Twisted Titan
12th March 2014, 09:07 AM
Tulving Post Mortem This page discusses what happened to The Tulving Company. Much of this is factual, but there is some speculation here (but with evidence supporting it).
Quick links on the page:
Stage 1 (~1995-2011) (http://about.ag/TulvingPostMortem.htm#stage1), Stage 2 (~2011-2012) (http://about.ag/TulvingPostMortem.htm#stage2), Stage 3 (mid-April, 2013) (http://about.ag/TulvingPostMortem.htm#stage3), Stage 4 (Jun 2013 - Jan 2014) (http://about.ag/TulvingPostMortem.htm#stage4), Stage 5 (mid-Feb 2014) (http://about.ag/TulvingPostMortem.htm#stage5), Stage 6 (February 28, 2014) (http://about.ag/TulvingPostMortem.htm#stage6), What Happened (http://about.ag/TulvingPostMortem.htm#whathappened), When laws were broken (http://about.ag/TulvingPostMortem.htm#lawsbroken), Timeline (http://about.ag/TulvingPostMortem.htm#timeline).
Stage 1: A Decade of Great Business
Hannes Tulving, Jr. started The Tulving Company in 1995, as an online bullion dealer. In 1997, you could buy 1oz gold Eagles for $19 over spot. At first, he had lots of ads in coin magazines. At times he had minimum orders as low as around $300. You could call or E-mail your order. He was known for almost always having the best prices, and often would ship the same day he received payment (and often overnight shipping). He also became known for high minimum orders (for the past year, the smallest order was likely just over $10,000). Has also became known as the most trustworthy dealer. When a dealer can take your order on the phone in less than 2 minutes, takes your call personally, and you have your metal within 48 hours, it's hard to complain. He did as much as $85M/month in sales at his peak.
The only complaints were typically either that he was gruff, and were usually from people who could not meet the minimum order or who wanted hand-holding. But he had a reputation that nobody could match, despite his early 1990s fiasco (more here (http://articles.latimes.com/keyword/hannes-tulving)), which many customers were aware of.
During Stage 1, it appears that he always had the products in stock at his Costa Mesa warehouse (except when pre-ordering new products such as ASEs), and would ship as soon as he possibly could (usually within 24 hours after receiving good funds). This business model was nearly fail-proof, for two reasons: [1] He only had perhaps 1-2 days worth of customer funds, and [2] He had no incentive to delay orders (doing so would hurt his reputation, with no financial gain).
Stage 2: Drop-shipping
At some point around 2011-2012, The Tulving Company started drop-shipping some of their orders. One of their drop-shippers was Coins 'N Things of Bridgewater, MA (one of the biggest suppliers of gold, and buyers of ASEs, from the U.S. Mint). So a customer would wire The Tulving Company money, Hannes would wire the drop-shipper money, and the drop-shipper would send out the order.
I believe this seemingly minor change to Tulving's business model ended up destroying his business, and caused many customers to lose millions of dollars.
This method was no longer fool-proof. If Tulving thought that the price of gold or silver was going to go down, he had an incentive to delay the order. For a monster box of ASEs, he might have a spread of $395. After shipping costs, insurance, payroll, etc., he might be lucky to get $20 profit out of it. If he thinks the price of silver is going to go down, he can wait to send out the order. He gets paid at, say, $25/oz, and then pays his reseller a week later based on the new price of silver at $24/oz. His profit goes from $20 to $520!
Problems compound, as not only is there an incentive to delay orders, but with delays you are increasing the amount of customer money at risk.
In 2010, he had 0 BBB complaints. In 2011, he only had 2 complaints with the BBB. In the first half of 2012, he only had 1 complaint. However, in the second half of 2012, he had at least 8 BBB complaints. Something changed, and that appears to have been the start of his problems. Given those 8 complaints, it appears that he first had (relatively) serious issues around June, 2012. In December, 2012 one person reported it taking 2 weeks from the time funds were received until the order was shipped (through a drop-shipper). Another person in December, 2012 reported their order arriving 2 days after Tulving received the funds (likely an item Tulving had in their own inventory). It appears that at that same time, Tulving was offering the in-stock items as a 'special' (with a lower spread), and the drop-shipped items at the regular prices.
From the evidence, it appears that in December, 2012, Tulving was cash-short and bullion-rich. In other words, he had his existing bullion inventory that he had had for many years, but for some unknown reason had already lost some cash. So with specials on items he had in stock, he could ship immediately, and essentially raise money to pay whatever debt he may have had. But orders for items that were not in stock took a couple weeks, because he had to wait until he had the cash in the bank to pay for them. This is speculation, but fits the evidence.
