toledoblade.com --

In the world of rare coins, quick profits can turn on the opinion of a single expert: the coin grader.

The grader's decision on a coin's quality and its rarity can mean extra money made almost from nothing. It's an opinion many coin dealers count on.

More items were seized yesterday at Tom Noe's coin shop.
( THE BLADE/JEREMY WADSWORTH )

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Ohio's failed $50 million investment in rare coins can be traced back in part to a strategy called "grading arbitrage," one that rests on the opinions of those who look coins up and down and sideways.

In his proposal to the state Bureau of Workers' Compensation, GOP fund-raiser and local coin dealer Tom Noe said he would use the strategy, which banks on human opinion to manipulate the rare-coin market, to generate returns for the state's two rare-coin funds: Capital Coin I and II.

It works like this: Rare coins are graded on a 1-70 scale - a subjective score based on the amount of their wear and tear and quality. A grade 60 and above is considered top notch. Dealers "arbitrage" by trying to find coins they believe have been undergraded and then resubmit them to different grading firms in hopes of winning a higher grade and higher profits.

But Mr. Noe may have had a leg up on other coin dealers.

The Blade has learned that he owns a stake in Numismatic Guaranty Corp., one of the three major coin-grading firms in the United States that most coin dealers use. Records show that numerous coins owned by the state were sent to be graded by that firm.

Coin dealers, including Mr. Noe and his colleagues, try to use coin grading to increase their profit. In this process, the coin itself has not changed, only the opinion about the coin.

Grades are an integral part of the equation that sets a coin's value, which also includes its rarity and collector taste. The all-important grades are determined by the nicks and scratches and other signs of wear and tear on each coin, in addition to its positive visual qualities such as color.

A grade of 60 or higher is commonly referred to as "Mint State," meaning it has been uncirculated and once part of commemorative sets, sometimes given as gifts to foreign leaders over the centuries.

And just like some trial lawyers go shopping for sympathetic judges, depending on the case, Mr. Noe proposed using the state's money to shop for grading firms that might look favorably on a particular coin. His proposal to the state also included other business activities, such as operating as a wholesaler of coins, but the big money comes from grading arbitrage.

"Sometimes these people spend lots of money and sometimes [the new grade], it comes back lower; it's a risk. There are people that I know over the years have made it a full-time business to spot undergraded coins, get them graded, and sell them at higher prices," said Beth Deisher, editor of Coin World Magazine. "They always tell you about the ones that got upgraded.... They don't tell you about the ones that came back lower."

The state bit on Mr. Noe's investment proposal and the result has been missing millions, careers lost, and possible criminal charges.

Eight years since the first $25 million was invested, at least eight agencies are investigating Mr. Noe and the two rare-coin funds he created.

The administrator of Ohio's Bureau of Workers' Compensation, James Conrad, resigned Friday over the scandal, and the FBI is investigating Mr. Noe for alleged campaign-finance violations connected to the Bush-Cheney campaign, which needed Ohio's 20 electoral votes to win the White House last year.

On the state side, the Ohio inspector general's investigation has widened to include a look at possible unreported gifts from Mr. Noe to members of Gov. Bob Taft's staff, including two stays by former chief of staff Brian Hicks at Mr. Noe's Florida home.

Grading is subjective

Many of the characters in the tale of Mr. Noe's coin funds flew high, lifted by the idea that quick money could be made by having a good eye for coins and skimming a margin off the top of a higher grade.

Sometimes it never happens. Other times it's a score. Grading has rules and standards, but it is also subjective, like judging figure skating.

"Let's say a coin is submitted, and it's a 64 1/2. Do I grade it as a 64 or a 65, that depends on the graders in the room," said Robert Brueggeman, executive director of the Professional Numismatists Guild. "The next time it comes in, a month or so, or a year later, it's [judged] a 64 3/4, and they might grade it a 65. It's a matter of subjectivity."

A deeper look into the world of coin grading reveals a system set up in 1986 that has been sometimes abused but that most often has been heralded as a savior to an industry once too populated with charlatans.

"There were some people who couldn't resist putting their thumb on the scale, and so we offered third party verification of quality. We offered to help the people," said David Hall, president of the California-based Professional Coin Grading Service, one of the three major coin grading firms in the United States.

Others say the third-party system is rife with conflict of interest and that the system is gamed by coin dealers, who have a good eye and a big bankroll.

The dealers search for coins that are the "sliders," or the "liners," as they are called, the ones that might glint in such a way on a certain day to become a 65, instead of a 64, in the eye of the right coin grader.

It's not illegal, but sins have been committed in the name of grading arbitrage in the high-dollar, fast-paced rare coin world. In some cases, the state of Ohio was footing the bill.

Conflict of interest?

Some critics of the third-party grading system point to conflicts of interest as a problem, such as Mr. Noe's part ownership of Numismatic Guaranty Corp. of Sarasota, Fla., which graded many Ohio-owned coins.

Some of the state's coins confiscated last week by inspectors were being held at the same building and suite as Numismatic Guaranty's headquarters.

"Dealers own the grading firms. I don't know if the grades come out any different, but the dealers get preferential treatment.... It's hard to prove," said Robert Hoge, curator of American coins and currency for the research-oriented American Numismatic Society. "It's really just a completely commercial thing. There really isn't consistency with these companies; they try, and it's a human thing, and it's all subjective."

According to his Ohio Ethics Commission disclosure form, Mr. Noe, who served as chairman of the Ohio Turnpike Commission and as a member of the Ohio Board of Regents, lists his stake in the company as a "stock investment."

Numismatic Guaranty has not returned numerous calls by The Blade, and the Bureau of Workers' Compensation spokesman, Jeremy Jackson, said he could not say if or why the Florida grading firm might have been home to part of the state's rare coin stock.

