Shareholders of stamp- and coin-trading outfit Escala
Perhaps it was the reports of strong stamp sales at a number of auctions conducted by some of its preeminent stamp divisions, including Nutmeg Stamp and Greg Manning Auctions. The company said it sold some $6.4 million worth of stamps in June. Yet at the risk of dampening the enthusiasm and of being excoriated on the Internet chat boards, I still think it's the height of folly to have a long position in this company.
While those auction sales appear strong on the surface, last year the company had $10.3 million in sales for the first three weeks of June, and that was from only three events. A fourth event later in the month generated nearly $1 million more in sales, for a total of some $11.6 million. Some of those sales occurred overseas, so if we make an even comparison of only the North American unit, we see that Escala generated about $7.6 million in June 2005 . but it still reported only $6.4 million this year. That's a 26% decline in sales year over year and hardly worth running up the stock.
For better or worse -- and lately it's not just been "worse" but "the worst possible" -- Escala is majority-owned by Spanish auction house Afinsa Biene Tangibles, a company that authorities allege has been running a glorified Ponzi scheme.
Spanish authorities have charged that Afinsa promised investors high guaranteed rates of return on their stamp "investments" but that the values were artificially determined, based on its own catalog prices. Independent stamp authorities have criticized that method of determining a stamp's value because oftentimes a stamp sells for far less than what its value appears as in a catalog, particularly one printed by the same company that's selling them. The only way Afinsa was able to pay current investors was to lure more investors into the scheme.
Other charges of fraud and money laundering also linger, and police reportedly found 10 million euros walled up in one executive's house. Between Afinsa and Forum Filatelico, another Spanish auction house accused of running a similar scheme, nearly a dozen people have been arrested and charged.
While it doesn't appear that the scandal has touched Escala yet, some believe that the U.S.-based auction house facilitated the scandal, at least tangentially, by providing the stamps necessary to act out the fraud at below-market rates. Afinsa owns 67% of Escala, and it's possible that if the Spanish authorities liquidate the parent's assets, their hand can stretch across the Atlantic to touch Escala.
And the potential for an Afinsa liquidation is growing. While Americans were celebrating their independence, Afinsa's court-appointed administrator was updating the courts on the auction house's condition. It wasn't pretty. The administrator estimated that Afinsa's deficit as of December 2005 was 1.73 billion euros, a 56% decline from 2004's deficit of 1.105 billion euros. According to the administrator, if these numbers are confirmed, liquidation will be "inevitable."
Afinsa's president has maintained the company's innocence and says he will offer a plan within 10 days to reopen Afinsa's offices. Yet even Ken Lay maintained, all the way until his death, that he was innocent of the charges of bringing Enron to its knees. Maybe that's not a fair comparison. Nevertheless, Spanish investors were wide-eyed in their belief that they could earn guaranteed above-market rates of return, and it seems that those who are still holding onto shares of Escala today are staking their investments on the mistaken belief that simply because the scandal occurred "over there," the company can't be held accountable here.
Blissful ignorance is no excuse for ignoring the danger signs that are flashing wildly before them.
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