In December, 2012, Tulving was also quoting 3 weeks for trades. Why would a trade take longer than paying with cash? It sounds like he had to sell the metal he received, wait to get the cash, then place an order with a drop-shipper. In other words, he was cash poor at the time.
In December, 2012 he was also reporting items as "in stock" that were in fact being drop-shipped, and therefore not in stock.
Stage 3: The Collapse
Things weren't great in early 2013, but few serious issues (there was one complaint of a $70K order taking 5 weeks, and split into 2 shipments when it happened).
"D Day" appears to have been Friday, April 11, 2013. That is when the price of silver and gold started plummeting, going down about 20% within a week. Between April 12, 2013 and April 22, 2013, there were are least 3 orders that took The Tulving Company over 20 weeks to ship. There was one complaint of an order placed April 8, 2013 that took 11 weeks to deliver.
So it appears that there was a huge shift in Tulving's ability to ship products starting when the price of silver and gold dropped. They were already somewhat behind, but rarely taking over a month to deliver (in other words, they were operating within the law). They were able to ship out all orders they received before that week, but almost all orders they received after April 11 were delayed significantly (up to 10 months).
Oddly, the BBB showed only 2 complaints between March 10, 2013 and July 1, 2013. It seems like few people were willing to complain until after it had taken a couple months for their order to be delivered.
It was only around September/October of 2013 that the word really got out in Internet forums, at which point people were more likely to complain (knowing that it was not just their order, and that there could be financial problems with Tulving).
Stage 4: The New Normal Complaints increased every month from June through the end of Tulving's operations in March, 2014. In October, he was up to 2 complaints a day. By February, he was getting about 5 complaints per day.
So Tulving came up with a new system. Rather than picking and choosing what orders he was going to send, as he was before, he gave priority to complaints coming in from official channels (mostly the BBB and BCA, as well as a handful of lawsuits and such). Things became a bit easier, and more routine. There were still orders piling up, but at least Tulving had a way of doing business that prevented him from going out of business.
Stage 5: The Tipping Point
Around February 19, 2014, I reported that Tulving had reached 'The Tipping Point (http://about.ag/TulvingOld.htm#tippingpoint).'
He was receiving as many complaints per day as new orders. If you are getting 5 orders a day, and have to ship out 5 old orders, that is sustainable -- but only if complaints do not rise and orders do not dwindle. However, with complaints rising steadily over 8 months, and orders dwindling over that time, new complaints were going to exceed new orders at any point.
This was the beginning of the short end to The Tulving Company.
Stage 6: The End
On Friday, February 28, 2014, I reported 'The End? (http://about.ag/TulvingOld.htm#theend)'. I stated "As far as we can tell, The Tulving Company is effectively out of business (and likely just tying up loose ends and/or filing for bankruptcy)."
This was because The Tulving Company had stopped responding to BBB and BCA complaints. Coming less than 10 days after I discovered that their complaint volume was close to exceeding their new order volume, it was clear that the end was here. I also put out a public plea to Hannes - "Hannes, could you please do the right thing, and either file bankruptcy or if you are not insolvent come clean and explain the situation?"
On Friday, someone actually asked Karen if The Tulving Company was insolvent, and ironically she said that nobody had told her not to come in on Monday.
On Monday, March 3, The Tulving Company ceased operations.
My Theory on What Happened
There are many facts out there, but nothing definitive about what happened.
The short version: I believe that Hannes Tulving was speculating in the futures market (either long and/or selling naked put options), and lost a large amount of money in doing so (in the order of $40M-$60M). He started paying that debt by selling off his inventory, and then with customer money (and possibly income from writing naked put options). The only way to stay in business paying debt with customer money was to delay orders, resulting in this fiasco.
For any theory to work, there are some relevent facts (some well known to be true, others fairly reliable) that must to be addressed:
Tulving used to have a large inventory (over $20M worth at one point in 2011, if his records are accurate)
Tulving used to always ship very quickly, often the same day as receiving payment.
The first known delays started in mid-2012 (from 1 BBB complaint in the first half of 2012 to 8+ in the second half).
Hannes lost complete control of the company in mid-April, 2013, unable to ship most orders.
The money appears to have been suddenly owed rather than spent. In other words, he did not buy a mansion, island, or yacht (which require money upfront).
The money was not likely spent on extravagance (he has lead a modest lifestyle for decades, even answering the phone 24 hours a day 7 days a week).
Hannes switched from selling items from his inventory to drop-shipping around 2011-2012.
The price of gold and silver plummeted the week that Tulving lost complete control of the company.
Between August 18, 2011 and August 23, 2011, The Tulving Company switched from using coininfo.com prices to kitco.com prices (suggesting the start of the switch to drop-shippers).
On August 23, 2011 Tulving listed 600,000oz of silver in stock, with a value of about $25M.
By December 29, 2011 Tulving listed 300,000oz of silver in stock, with a value of about $8M.
By February 15, 2012 Tulving no longer listed their total silver stock in ounces.
By July, 2012, Tulving was only listing about 50,000oz of silver products as in stock, worth less than $1.5M.
The Tulving Company was in a business that commonly uses the futures market for legitimate hedging.
What did not likely cause this:
The value of his inventory decreasing did not cause this. If the price of gold goes down, he still has the metal, and makes profit from the spread. The company's value would go down, but it would not affect orders.
The problem was not caused by getting 'backed up' by taking too many orders, and a big price change causing him to lose money. The prices were going down in mid-April when things went out of control, which would have generated a profit in that scenario.
My detailed theory/analysis:
Around the time that the price of gold hit its peak (September 5, 2011), Tulving started losing money. I believe Tulving started speculating on the futures market at or before this point (he may have been long gold and silver during the bull market).
Tulving was either purchasing long gold/silver contracts, or writing put options (at first covered with his inventory, then naked). Both would cause him to lose money if the prices went down, a huge amount with options.
As the price of gold went down in late 2011, Tulving owed quite a bit of money, and ended up selling off his inventory over the next 6 months or so.
At this point, he had made a big mistake, and lost most/all of his life savings (the $25M+ of bullion the company owned). But customers were unaffected (and unaware).
By the middle of 2012, he still owed money, and had no inventory left to sell. So he started using money from customer orders to pay his debt, which he could do without inventory because he now had resellers.
By floating customer orders 2-3 weeks, at $350M/year business in 2012, he could pay off another $15M-$20M in debt.
At this point -- circa June, 2012 -- I believ The Tulving Company was insolvent, never to become solvent again.
By mid-April, 2013, he still had a backlog of about several weeks, which was managable. But he still was in the futures markets; perhaps he tried to "double down" and increase his speculation in hopes of getting rid of the backlog.
on Friday, April 12, 2013, the price of gold went down 5.4% in a single day, and went down 8.7% the next trading day. At this point, Hannes owed a huge amount of money.
To pay that debt, Hannes had to continue delaying customer orders, using the money coming in from new customers to pay his debt.
A few notes about this theory:
If he owed, for example, $10M in margin on long futures contracts, then he would have had to have been long about $180M worth of gold or $100M worth of silver. This is well beyond his own inventory, and clearly would have been speculation. It also likely well exceeeded the reportability limits (meaning that the CFTC would have considered him a Larger Trader).
Another scenario is that he was writing naked put options. As an example of a put option, let's say the price of silver is $21. Someone might pay me $2 for the option to sell an ounce of silver for $18 by the end of next month. If silver is over $18 by the end of the month, I keep the $2. But if silver went down to $10/oz, I would owe the person $8 (much more than what I received).
Combining these, he may have been long gold and/or silver futures contracts. When the position started to go bad, he sold off his inventory. When that was gone, he may have sold naked put options to generate cash, to help reduce the several-week shipping delays. These naked put options may have been at $1,600, at which point he would have had to come up with perhaps a couple million dollars in mid-February, which was possible. Then in mid-April, the amount owed would have ballooned, to the order of around $30-$40M (the amount of outstanding orders when Tulving ceased operations, minus any outstanding orders in mid-April).
It is known that many bullion dealers hedge, so Hannes was likely familiar with the futures market, and may well have used it at times to hedge (especially with larger orders).
I cannot think of any other scenarios that could explain what happened as easily as this.
When Did Laws Start Being Broken?
Assuming that my theory is correct, as sole owner of The Tulving Company, Hannes likely had every right to speculate on the futures market, and risk his entire inventory (assuming it was fully paid for).
Things become less clear when he first started using customer funds to pay the debt (perhaps mid-2012). As soon as he spent enough customer funds that he was insolvent (owing more in customer funds than he had in assets), that line was likely crossed. I am not aware of laws directly requiring businesses not to dip into customer funds like that, but it very quickly got to the point where he was taking customer orders that he knew he could not fulfill in the time required by law (typically 28-30 days).
Timeline March 10, 2014 8:30AM EST
October 25, 1990
Hannes Tulving, Jr. incorporates The Tulving Company.
October 20, 1995
The tulving.com domain name is registered. The saga begins.
