SEC v. ESCALA GROUP, INC.; GREGORY MANNING; and LARRY LEE CRAWFORD, CPA, Southern District of New York (Mar. 23, 2009) — Complaint

------------------------------------------------------
UNITED STATES DISTRICT COURT 
SOUTHERN DISTRICT OF 
NEW YORK 
------------------~-----~--------------------------------------------------------l[ 
SECURITIES AND EXCHANGE COMMISSION, 
Plaintiff, 
v. 
ESCALA GROUP, INC., 09 Civ.
 
GREGORY MANNING,
 
LARRY LEE CRAWFORD, CPA,
 
Defendants. 
------~--------------------x. 
COMPLAINT 
Plaintiff Securities and Exchange Commission (the "SEC"), for its Complaint 
against Escala Group, Inc., ("Escala"), Gregory Manning ("Manning") and Larry Lee 
Crawford ("Crawford"), alleges that: 
NATURE OF THE ACTION 
1. This is a disclosure and accounting fraud case that concerns fraudulent 
related party transactions between Escala, then a Nasdaq-listed company in the 
collectibles market, and its parent company, Afinsa Bienes Tangibles, S.A. ("Afinsa"), a 
privately held Spanish company that sold investments in portfolios 
of starrlPS in Europe, 
in connection with sales that became part 
ofwhat Spanish criminal authorities have 
called a ponzi or pyramid scheme. In a fraudulent business scheme based upon the secret 
and dramatic manipulation 
of collectible stamp values, Escala and its former CEO, 
Manning, violated the antifraud and reporting provisions 
of the Exchange Act by: (1) 
failing to disclose the related party status 
of Barrett & Worthen, Inc., resulting in control 

