Today's Naked Shorting Poster Child: The 'Enron of Spain'

As I noted in my item the other day on the famous "Sith Lord" delusion at Overstock.com,"naked short selling" has been used as an excuse for malfeasance, fraud and even criminality at a host of miserable companies. There is Overstock, of course, Universal Express, CMKM Diamonds, and even Enron.

Today comes a particularly grotesque example of the NSS excuse genre: the "Enron of Spain," Greg Manning Auctions a/k/a Escala Group.

The "sad tale" of this horrific company unfolds today on the website of R. Emmett Tyrrell Jr.'s American Spectator, in a truly dreadful article by Brett Joshpe.

Here's the story reduced to its essentials: As a result of "allegations" against this company, there is a Spanish police raid accompanied by suspicious trading. The terrible thing is not the reason the company was raided, involving pyramid scheme allegations that have "never been proven and vigorously denied."

What's horrid here, according to Joshpe, are insinuations of "naked short selling"--which has never been alleged, much less denied--and, of course, collusion by the evil financial press which had the audacity to say that this was a bad company. There's lots on that, as well as the usual "fails to deliver" statistics.

Interestingly enough, Congress issued a report in 1991 on short selling in which it stated that the publication Barron's was used by short sellers to spread negative information about companies. Louis Corrigan from Kingsford Capital, a hedge fund with heavy short positions, also reportedly told Spanish authorities that Afinsa was a fraudulent company.

Following these reports and protests by Escala, the brokerage firm Oppenheimer looked into the company and reported on November 29, 2005 that "two financial publications published false, negative stories on Escala Group, driving the shares down 25%. Based on our research, the implied allegations in the stories are false." It also said that "the articles of November 22 again imply that the authors worked in conjunction with these same hedge fund managers. The fact that both articles were published on the same slow news day further raises our suspicions."

Note that the veracity of the Oppenheimer reports is not questioned.

Then came the May 2006 raid by Spanish police and then, again, the emphasis is not a company that lies on its books, but evil naked shorts:

In December 2006, Escala shook up its management and announced that it was restating prior earnings going back to 2003.

So what does that mean? Bad company, right? No, according to Joshpe, what's bad is that the stock went down after the company admitted that it's accounting was FUBAR.

In December and into January of 2007, the market for Escala shares again exhibited signs of potential manipulation, as volume exploded, along with fails to deliver.

Well, yeah. When a company admits that its financial statements are about as valuable as used toilet paper, naturally volume will "explode" and so will failures to deliver the stock.

The SEC finally took action, very belatedly in March 2009, against Escala. The SOBs just can't get their act together, says Joshpe. The forgot to act against the evil nekkid short sellers.

For Manning, it is an unfortunate irony that the body charged with ensuring fair marketplace trading declined to investigate prior trading irregularities but is now pursuing him.

Damn! The SEC forgot to act against the really important thing that happened here.

Speaking of which, what really happened here? For that, you have to spend approximately forty seconds on the Internet. I guess Joshpe didn't have the time.

First of all the "vigorously denied" is a bit imprecise. The company agreed to the consent decree without admitting or denying the allegations. The SEC litigation release is interesting reading, but doesn't tell the whole story. To find that requires about ten seconds of the forty required to research this company.

You need to go to a scathing article by my Project Klebnikov colleague Rich Behar on the Fox website back in 2006. He pointed out that "some 350,000 working and middle-class investors in collectible stamps in Spain and Portugal may have lost billions of dollars in savings."

These investors were guaranteed annual returns of 6 to 10 percent in their stamp collection investments, depending on how many years they held the stamps. But as one top stamp fraud expert told FOX News: “You could buy these stamps all day on eBay (EBAY) for one-tenth of what Afinsa had valued them at for their investors.”

The allegation is that rather than earning investment returns, early investors were simply being paid out of revenues that later investors brought to the party – essentially a Ponzi scheme.

The "Enron of Spain" expression was used by a philatelic expert quoted by Behar.

Oppenheimer, whose pumping of Escala merited a pat on the back from Joshpe, was raked over the coals by Behar.

Manning himself is quoted in Behar article three years ago: saying “the real story is what short-sellers and the media have done to the company, and that story I’m confident will someday be told."

Manning got his wish three years later.

There's an ironic postscript to this story. Joshpe points out that class action suits were filed on the day of the police raid--a hardly surprising denouement, but made out in the article to be a sign of nefarious evildoing. Well, it so happens another class action suit was filed against Escala a week after the raid by Berman DeValerio, one of whose partners, Joseph J. Tabacco, sits on the board of fellow naked shorting poster child Overstock.com.

Seems that Tabacco's firm had a nice payday:

Thereafter the parties agreed to settle the action and on September 22, 2008 the Court preliminarily approved the Settlement. Pursuant to the Stipulation of Settlement between the Lead Plaintiffs and Defendants, a Settlement Fund in the amount of $18,000,000, consisting of $10,000,000 in cash, plus interest, and 4 million shares of Escala Common Stock with a value of at least $8,000,000, will be created for the Class. The Judge approved the settlement at a final approval hearing on December 3, 2008.

© 2009 Gary Weiss. All rights reserved.