On its Web site, the company promises "impartiality" and "integrity" from its staff: "NGC's full-time grading experts are no longer active in the commercial coin marketplace, and are prohibited from buying or selling coins to ensure impartiality," the site says.

Most in the industry, including the respected Professional Numismatists Guild, point to three firms - Numismatic Guaranty, Professional Coin Grading Service, and ANACS - as the most popular and among the most consistent graders from coin to coin.

Mr. Hall, the president of Professional Coin Grading Service, said dealers owning stakes in grading firms is ethical, in his opinion, as long as the dealers are not doing the grading.

At his firm - which is publicly traded as a division of Collectors Universe - professional graders do not know the owners of the coins they inspect, he said. The advent of the independent third-party grading system more than 20 years ago legitimized the rare-coin industry and brought necessary standards to grading, he said.

Before third-party grading, "it was buyer beware; the wild wild West," Mr. Hall said. "The person selling the item represented the quality of the item."

But Mr. Hoge points out that dealers have advantages; they pay lower fees to have their coins graded than the general public. And the grading submission forms include the previous or "current grade" for the coin submitted, meaning it's clear the coin is not being graded for the first time and that the dealer is hoping for a higher score.

Sometimes dealers simply request a second look or a "regrade" by the same firm, or a special "presidential review," meaning the chief grader or owner looks at the coin.

A potential superstar

With the gleaming $3 U.S. gold piece, Mr. Noe and his partners scored. It had received a "presidential review" from a grading company and was more valuable because of it.

The 1855 coin was a potential auction superstar with a superior pedigree: It was extremely rare and struck in 19th-century America, among the most valuable breed.

The $3 coin, one of only a few known to exist, was purchased from a Boulder, Colo., coin dealer and a rare piece to be sure. But it also represented a triumph of grading arbitrage.

But before Mr. Noe, his partners, and the state of Ohio could slice up the extra profits, the $3 coin, and an 1845 $10 gold piece, went missing in the mail on their way back from a grading firm.

Coin Dealer Kevin Lipton and Michael Storeim, then-manager of Mr. Noe's subsidiary, Numismatic Professionals Limited in Evergreen, Colo., decided to buy and then submit the newly acquired coin to at least one "grading" firm, hoping the experts there would increase its 64 grade.

The coin was regraded by Professional Coin Grading Service at 65 "Deep Cameo," pushing the rarest of rare up one more notch toward perfection and profit.

Purchased for $150,000, the coin was now considered $50,000 more valuable after being upgraded, by some estimates, simply because an expert or group of experts on a certain day said so.

"That's what we do," Mr. Lipton said of the arbitrage.

He was testifying in an insurance company deposition about the missing coins.

The arbitrage process is accepted and even encouraged in the rare coin industry. It was part of the Ohio-approved investment strategy, but also is at the heart of some of the problems with the investments, particularly in Colorado.

At Numismatic Professionals Limited, Mr. Storeim was accused of an illicit type of grading arbitrage, perpetrated behind his colleagues' backs.

He was accused of sending in company coins to be regraded secretly. If he learned online that a coin had been graded higher, then he might buy it anonymously from the subsidiary at the original lower price, determined by the original lower grade, his colleagues charged.

That allegation, and the loss of the two valuable coins in the mail, prompted Mr. Noe to confiscate about $500,000 worth of coins from the Evergreen shop when Mr. Storeim was out of town. The two have traded lawsuits over the issue.

His colleagues complained that they were being cut out of the higher commissions associated with the higher grade.

A higher grade can dramatically increase a coin's auction price, sometimes to unreasonable levels: A 1963 Lincoln penny that received a perfect grade of MS 70 "Deep Cameo," like a gymnast earning a perfect 10, was bid up to $39,100.

Without that grade, such a penny might normally sell for less than $100. The penny, later found to have a flaw, has become the classic example of grading-induced mania.

But Scott A. Travers, a coin-book author and consumer advocate who used to work at Numismatic Guaranty as a grader, said that succeeding at big-money arbitrage can be difficult in part because some graders are reluctant to earn someone else thousands of dollars just on their decision. The author also edited The Official Guide to Coin Grading and Counterfeit Detection.

Adding value to a $50 coin that is a borderline 64/65 grade didn't bother Mr. Travers when he was grading. But to truly produce wealth is a responsibility, and faced with a "liner," he automatically became more conservative. He was not the grading arbitrager's friend when tens of thousands of dollars were at stake, he said.

Graders also have been accused of being stingy with upgrades to preserve the rarity of coins that dwell near the top of the scale and to protect the interest of others and the market.

"I was a grader at [Numismatic Guaranty], and it's not to preserve the rarity of it, you're concerned about creating wealth," he said. "If I look at a coin and it was graded 64, or it would likely be a 64-high end, and as a 64 it was worth $40,000 and as a 65, it was worth $400,000, then I would be very concerned about calling it a 65."

"If I thought it was a marginally low-end 65, I would opt to grade it a 64," he said of his example. "It has nothing to do with honesty. You look at a coin and you don't want to create wealth. I don't want to bear that responsibility, and I would give it the lower grade."

Grading, grading firms, and arbitrage; coin collecting as business, rather than hobby; rare coins as commodity rather than history have stolen the purity of the market, Mr. Hoge said.

Some purists believe the profit-based grading system has turned the hobby into a grading game, enriching those dealers in the know, he said.

"I think a lot of the pleasing aspects of the hobby of coin collecting are pretty much gone," he said. "It's largely for investors or dealers, and values are pretty much inflated by this grading thing. Every coin reaches the highest grade it can attain."

Contact Christopher D. Kirkpatrick at: ckirkpatrick@theblade.com or 419-724-6077.

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