In late 2006, Florida area coin collector Thomas Francisco hired attorneys Tucker Ronzetti and Chuck Lipcon to file a class action lawsuit relating to the misleading grading service designation First Strikes. In what turns out to have been separate actions, both PCGS and NGC were sued under consumer protection statutes for engaging in this misleading practice. (For the uninitiated, the designation First Strikes has nothing to do with when the coin was struck. The practice of designating coins as First Strikes is an embarrassment to many honest coin dealers, who refuse to handle them.)
The terms of the settlement between NGC and the class represented by Francisco are as follows: NGC will pay $650,000 into a Settlement Fund, from which Francisco’s attorneys will receive fees of 30% ($195,000) and Francisco will receive $7,500. The remaining $447,500 will be donated to the American Numismatic Association (ANA), pending court approval.
NGC agrees to stop using the First Strikes designation for any coin, unless it can be proven that the coins were struck from a new pair of dies.
NGC will provide informational cards, about the same size as its coin holder, free of charge to all dealers it can identify as having NGC First Strikes designated coins for sale. The cards will clearly state what the First Strikes designation really means, and are intended to be included with any First Strike coins which are sold in the future. The cards will also be available free of charge to NGC First Strikes end buyers, and to anybody else who requests one, for at least a two year period.
NGC will undertake, at its own expense, to inform interested parties about the settlement, including mailing (via U.S. Mail) a copy of the Settlement Agreement to its First Strikes customers. This notice requests that they pass the information along to their own customers. NGC will also purchase advertising in coin collecting publications to make collectors aware of the Settlement Agreement, and will make the long version of the Settlement Agreement available on the Web. If NGC’s costs for these various forms of announcement exceed $25,000, the extra monies can be taken out of the Settlement Fund.
Parties who wish to remove themselves from this class, protest the settlement, or comment upon it must file by November 13, 2007. The Final Hearing for this matter is scheduled for December 13, 2007. Additional information is available on the FirstStrikesSettlement.com Web site.
First Strikes Lawsuit Background
Shortly after the First Strikes litigation was filed against both major grading services, NGC announced that it was abandoning the First Strikes designation, and would begin using the more honest term Early Releases instead. A couple of months later, word came down that PCGS had quietly settled the First Strikes litigation out of court, in a secret settlement. Rumors swirled around what the terms of the secret settlement might be, with leading theories including such notions as that PCGS would quietly back away from First Strikes at the end of the 2007 coin year, taking the extra time both to fulfill existing contracts and to save face. Less charitable rumors claimed that Francisco and his lawyers had been “bought off” by PCGS. The fact is that nobody involved will disclose the details, and PCGS recently expanded its deceitful First Strikes program to include Proof Presidential Dollars, so the rumors are apparently wrong. Suffice to say that PCGS isn’t listening to the collective clamor of the coin collecting community as a whole, instead preferring to pander to a privileged pantheon of pernicious parties.
NGC, on the other hand, voluntarily scrapped the First Strikes designation long before any kind of legal injunction or agreement had required them to do so. Multiple sources, (including the legal filings themselves,) have indicated that the leaders at NGC had never been real thrilled with the whole First Strikes concept, and that NGC only went along with the game as the result of competitive pressure from PCGS. Disclosures which were made as part of the NGC First Strikes lawsuit settlement state that NGC’s incremental revenue from the First Strikes program was less than $90,000!
First Strikes Litigation Reveals Interesting Facts
Some interesting details emerged during the various legal maneuvers that were part of this lawsuit. Some interesting claims were made by NGC in the various court filings, some of which seem contradictory:
NGC received approximately $88,950 in additional fees to add the First Strikes designation to their slab inserts.
291,302 Silver Eagles dated 2005 and 2006 were designated as First Strikes (apparently by all grading services; NGC’s population report only totals 79,251.)
NGC charged between $2.50 and $5.00 per coin to add the First Strikes designation to a coin.
A bullion coin dealer gave away 96,740 free First Strikes Silver Eagles (apparently designated by multiple grading services) dated 2005 and 2006 as part of a promotion.
The First Strikes designation has been applied to as much as 50% of the production run of some bullion coin issues! (This includes coins certified by all grading services, not just NGC.)
NGC CEO Steven Eichenbaum claims under oath that NGC had never received any complaints that the First Strikes program was confusing to consumers. (This claim is astonishing since I personally complained to NGC personnel on several occasions and have witnessed others do so. In addition, I know of an organized campaign to register complaints about the First Strikes deception with both PCGS and NGC, where dozens of members of an online coins discussion forum agreed to take part. Eichenbaum’s claim about this isn’t really material to the settlement terms, but it’s an interesting bit of dissembling.)
Performing some mathematical computations on the above figures leads to numbers that don’t match up. According to NGC’s population reports for both Proof and Circulated coins, it has issued the First Strikes designation to 94,916 Silver Eagles, 108,159 Gold Eagles, and 5,215 Platinum Eagles. The total is 208,290 coins that have been given the NGC First Strikes designation. If NGC has only ever “received” $88,950 for granting First Strikes, that means each coin brought 42.7 cents. The reason I emphasize “received” here is because this is the term explicitly used by Eichenbaum, and also used elsewhere in the legal filings. I believe an unqualified “received,” even in the legal sense, means just that. This is not a “net earnings” figure, but just what it says, “received.” Anyway, it’s one more curiosity in a legal proceeding that has been loaded with them. (For the benefit of those who aren’t familiar with how grading services handle this designation, it is an add-on service to the standard grading and encapsulation, where the service makes the bulk of its fee. Such add-ons typically cost only a few dollars extra, and are sometimes free. Judging by the above numbers, it seems NGC gave away a lot of free First Strikes designations. Hopefully.) 😉
My Conclusions Regarding the NGC First Strikes Lawsuit
All in all, my investigation into this matter has left me two big impressions. The first is that NGC reluctantly began using the First Strikes designation in the first place, and wasn’t really comfortable with it at any point. NGC quickly backed away from First Strikes when the lawsuit was filed, but I honestly believe their claim that they had planned to do so anyway. Had they not, they could have held out until the judge issued the injunction. Although there are some curious claims and interesting mathematics present here, all in all I think NGC was more of a victim than a perpetrator when it’s all said and done. After all, it cost them $650,000 plus legal fees, compliance expenses, and internal costs to “receive” that $88,950.
Secondly, it seems that NGC has bought itself some protection. In this class action lawsuit, once the judge finalizes the settlement, anybody who has purchased an NGC First Strikes coin is losing their right to ever sue NGC in the future regarding this designation unless they have explicitly removed themselves from the class. The compensation you are receiving for giving up your rights is the fact that the ANA will get a $447,500 donation. I’m not a lawyer, but I have taken some law classes and I have great “street smarts.” It seems to me that NGC might have invested in some future problem avoidance here. By settling this class action suit, NGC is ensuring that all those folks who are stuck with NGC First Strikes coins have all been stripped of their rights to sue NGC over it in the future. Many coin market analysts feel that all of those naive buyers who are sitting on most of the First Strikes coins, (along with a number of other “perceived value” designations,) will rise up and scream once the economy takes a downturn and people need to cash in their coin “investments.” The perceived value will evaporate overnight in a flooded market, and in the fine tradition of litigious 21st century America, people will turn to the lawyers. Will this settlement keep NGC safe?
From Susan Headley,
Your Guide to Coins.