June 17, 2005
Hannes Tulving, Jr. has a stroke. It was about a year before he started going to the office everyday. However, there appears to have been minimal impact on the operations of The Tulving Company.
2009
Tulving claims $285M in sales.
Feburary 4, 2010
Tulving claims best sales day, $5.3M.
July, 2010
The Tulving Company takes out a 1-year shipping insurance policy for $100,000 with HWWoods.
2010
Tulving claims $370M in sales.
2011 Q1
Tulving claims $150M in sales in the first quarter of 2011 (January through March).
July, 2011
The Tulving Company takes out a 1-year shipping insurance policy for $250,000 with HWWoods.
August 23, 2011
The Tulving Company reports claims to have 600,000oz of silver in stock, worth about $25M.
~August 25, 2011
Tulving switches from using coininfo.com prices to Kitco prices. I believe this was due to starting to use drop-shippers, who all used the Kitco prices.
August, 2011
Tulving claims $83.5M+ in sales for August, 2011 (equivalent to $1B/year).
September 5, 2011
Gold hits its peak of $1,895
September 29, 2011
Gold goes down to $1,613, a drop of 15% in just over 3 weeks.
September, 2011
Tulving claims $13M in sales in one day.
October, 2011
I believe Tulving started selling down his inventory to pay off debt.
2011
Tulving claims $675M in sales.
February, 2012
Between February 6, 2012 and February 15, 2012, The Tulving Company stops reporting how much silver they have in stock. I believe they had sold off most of their inventory.
May, 2012
Tulving no longer shows how many ounce of any silver item are in stock.
July 1, 2012
The Tulving Company starts getting an influx in BBB complaints. He gets 8 BBB complaints between July 1, 2012 and mid-December, 2012. He had 0 in 2010, 2 in 2011, and just 1 in the first half of 2012.
July, 2012
The Tulving Company takes out a 1-year shipping insurance policy for $140,000 with Willis.
December, 2012
One customer reports a 2 week delay, while another reports getting their order within 48 hours of the wire being receieved by Tulving. I believe he was selling his inventory at this point. So if he had a $15,000 order for 500 ounces of silver, he would use the $15,000 to pay off his debt, and send the silver he had. If he did not have the silver, he would order through a reseller (which took a couple weeks, as he had already spent several weeks' of customer funds).
2012
Tulving claims $350M in sales.
April 12, 2013
Gold goes down 13.6% in two trading days (Friday April 12 and Monday April 15).
July 1, 2013
The BBB only reports 2 complaints since March. Behind the scenes, on this date there were about 70 people who had ordered products who would later complain.
July, 2013
The Tulving Company takes out a 1-year shipping insurance policy for $140,000 with Willis.
September 20, 2013
Word starts getting out on the Internet about major delays at The Tulving Company, after someone posts of a $200,000 order that was 5 months overdue.
September 23, 2013
The BBB now has 21 complaints on file. Behind the scenes, on this date over 200 people had ordered and would later complain.
October 11, 2013
I realize that The Tulving Company has a serious problem, and start warning people.
October 14, 2013
I first explained the game online: Tulving has outstanding orders worth lots of money, but no money in the bank. I also wrote "If people stopped buying from him altogether and he only had the $1M in the bank rather than $100M, he would go bankrupt and those 1,000-or-so people would get no silver/gold and no money." I explained that the big red flag was a $300K cash payment Tulving owed and was not paying. That was the big red flag. If you have $100M in the bank, you don't have problems paying for $300K of metal.
October 14, 2013
I start keeping track of complaints.
October 15, 2013
I start the page about.ag/tulving.htm.
October, 2013
The Tulving Company was getting about 2 complaints (BBB and similar) per day.
February, 2014
The Tulving Company was now up to about 5 complaints (BBB and similar) per day.
February 10, 2014
The local newspaper reports on someone that ordered from Tulving and did not receive their order.
February 19, 2014
about.ag reported that Tulving has reached 'The Tipping Point', with complaint volume exceeding order volume, meaning the end was near.
February 28, 2014
(Friday)
about.ag reported that The Tulving Company was effectively out of business. When an about.ag visitor called The Tulving Company later that day, one employee stated she was 'not told to not come into work Monday.' On Monday she was told to go home.
March 3, 2014
(Monday)
about.ag reported that The Tulving Company shut down, and employees were sent home. Nobody was answering the phones or responding to E-mail.
March 6, 2014
(Thursday)
The local newspaper discovers that The Tulving Company shut down.
March 6, 2014
(Thursday)
A class action lawsuit is filed.
March 7, 2014
(Friday)
A temporary restraining order is requested on behalf of the class action lawsuit.