ofthe Brookman Catalogue and failing to disclose the revenues obtained by virtue of 
Afinsa and Manning's control ofthe 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; (3) selling back to Afinsa in a 
round-trip transaction inventory acquired from Afinsa in direct contraventi?n 
of Escala's 
public promise not to do so; and (4) falsely reporting a payment for business 
combination-related expenses as the "sale" 
ofcertain antiques. Escala's form~r CFO 
Crawford likewise violated the antifraud and reporting provisions 
ofthe federal securities 
laws by: (1) failing to disclose the related party status 
ofBarrett & Worthen, Inc., 
resulting in control 
ofthe Brookman Catalogue and failing to disclose the revenues 
obtained by virtue 
ofAfinsa and Manning's control ofthe 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 
price~ and influenced and edited the appraisals; and (3) 
improperly booking the sale ofthe antiques. 
2. These false and misleading disclosures and omissions were material. 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 
offiscal year 2004, and for the first quarter and year-end in fiscal 2005. 
As a result ofthese transactions, Escala went from trading at $1.47 per share on January 
23,2003, the day that Escala and Afinsa entered into the merger agreement, to a $32-per­
share company with a purported market cap 
of$898 millionOin the span ofa few years. 
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3. Because ofthese transactions, Afinsa was able to obtain a constant supply 
ofstamps that it needed for two reasons: (1) to replace forgeries that Manning 
discovered in Afinsa's vault and (2) to feed the growing demand for stamp portfolios that 
it offered to investors in what the criminal authorities 
in Spain have called a giant 
pyramid scheme. The fraudulent related-party transactions ceased after May 2006, when 
Spanish authorities raided Afinsa's offices and charged 
Afinsl;\. and certain individmils 
with engaging in a massive unlawful pyramid scheme. 
4. By engaging in such conduct, and committing the acts described in this 
Complaint, defendant Escala directly and indirectly engaged in and, unless restrained and 
enjoined 
by the Court, will continue to engage in, transactions, acts, practices and courses 
ofbusiness that violate Sections lOeb), 13(a), 13(b)(2)(A) and (B) ofthe Securities 
Exchange Act 
of 1934 ("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], defendants Manning and Crawford directly and indirectly 
engaged in and, unless restrained and enjoined 
by the Court, will continue to engage in, 
transactions, acts, practices and courses 
ofbusiness that violate Sections 1O(b) and 
13(b)(5) 
ofthe Exchange Act [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Exchange Act 
Rules lOb-5, 13b2-1, 13b2-2, and 13a-14, [17 C.F.R. 
§§ 240.10b-5, 240.13b2-1, 
240.13b2-2 and 240.13a-14] aiding and abetting Escala's violations 
of Sections 13(a), 
and 13(b)(2)(A) and (B) 
ofthe Exchange Act and Exchange Act Rules 12b-20, 13a-1, 
and 13a-13. Unless enjoined 
by order ofthis Court, defendants are likely to commit future 
violations, and the SEC seeks a judgment permanently enjoining each defendant from 
future violations. From defendants Manning and Crawford, the SEC also seeks 
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disgorgement ofill-gotten gains and prejudgment interest, an award ofcivil penalties 
pursuant to Section 21(d) ofthe Exchange Act [15 U.S.C. §78u(d)], and an officer and 
director bar pursuant to Section 21(d) ofthe Exchange Act [15 U.S.c. §78u(d)]. 
JURISDICTION 
5. This Court has jurisdiction over this action pursuant to Section 21 (d), 
21(e) and 27 
ofthe Exchange Act [15 U.S.C. §§ 78u(d), 78(u)(e) and 78aa]. The 
defendants, directly or indirectly, used the means or instrumentalities of interstate 
commerce or the mails, or the facilities ofa national securities exchange, in connection 
with the transactions, acts, practices, and courses 
ofbusiness described herein. 
6. Venue is proper in this District pursuant to Securities Exchange Act 
Section 27 [15 U.S.c. § 78aa], because certain 
ofthe transactions, acts, practices and 
coursesofbusinessoccurredwiththeSouthernDistrict ofNewYork. From2005to 
2007, defendant Escala was headquartered in New York City. As Escala officers, 
Manning and Crawford conducted business in and from Manhattan from time to time. 
Escala board meetings were held in Manhattan. 
DEFENDANTS 
7. Escala Group, Inc., which was known as Greg Manning Auctions, Inc. 
(GMAI) until September 28, 2005, is a Delaware corporation established in 1981 and 
currently headquartered in Bethel, Connecticut. Escala is a global netWork of companies 
in the collectibles market (stamps, coins, arms and armour) with operations in North 
America, Europe, and Asia as well as on the Internet. Escala's common stock is 
registered with the Commission pursuant to Section 12(g) 
of the Exchange Act [15 
U.S.C. 
§781(g)]. Its common stock was previously registered pursuant to Section 12(b) 
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ofthe Exchange Act [15 U.S.C. §781(g)] and was listed on the NASDAQ National 
Market until February 7, 2007, when it was delisted and deregistered for failing to file its 
SEC Form lO-K Annual Report for the fiscal year ended June 30, 2006 and its SEC Form 
10-Q Quarterly Report for the quarter ended September 30, 2006. 
It is now traded over­
the-counter and quoted on the Pink Sheets. Escala's fiscal year runs from July 1 to June 
30. 
8. Gregory Manning, 62, is the founder of Escala. As of October 17,2005, 
heowned7.7percent 
ofthecommonstock ofthecompany. ManningwasChairman of 
the Board of the company from its inception in 1981 through December 2002, and served 
as the company's CEO from December 1992 to September 28,2005. He was the 
company's President from 
1981 until August 12, 1993, and again from March 8, 1995 to 
September 27,2005. On September 28,2005, Manning was appointed as President, 
North American and Asian Philatelic Auction Division and also served as the First Vice 
Chairman 
ofthe Board. On December 15,2006, Manning resigned and automatically 
became a consultant to Escala pursuant to his employment contract. On April 24, 2007, 
the company terminated Manning's consulting agreement for cause. 
9. Larry Lee Crawford, 60, is a licensed CPA in North Carolina, New 
Jersey, and Pennsylvania. He was Escala's CFO and Executive Vice President from 
April 2001 until May 2006. Crawford was one 
ofthree members of Escala's disclosure 
committee, which was responsible for disclosure issues involved in Escala's filings with 
the Commission. From 1996 to 2001, Crawford was CFO 
ofa privately held company. 
From 1970 to 1975, Crawford served as a senior accountant at one 
ofthe "big four" 
accounting firms where, among other things, he worked as an auditor ofpublicly traded 
5
 

