selling American coins to Japanese investors at multiples of what like-kind coins, graded the same (but without Mr. Wada s AAA designations) have sold for in the U.S. market. Again, the highest grading standard for U.S. rare coins is the CAC brand. Overall, CAC-approved coins attain much higher prices than like-kind coins without the CAC sticker of approval. Because Mr. Wada s AAA-ranking system is not recognized or accepted in the United States, his premiums of 200% to 6

600% are deceptively high in the market for rare United States coins. Again, as comparisons, I reference the CAC Market Study I researched and wrote in 2012 and customary coin dealer commissions and profit margins explained elsewhere in this report. United States Rare Coin Investment Funds and Mr. Wada s Buy-Backs Because Mr. Wada s AAA grading system is not recognized or accepted in the rare coin market in the United States, it is highly unlikely that there would be investment funds in the U.S. that purchase coins stickered by him. Any competent manager of a rare coin fund in the United States would most likely limit its purchases to those rare coins that have been graded and encapsulated by PCGS and NGC only, as well as those PCGS and NGC graded coins that have been approved and stickered by CAC. The highest demand for rare United States coins is in the United States. Therefore, general market prices for U.S. coins are the highest in the United States. That means that rare United States coins bought and sold around the world, in places like Europe, South America, Japan and China, would trade for prices that are commensurate with their market prices in the United States. Therefore, on the basis that the highest demand and highest prices for rare U.S. coins is in the United States, if Mr. Wada is purchasing back the coins he sold to his customers in Japan to sell to new buyers in Japan or China at the inflated prices again, he would be unfairly over-charging the investors repeatedly in Japan or China (should such a Chinese market exist). In the United States that practice might be considered a Ponzi scheme, similar to what Mr. Madoff famously did with investors in the investment funds he managed in New York. False Appreciation Claims As the Federal Trade Commission warns, Dishonest dealers often mislead buyers by quoting appreciation rates for rare coins from an index formerly compiled each year by Salmon Brothers, a New York investment bank. I understand from Mr. Kaneshiro that Mr. Wada has been utilizing his popular blog site and his other publications to quote appreciation rates for rare U.S. coins from a book called 100 Greatest U.S. Coins. I also understand that Mr. Wada has been representing to the Japanese investors that, citing the book, U.S. rare coins in general appreciated 140 times or more in the past 50 years. This book, however, is based on a list of 100 coins that are very rare, while the coins sold by Mr. Wada are more common coins. In general, very rare high quality coins appreciate at a higher rate than more common coins, but there have also been times when market values for all rare coins have declined. It must be recognized that there is absolutely no guarantee that rare U.S. coins will appreciate in market value in the future. Economic factors, as well as those within the coin market itself, affect coin market trends and values, and basic supply and demand factors determine rare coin market values. Past performance is not guarantee of future results and there is no way to know for sure whether rare coin values will change one way or another in the future. Conclusion: Mr. Wada has invented his own self-serving coin grading system patterned after the CAC system. His grading system however relies solely on eye-appeal, despite the fact eye-appeal is 7

already a part of PCGS/NGC grading criteria. Many of the coins Mr. Wada has sold in Japan are found to have been dipped in a cleaning solution. He has been misrepresenting buyers of the values of accurately graded PCGS and NGC coins. He has been making false appreciation claims for U.S. rare coins and misrepresenting to the Japanese investors concerning his profit margins. When coin dealers charge unreasonable margins, such as 200% to 600% charged by Mr. Wada, it is likely that their business model will not be sustainable when their clients discover such fraudulently high rates, quit buying from those dealers and start demanding to buy back coins. Mark Ferguson Professional Numismatist 8

Qualifications of Mark Ferguson, Professional Numismatist Mark Ferguson P.O. Box 177 Oshkosh, WI 54903-0177 U.S.A. 920-233-6777 mark@mfrarecoins.com; mark@1804dollar.com 2014: Wrote and published book, The Dollar of 1804 The U.S. Mint s Hidden Secret. 1969 Present: Coin Dealer specializing in U.S. coins, rare U.S. paper money and precious metals products with experience in British and other world coinage. Extensive experience at all levels of U.S. coinage on a national level including appraisals for attorneys, estates, insurance work, legal work, etc. 2011 Present: Writer of The Market in Depth weekly column for the front page of the Coin Dealer Newsletter, covering the U.S. coin and precious metals markets. This publication has been the primary wholesale price guide used by virtually all U.S. coin dealers since 1963. 2011 Present: Regular columnist for CoinWeek.com on numismatic topics of my choosing. 2012: Performed market study of coins approved by CAC, Certified Acceptance Corporation. CAC is a third-party coin grading service which reviews and endorses coins graded by PCGS and NGC and affixes green stickers to those coins meeting CAC standards. CAC s founder was also a founder of both PCGS and NGC. 2002 2009: Market Analyst for Coin World s Coin Values price guide and magazine. Coin World has been the leading print news publication for the U.S. coin market since 1960. Coin Values (formerly Coin World Trends) was the largest retail price guide used for U.S. coins during the time I was the Market Analyst. (Note: This was an extremely influential position in the U.S. coin market because this price guide was the largest and most used in the United States. As an independent contractor I agreed through contract to give up coin dealing during the time period I performed this work.) I researched and established values for all U.S. coins from common coins worth 50 cents to major rarities worth $5 million and more, and for bullion related coins. 1987 1990: Professional coin grader for PCGS, the Professional Coin Grading Service. This is the premier and largest coin grading service, with offices globally. 9