March 10, 2014
(Monday)
The judge approves the temporary restraining order.
Quick links on the page:
Stage 1 (~1995-2011) (http://about.ag/TulvingPostMortem.htm#stage1), Stage 2 (~2011-2012) (http://about.ag/TulvingPostMortem.htm#stage2), Stage 3 (mid-April, 2013) (http://about.ag/TulvingPostMortem.htm#stage3), Stage 4 (Jun 2013 - Jan 2014) (http://about.ag/TulvingPostMortem.htm#stage4), Stage 5 (mid-Feb 2014) (http://about.ag/TulvingPostMortem.htm#stage5), Stage 6 (February 28, 2014) (http://about.ag/TulvingPostMortem.htm#stage6), What Happened (http://about.ag/TulvingPostMortem.htm#whathappened), When laws were broken (http://about.ag/TulvingPostMortem.htm#lawsbroken), Timeline (http://about.ag/TulvingPostMortem.htm#timeline).
Stage 1: A Decade of Great Business
Hannes Tulving, Jr. started The Tulving Company in 1995, as an online bullion dealer. In 1997, you could buy 1oz gold Eagles for $19 over spot. At first, he had lots of ads in coin magazines. At times he had minimum orders as low as around $300. You could call or E-mail your order. He was known for almost always having the best prices, and often would ship the same day he received payment (and often overnight shipping). He also became known for high minimum orders (for the past year, the smallest order was likely just over $10,000). Has also became known as the most trustworthy dealer. When a dealer can take your order on the phone in less than 2 minutes, takes your call personally, and you have your metal within 48 hours, it's hard to complain. He did as much as $85M/month in sales at his peak.
The only complaints were typically either that he was gruff, and were usually from people who could not meet the minimum order or who wanted hand-holding. But he had a reputation that nobody could match, despite his early 1990s fiasco (more here (http://articles.latimes.com/keyword/hannes-tulving)), which many customers were aware of.
During Stage 1, it appears that he always had the products in stock at his Costa Mesa warehouse (except when pre-ordering new products such as ASEs), and would ship as soon as he possibly could (usually within 24 hours after receiving good funds). This business model was nearly fail-proof, for two reasons: [1] He only had perhaps 1-2 days worth of customer funds, and [2] He had no incentive to delay orders (doing so would hurt his reputation, with no financial gain).
Stage 2: Drop-shipping
At some point around 2011-2012, The Tulving Company started drop-shipping some of their orders. One of their drop-shippers was Coins 'N Things of Bridgewater, MA (one of the biggest suppliers of gold, and buyers of ASEs, from the U.S. Mint). So a customer would wire The Tulving Company money, Hannes would wire the drop-shipper money, and the drop-shipper would send out the order.
I believe this seemingly minor change to Tulving's business model ended up destroying his business, and caused many customers to lose millions of dollars.
This method was no longer fool-proof. If Tulving thought that the price of gold or silver was going to go down, he had an incentive to delay the order. For a monster box of ASEs, he might have a spread of $395. After shipping costs, insurance, payroll, etc., he might be lucky to get $20 profit out of it. If he thinks the price of silver is going to go down, he can wait to send out the order. He gets paid at, say, $25/oz, and then pays his reseller a week later based on the new price of silver at $24/oz. His profit goes from $20 to $520!
Problems compound, as not only is there an incentive to delay orders, but with delays you are increasing the amount of customer money at risk.
In 2010, he had 0 BBB complaints. In 2011, he only had 2 complaints with the BBB. In the first half of 2012, he only had 1 complaint. However, in the second half of 2012, he had at least 8 BBB complaints. Something changed, and that appears to have been the start of his problems. Given those 8 complaints, it appears that he first had (relatively) serious issues around June, 2012. In December, 2012 one person reported it taking 2 weeks from the time funds were received until the order was shipped (through a drop-shipper). Another person in December, 2012 reported their order arriving 2 days after Tulving received the funds (likely an item Tulving had in their own inventory). It appears that at that same time, Tulving was offering the in-stock items as a 'special' (with a lower spread), and the drop-shipped items at the regular prices.
From the evidence, it appears that in December, 2012, Tulving was cash-short and bullion-rich. In other words, he had his existing bullion inventory that he had had for many years, but for some unknown reason had already lost some cash. So with specials on items he had in stock, he could ship immediately, and essentially raise money to pay whatever debt he may have had. But orders for items that were not in stock took a couple weeks, because he had to wait until he had the cash in the bank to pay for them. This is speculation, but fits the evidence.
In December, 2012, Tulving was also quoting 3 weeks for trades. Why would a trade take longer than paying with cash? It sounds like he had to sell the metal he received, wait to get the cash, then place an order with a drop-shipper. In other words, he was cash poor at the time.
In December, 2012 he was also reporting items as "in stock" that were in fact being drop-shipped, and therefore not in stock.
Stage 3: The Collapse
Things weren't great in early 2013, but few serious issues (there was one complaint of a $70K order taking 5 weeks, and split into 2 shipments when it happened).
"D Day" appears to have been Friday, April 11, 2013. That is when the price of silver and gold started plummeting, going down about 20% within a week. Between April 12, 2013 and April 22, 2013, there were are least 3 orders that took The Tulving Company over 20 weeks to ship. There was one complaint of an order placed April 8, 2013 that took 11 weeks to deliver.
So it appears that there was a huge shift in Tulving's ability to ship products starting when the price of silver and gold dropped. They were already somewhat behind, but rarely taking over a month to deliver (in other words, they were operating within the law). They were able to ship out all orders they received before that week, but almost all orders they received after April 11 were delayed significantly (up to 10 months).
Oddly, the BBB showed only 2 complaints between March 10, 2013 and July 1, 2013. It seems like few people were willing to complain until after it had taken a couple months for their order to be delivered.
It was only around September/October of 2013 that the word really got out in Internet forums, at which point people were more likely to complain (knowing that it was not just their order, and that there could be financial problems with Tulving).
Stage 4: The New Normal Complaints increased every month from June through the end of Tulving's operations in March, 2014. In October, he was up to 2 complaints a day. By February, he was getting about 5 complaints per day.
So Tulving came up with a new system. Rather than picking and choosing what orders he was going to send, as he was before, he gave priority to complaints coming in from official channels (mostly the BBB and BCA, as well as a handful of lawsuits and such). Things became a bit easier, and more routine. There were still orders piling up, but at least Tulving had a way of doing business that prevented him from going out of business.
Stage 5: The Tipping Point
Around February 19, 2014, I reported that Tulving had reached 'The Tipping Point (http://about.ag/TulvingOld.htm#tippingpoint).'
He was receiving as many complaints per day as new orders. If you are getting 5 orders a day, and have to ship out 5 old orders, that is sustainable -- but only if complaints do not rise and orders do not dwindle. However, with complaints rising steadily over 8 months, and orders dwindling over that time, new complaints were going to exceed new orders at any point.
This was the beginning of the short end to The Tulving Company.
Stage 6: The End
On Friday, February 28, 2014, I reported 'The End? (http://about.ag/TulvingOld.htm#theend)'. I stated "As far as we can tell, The Tulving Company is effectively out of business (and likely just tying up loose ends and/or filing for bankruptcy)."
This was because The Tulving Company had stopped responding to BBB and BCA complaints. Coming less than 10 days after I discovered that their complaint volume was close to exceeding their new order volume, it was clear that the end was here. I also put out a public plea to Hannes - "Hannes, could you please do the right thing, and either file bankruptcy or if you are not insolvent come clean and explain the situation?"
On Friday, someone actually asked Karen if The Tulving Company was insolvent, and ironically she said that nobody had told her not to come in on Monday.
On Monday, March 3, The Tulving Company ceased operations.
My Theory on What Happened
There are many facts out there, but nothing definitive about what happened.
The short version: I believe that Hannes Tulving was speculating in the futures market (either long and/or selling naked put options), and lost a large amount of money in doing so (in the order of $40M-$60M). He started paying that debt by selling off his inventory, and then with customer money (and possibly income from writing naked put options). The only way to stay in business paying debt with customer money was to delay orders, resulting in this fiasco.
For any theory to work, there are some relevent facts (some well known to be true, others fairly reliable) that must to be addressed:
Tulving used to have a large inventory (over $20M worth at one point in 2011, if his records are accurate)
Tulving used to always ship very quickly, often the same day as receiving payment.
The first known delays started in mid-2012 (from 1 BBB complaint in the first half of 2012 to 8+ in the second half).
Hannes lost complete control of the company in mid-April, 2013, unable to ship most orders.
The money appears to have been suddenly owed rather than spent. In other words, he did not buy a mansion, island, or yacht (which require money upfront).
The money was not likely spent on extravagance (he has lead a modest lifestyle for decades, even answering the phone 24 hours a day 7 days a week).
Hannes switched from selling items from his inventory to drop-shipping around 2011-2012.
The price of gold and silver plummeted the week that Tulving lost complete control of the company.
Between August 18, 2011 and August 23, 2011, The Tulving Company switched from using coininfo.com prices to kitco.com prices (suggesting the start of the switch to drop-shippers).
On August 23, 2011 Tulving listed 600,000oz of silver in stock, with a value of about $25M.
By December 29, 2011 Tulving listed 300,000oz of silver in stock, with a value of about $8M.
By February 15, 2012 Tulving no longer listed their total silver stock in ounces.
By July, 2012, Tulving was only listing about 50,000oz of silver products as in stock, worth less than $1.5M.
The Tulving Company was in a business that commonly uses the futures market for legitimate hedging.
What did not likely cause this:
The value of his inventory decreasing did not cause this. If the price of gold goes down, he still has the metal, and makes profit from the spread. The company's value would go down, but it would not affect orders.
The problem was not caused by getting 'backed up' by taking too many orders, and a big price change causing him to lose money. The prices were going down in mid-April when things went out of control, which would have generated a profit in that scenario.
My detailed theory/analysis:
Around the time that the price of gold hit its peak (September 5, 2011), Tulving started losing money. I believe Tulving started speculating on the futures market at or before this point (he may have been long gold and silver during the bull market).
Tulving was either purchasing long gold/silver contracts, or writing put options (at first covered with his inventory, then naked). Both would cause him to lose money if the prices went down, a huge amount with options.
As the price of gold went down in late 2011, Tulving owed quite a bit of money, and ended up selling off his inventory over the next 6 months or so.
At this point, he had made a big mistake, and lost most/all of his life savings (the $25M+ of bullion the company owned). But customers were unaffected (and unaware).
By the middle of 2012, he still owed money, and had no inventory left to sell. So he started using money from customer orders to pay his debt, which he could do without inventory because he now had resellers.
By floating customer orders 2-3 weeks, at $350M/year business in 2012, he could pay off another $15M-$20M in debt.
At this point -- circa June, 2012 -- I believ The Tulving Company was insolvent, never to become solvent again.
By mid-April, 2013, he still had a backlog of about several weeks, which was managable. But he still was in the futures markets; perhaps he tried to "double down" and increase his speculation in hopes of getting rid of the backlog.
on Friday, April 12, 2013, the price of gold went down 5.4% in a single day, and went down 8.7% the next trading day. At this point, Hannes owed a huge amount of money.
To pay that debt, Hannes had to continue delaying customer orders, using the money coming in from new customers to pay his debt.
A few notes about this theory:
If he owed, for example, $10M in margin on long futures contracts, then he would have had to have been long about $180M worth of gold or $100M worth of silver. This is well beyond his own inventory, and clearly would have been speculation. It also likely well exceeeded the reportability limits (meaning that the CFTC would have considered him a Larger Trader).
Another scenario is that he was writing naked put options. As an example of a put option, let's say the price of silver is $21. Someone might pay me $2 for the option to sell an ounce of silver for $18 by the end of next month. If silver is over $18 by the end of the month, I keep the $2. But if silver went down to $10/oz, I would owe the person $8 (much more than what I received).
Combining these, he may have been long gold and/or silver futures contracts. When the position started to go bad, he sold off his inventory. When that was gone, he may have sold naked put options to generate cash, to help reduce the several-week shipping delays. These naked put options may have been at $1,600, at which point he would have had to come up with perhaps a couple million dollars in mid-February, which was possible. Then in mid-April, the amount owed would have ballooned, to the order of around $30-$40M (the amount of outstanding orders when Tulving ceased operations, minus any outstanding orders in mid-April).
It is known that many bullion dealers hedge, so Hannes was likely familiar with the futures market, and may well have used it at times to hedge (especially with larger orders).
I cannot think of any other scenarios that could explain what happened as easily as this.
When Did Laws Start Being Broken?
Assuming that my theory is correct, as sole owner of The Tulving Company, Hannes likely had every right to speculate on the futures market, and risk his entire inventory (assuming it was fully paid for).
Things become less clear when he first started using customer funds to pay the debt (perhaps mid-2012). As soon as he spent enough customer funds that he was insolvent (owing more in customer funds than he had in assets), that line was likely crossed. I am not aware of laws directly requiring businesses not to dip into customer funds like that, but it very quickly got to the point where he was taking customer orders that he knew he could not fulfill in the time required by law (typically 28-30 days).
Timeline March 10, 2014 8:30AM EST
October 25, 1990
Hannes Tulving, Jr. incorporates The Tulving Company.
October 20, 1995
The tulving.com domain name is registered. The saga begins.
June 17, 2005
Hannes Tulving, Jr. has a stroke. It was about a year before he started going to the office everyday. However, there appears to have been minimal impact on the operations of The Tulving Company.
2009
Tulving claims $285M in sales.
Feburary 4, 2010
Tulving claims best sales day, $5.3M.
July, 2010
The Tulving Company takes out a 1-year shipping insurance policy for $100,000 with HWWoods.
2010
Tulving claims $370M in sales.
2011 Q1
Tulving claims $150M in sales in the first quarter of 2011 (January through March).
July, 2011
The Tulving Company takes out a 1-year shipping insurance policy for $250,000 with HWWoods.
August 23, 2011
The Tulving Company reports claims to have 600,000oz of silver in stock, worth about $25M.
~August 25, 2011
Tulving switches from using coininfo.com prices to Kitco prices. I believe this was due to starting to use drop-shippers, who all used the Kitco prices.
August, 2011
Tulving claims $83.5M+ in sales for August, 2011 (equivalent to $1B/year).
September 5, 2011
Gold hits its peak of $1,895
September 29, 2011
Gold goes down to $1,613, a drop of 15% in just over 3 weeks.
September, 2011
Tulving claims $13M in sales in one day.
October, 2011
I believe Tulving started selling down his inventory to pay off debt.
2011
Tulving claims $675M in sales.
February, 2012
Between February 6, 2012 and February 15, 2012, The Tulving Company stops reporting how much silver they have in stock. I believe they had sold off most of their inventory.
May, 2012
Tulving no longer shows how many ounce of any silver item are in stock.
July 1, 2012
The Tulving Company starts getting an influx in BBB complaints. He gets 8 BBB complaints between July 1, 2012 and mid-December, 2012. He had 0 in 2010, 2 in 2011, and just 1 in the first half of 2012.
July, 2012
The Tulving Company takes out a 1-year shipping insurance policy for $140,000 with Willis.
December, 2012
One customer reports a 2 week delay, while another reports getting their order within 48 hours of the wire being receieved by Tulving. I believe he was selling his inventory at this point. So if he had a $15,000 order for 500 ounces of silver, he would use the $15,000 to pay off his debt, and send the silver he had. If he did not have the silver, he would order through a reseller (which took a couple weeks, as he had already spent several weeks' of customer funds).
2012
Tulving claims $350M in sales.
April 12, 2013
Gold goes down 13.6% in two trading days (Friday April 12 and Monday April 15).
July 1, 2013
The BBB only reports 2 complaints since March. Behind the scenes, on this date there were about 70 people who had ordered products who would later complain.
July, 2013
The Tulving Company takes out a 1-year shipping insurance policy for $140,000 with Willis.
September 20, 2013
Word starts getting out on the Internet about major delays at The Tulving Company, after someone posts of a $200,000 order that was 5 months overdue.
September 23, 2013
The BBB now has 21 complaints on file. Behind the scenes, on this date over 200 people had ordered and would later complain.
October 11, 2013
I realize that The Tulving Company has a serious problem, and start warning people.
October 14, 2013
I first explained the game online: Tulving has outstanding orders worth lots of money, but no money in the bank. I also wrote "If people stopped buying from him altogether and he only had the $1M in the bank rather than $100M, he would go bankrupt and those 1,000-or-so people would get no silver/gold and no money." I explained that the big red flag was a $300K cash payment Tulving owed and was not paying. That was the big red flag. If you have $100M in the bank, you don't have problems paying for $300K of metal.
October 14, 2013
I start keeping track of complaints.
October 15, 2013
I start the page about.ag/tulving.htm.
October, 2013
The Tulving Company was getting about 2 complaints (BBB and similar) per day.
February, 2014
The Tulving Company was now up to about 5 complaints (BBB and similar) per day.
February 10, 2014
The local newspaper reports on someone that ordered from Tulving and did not receive their order.
February 19, 2014
about.ag reported that Tulving has reached 'The Tipping Point', with complaint volume exceeding order volume, meaning the end was near.
February 28, 2014
(Friday)
about.ag reported that The Tulving Company was effectively out of business. When an about.ag visitor called The Tulving Company later that day, one employee stated she was 'not told to not come into work Monday.' On Monday she was told to go home.
March 3, 2014
(Monday)
about.ag reported that The Tulving Company shut down, and employees were sent home. Nobody was answering the phones or responding to E-mail.
March 6, 2014
(Thursday)
The local newspaper discovers that The Tulving Company shut down.
March 6, 2014
(Thursday)
A class action lawsuit is filed.
March 7, 2014
(Friday)
A temporary restraining order is requested on behalf of the class action lawsuit.
March 10, 2014
(Monday)
The judge approves the temporary restraining order.