companies. Crawford has a Bachelor's Degree and a Masters of Business 
Administration. 
RELATED ENTITIES 
10. Afinsa Bienes Tangibles, S.A. ("Afinsa"),was a private company 
organized under the laws 
of Spain. Its principal place of business was in Madrid, Spain. 
Afinsa was engaged 
in commercial and trading activities involving tangible investment 
products throughout Europe. Afinsa's primary business was a stamp investment 
program. According to a September 
27,2005 article in the Financial Times, Afinsa sold 
€1.2 billion worth 
of stamps under its investment programs to 143,000 investors. From 
1996-2001, the company's revenues grew at a compounded annual rate 
of 18.3 percent, 
reaching€180million
in2001 (as ofJanuary1,2001€180millionequaledapproximately 
$169.5 million). Further, its total assets grew at a compounded annual growth rate 
of 
36.1 percent since 1997, reaching €160.8 million in 2001 (as ofJanuary 1,2001 €160.8 
million equaled approximately $151.5 million).  In May 2006, Afinsa owned 
approximately 70 percent 
ofEscala's outstanding common stock. That month, the 
operations 
of Afinsa ceased when Spanish authorities raided its business operations as 
part 
ofa criminal investigation. Afinsa is now operated under the control of trustees 
appointed by a Spanish court. 
11. 
Central de Compras Coleccionables, S.L. ("CdC") (flklal GMAI-
Auctentia 
Central de Compras) ,was an Afinsa subsidiary headquartered in Spain that 
held stamp and art inventory. On September 8, 2003, CdC became a subsidiary 
of 
Escala, and Escala and CdC became the exclusive suppliers of collectibles for Afinsa on 
6
 

a worldwide basis, selling directly to Afinsa as well as buying goods and procuring 
requested material for sale to Afinsa. 
12. 
Barrett & Worthen, Inc., ("Barrett & Worthen") is a small privately held 
publishing company located in Bedford, New Hampshire owned by Arlene Dunn 
Driscoll, a close family friend of Manning. In 1983, Barrett & Worthen purchased all 
rights to the Brookman Catalogue from Manning. Barrett & Worthen has published the 
Brookman Catalogue since then, including a series 
of Brookman Catalogues for Afinsa. 
On June 16,2003, Afinsa entered into a confidential agreement with Barrett & Worthen, 
where, in exchange for the payment 
of $650,000, payable at $65,000 per year for ten 
years, Barrett & Worthen gave Afinsa "full and final editorial review and control" ofthe 
Brookman Catalogue, including "final review 
ofall pricing." This agreement contained a 
confidentiality clause providing for non-disclosure of its contents. 
13. The Brookman Catalogue ("Brookman"), is a stamp catalogue 
published by Barrett & Worthen. The catalogue and publishing rights were sold to 
.  different owners over the years and were sold to Manning 
in 1973. In 1983, Manning 
sold the Brookman Catalogue to Arlene Dunn Driscoll, owner 
of Barrett& Worthen.
 
FACTS
 
A. Afinsa's Stamp Investment Programs 
14. Afinsa sold investment contracts based on portfolios of stamps to 
thousands ofindividual investors in Europe. Afinsa offered a guaranteed, fixed rate of 
return equal to or greater than 7 percent per year for the stamp investments, promising 
investors that it would either find a buyer for the stamps at the original purchase price, or 
buythestampsbackitselfat theend 
ofthecontractterm. Alternatively,investorscould 
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choose to invest the returns in more stamps. Because the investment was supposedly 
based upon the pristine condition 
of the stamps, Afinsa offered investors the option to 
hold the stamps in its custody in a cost-free vault on its premises. 
15. The prices investors paid for these stamp portfolios were based on values 
published in stamp catalogues. The sale price to the investors always equaled the 
catalogue prices, but Afinsa purchased the stamps at a fraction 
ofthe catalogue prices, 
sometimes as low as 8 percent 
of the catalogue values. When Afinsa repurchased the 
stamps from the investors, the guaranteed price was equal to the catalogue price paid by 
the investor plus the promised return or interest. In order to sustain its business, Afinsa 
had to sell stamps in increasingly larger quantities, because the catalogue values for 
stamps tended not to increase annually in amounts sufficient to cover payments on 
maturing contracts and other expenses. The Spanish authorities have alleged that Afinsa 
in fact sold interests in "batches 
of stamps which were completely overvalued, when not 
actually forgeries" and that the promised return or interest that Afinsa paid its investors 
came from the investments 
ofnew investors in a manner that the Spanish authorities have 
alleged was a pyramid or ponzi scheme. 
B. The Escala/Armsa Business Combination Transaction 
16. In April 2002, Manning initiated discussions with Afinsa of a possible 
business combination 
ofEscala and Afinsa. An agreement was signed on January 23, 
2003, consisting 
ofthree transactions, a Share Purchase Agreement, an Inventory 
Purchase Agreement and a Subscription Agreement. Inthe spring of2003, before the 
transaction had closed, Manning examined in Afinsa's vaults stamps used in Afinsa's 
8
 

investment programs and discovered that stamps with an alleged estimated value of $200 
to $300 million had been forged. In August 2003, after Afinsa confirmed Manning's 
discovery, Afinsa terminated its previous supplier 
of stamps and entered into agreements 
that made Escala its exclusive stamp supplier. 
17. On September 8, 2003, the Escala/Afinsa business combination 
transaction closed. In exchange for, among other things, 13,000,000 shares 
of Escala 
stock, Escala acquired Afinsa's subsidiary, CdC, and Escala and CdC became the 
exclusive suppliers 
ofcollectibles for Afinsa. At the time ofthe merger, CdC held 
approximately$11 millionworth ofstampandartinventory. Asa result ofthe 
transaction, Afinsa became the beneficial owner 
of72 percent ofEscala's outstanding 
stock. 
18. Despite 
h~ving discovered stamps with an alleged estimated value of 
$200 to $300 million to be forgeries in Afinsa's vault, Manning completed the 
Escala/Afinsa business combination transaction without disclosing the existence ofthe 
forgeries to others at Escala. 
C. The Afinsa Supply Agreement 
19. Escala was under tremendous pressure as the exclusive supplier ofstamps 
to Afinsa. Afinsa's stamp needs were enormous and critical to its continued operation. 
Because it promised to buy back its stamp portfolios at 100 percent 
ofthe initial sale 
price plus interest, Afinsa required increasing numbers 
ofinvestors and, in turn, 
increasing volumes 
ofstamps to sell to them. For each subsequent year, Afinsa had to 
increase the volume 
of stamps it sold in order to make new profits and to cover losses 
9
 

incurred for repurchases and interest. In other words, more new sales each year meant 
more repurchases in future years which in 
turn required more new sales. Manning 
understood the tremendous pressure Afinsa was under to maintain its ponzi-like 
investment program. 
D. The Brookman Agreement 
20. To ensure that it could keep increasing the catalogue value ofthe stamp 
portfolios that it marketed to investors, Afinsa wished to control a pre-existing, 
international stamp catalogue. In an internal Afinsa report, the company stated: "Steps 
are being taken to control an international catalogue or to create our own 
in order to be 
abletofixpricesinaccordance
withourphilosophy." Inthewords ofa principal of 
Afinsa: "If we allow a third party to put out the prices, we are really in his hands, which 
cannot be admissible given the nature of our business." 
21. Afinsa's discussions about controlling its own catalogue were occurri,ng in 
the early stages 
of the Escala/Afinsa business combination negotiations-and included 
Manning. Recognizing Afinsa's interest, Manning proposed that Afinsa consider 
entering into an arrangement with Barrett 
& Worthen, the current owner ofthe Brookman 
Catalogue -  a stamp catalogue that Manning had owned before he sold it to a close 
family friend in 1983. Manning told Mmsa: "I believe that a deal 
could be set up with 
[the current owners] staying on to run the e,ntire operation 
.... We would have complete 
editorial control over the prices in the catalogue, but we can still use the current editors 
for the bulk 
ofthe work." 
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22. OnbehalfofAfinsa,Manningactivelyengagedinthenegotiationswith 
Barrett 
& Worthen focusing on editorial control ofthe Brookman Catalogue. On June 
16,2003, Afinsa and Barrett 
& Worthen signed an agreement (the "Brookman 
Agreement") that Afinsa would pay $650,000 in annual payments 
of $65,000 for ten 
years.to Barrett 
& Worthen and would gain "full and final editorial review and control of 
the content and form of each edition ofthe Brookman Catalogue published during the 
term 
of [the] agreement," and that this "control and review shall include, but not be 
limited to, the final review 
of all pricing, the preparation and revision of all descriptions 
and the deletion and/or addition 
of material, in each case as [Afinsa], in its sole 
discretion, may determine 
...."  The Brookman Agreement provided for confidentiality 
and non-disclosure 
of its contents. Manning negotiated the Brookman agreement, and it 
was drafted in-house at Escala. Crawford learned 
ofthe agreement while it was being 
drafted in-house. 
23. Neither Manning nor Crawford told Escala's Audit Committee about the 
Brookman Agreement. Escala did not disclose the agreement publicly or mention it in 
any 
of its quarterly or annual reports that it filed with the SEC. To the contrary, Escala 
remained silent on the matter and Afinsa sought to portray the Brookman Catalogue as an 
independent entity. In October 2003, an Afinsa representative thanked Manning for 
negotiating the Brookman deal and reminded him that "our name must not appear" in any 
Brookman Catalogue. 
24. In fact, once the parties executed the Brookman Agreement, Barrett 
& 
Worthenbecame an affiliate and a relatedparty ofEscala's because both Escalaand 
Barrett 
& Worthen and the Brookman Catalogue were then under common control of 
11
 

Afinsa. (Escala was under Afinsa's control by virtue of Afmsa's majority share 
ownership, and Barrett 
& Worthen and the Brookman Catalogue were also under 
Afmsa's control by virtue ofthe Brookman Agreement.) Generally Accepted Accounting 
. Principals ("GAAP") Statement 
ofFinancial Accounting Standards No. 57, Related Party 
Disclosures (FAS 57), defines control as the possession, direct or indirect, ofthe power to 
direct or cause the direction ofthe management and policies ofan enterprise through 
ownership, by contract, or otherwise;" (Appendix B, definitions, at FAS 57-6). FAS 57 
then provides that: 
If the reporting enterprise and one or more other enterprises are under 
common ownership or management control and the existence 
ofthat 
control could result 
in operating results or fmancial position ofthe 
reporting enterprise significantly different from those that would have 
been obtained 
ifthe enterprises were autonomous, the nature of the control 
relationship shall be disclosed even though there are no transactions 
between the enterprises. 
~ 4 at FAS 57-3. FAS 57 further provides that: 
Financial statements shall include disclosures 
of material related party 
transactions 
.... The disclosures shall include: a.  The nature of the 
relationship(s) involved; b. A description 
ofthe transactions, including 
transactions to which no amounts or nominal amounts were ascribed 
... 
and such other information deemed necessary to an understanding ofthe 
effects 
ofthe transactions on the financial statements; c.  The dollar 
amounts
oftransactionsforeach oftheperiods ...; d. