Nasdaq Stamps Out Escala

In the end, it was too much for even the Nasdaq exchange to endure. Last night, the bourse reached the end of its tether with troubled stamp trader Escala (Nasdaq: ESCL  ) , advising it that tomorrow, Jan. 10, the stock would be delisted.

Then again, it was amazing to many that Escala remained listed on the exchange for as long as it had.

Early last year, the high-flying stamp- and coin-trading outfit became embroiled in scandal. Spanish authorities raided the offices of its parent Afinsa Bienes Tangibles, where executives were charged with orchestrating a massive Ponzi scheme. Those executives were jailed, offices were sealed, and investigators found millions of euro buried behind a wall in the home of one of the principals. Escala's stock, which had been soaring in the mid-$30's, crumbled under the weight of the accusations, falling all the way to $3 per share.

While investigations continue, and no evidence of fraud has directly linked Escala to the crime, there was a lot of circumstantial evidence that the stateside company had, if nothing else, enabled Afinsa's scheme.

Before the raid, Afinsa had been the world's third-largest auction house, behind Sotheby's (NYSE: BID  ) and Christie's. In addition to offering apparently legitimate stamp and coin auctions, Afinsa sold stamps as investments, offering guaranteed rates of return as high as 10%, backed by the value of the stamps in its collection. In these investments, a postdated check is given to the investor, and after a year, the auction house either finds a buyer for the stamps, or buys them back itself. The investor has the option of taking the money, or investing in more stamps. Most investors reinvested their proceeds.

The value of the stamps investors were buying was illusory, though. It was based on prices listed in various stamp catalogues, prices which -- because of the insular nature of the stamp market -- were set by Afinsa itself. The Spanish auction house was buying the stamps from Escala at inflated prices to justify the values set for investors. In numerous cases, independent appraisers found the stamps to be worth far less than the values Afinsa had assigned them.

Afinsa owned 67% of Escala's stock, which made it useful for the Spanish firm to pay its American ally inflated prices. Such exponential revenue growth caused Escala's stock to soar. Afinsa was essentially laundering the money it received from Spanish investors through Escala, in the form of artificially high stamp prices. For that reason, it's believed the assets of Escala may end up yet being seized by Spanish authorities, to repay Afinsa's swindled investors.

As of result of the scandal, Escala announced that it was disassociating itself from Afinsa and would no longer do any business with the company. However, it would be unable to file its financial statements until it completed its own internal investigation. Naturally, when it missed its first deadline, the Nasdaq exchange notified Escala that it was in danger of being delisted, but interestingly, the deadlines were extended. Escala eventually completed its audit, naturally finding that it had committed no wrongdoing, even though all of its top executives resigned just prior to the report's release. As I noted then, it's a funny way of responding to a report that supposedly exonerates you.

Moreover, Escala admitted that it misclassified the revenues it received from Afinsa as related-party transactions, instead of the more appropriate additional paid-in capital -- money a company receives from investors. Escala identified $73 million of the $417 million it received from Afinsa as archival sales, and while that represented only 17% of the money received, it accounted for 73% of the $100 million in profits Escala made during that period.

Yet even after completing its investigation, Escala still didn't file its financial statements -- but somehow remained a listed stock on Nasdaq. Until yesterday, that is. After 9:30 p.m. on Jan. 8, Escala announced that it had received its long-awaited delisting notice. Its shares will stop trading on the exchange on Wednesday.

It's a bitter pill to swallow for the investors who bid up the stock by more than 100% last month, when Escala released its results. But they weren't investing then; they were gambling, hoping that Escala would stay clear of further involvement. In light of all the information made available concerning the fraud scheme, it should have been clear that Escala wasn't long for this world -- at least on the Nasdaq.

Escala expressed hopes of regaining its Nasdaq listing in the future. In the meantime, the stock can probably apply to trade on the Pink Sheets, home to many companies of dubious value. Perhaps that's the most appropriate end for this red-letter stock.

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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