Securities Law Updates | New Settlements and Verdicts
April 3, 2009
NASDAQ Market-Issuer Escala Consents to Final Judgment in Accounting and Disclosure Fraud Case
Securities and Exchange Commission v. Escala Group, Inc., et al.
No. 09 CV 2646 (DLC), U.S. District Court for the Southern District of New York, 3/23/2009
Without admitting or denying the allegations in the complaint filed by the Securities and Exchange Commission (“SEC”), Escala Group, Inc. (“Escala”) consented to a permanent injunction against future violations of anti-fraud and reporting provisions of federal securities laws, specifically the Securities Exchange Act of 1934 (“Exchange Act”) and its implementing rules. The SEC filed the disclosure and accounting fraud case against then-NASDAQ national market issuer Escala; its founder and former chief executive officer Gregory Manning, 62; and its former chief financial officer Larry Lee Crawford, 60, alleging fraudulent related party transactions between Escala and its parent company, Afinsa Bienes Tangibles, S.A. ("Afinsa"). Escala is a network of companies in the collectibles market specializing in stamps, among other things. Afinsa was a privately held Spanish company that sold investments in portfolios of stamps in Europe. According to the complaint, the fraudulent related-party transactions ceased after May 2006, when Spanish authorities raided Afinsa's offices and charged Afinsa and certain individuals with engaging in a massive unlawful pyramid scheme.
The SEC complaint alleged a fraudulent business scheme based upon the secret and dramatic manipulation of collectible stamp values, in which Escala, Manning, and Crawford violated the antifraud and reporting provisions of the federal securities laws by:
1. failing to disclose the related party status of Barrett & Worthen, Inc., resulting in control of the Brookman Catalogue, and failing to disclose the revenues obtained by virtue of Afinsa and Manning’s control of the prices in the Brookman Catalogue;
2. falsely representing that Escala sold Afinsa several large stamp archives at prices determined by reference to independent stamp catalogues and appraisals when in fact Manning set the catalogue prices and influenced and edited the appraisals; and
3. falsely reporting a payment for business combination-related expenses as the “sale” of certain antiques.
The complaint further alleged that Escala and Manning also violated the antifraud provisions by selling back to Afinsa in a round-trip transaction inventory acquired from Afinsa in direct contravention of Escala’s public promise not to do so.
The SEC stated in its complaint that these false and misleading disclosures and omissions were material in that the related-party transactions contributed over $80 million to Escala’s revenues and allowed Escala to meet its forecasts for either revenue or pre-tax net income for the third quarter and for year-end of fiscal year 2004, and for the first quarter and year-end in fiscal 2005. According to the complaint, as a result of these transactions, Escala went from trading at $1.47 per share on January 23, 2003, to a $32-per-share company with a purported market cap of $898 million in the span of a few years.
The SEC charged Escala with violations of anti-fraud, reporting, disclosure, and accounting provisions of federal securities laws, particularly Sections 10(b), 13(a), 13(b)(2)(A) and (B) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A) and (B)] and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13, (17 C.F.R. §§ 240.10b-5, 240.12b-20, 13a-1 and 13a-13).
Subscribe to Securities Law Updates
It's FREE and only takes seconds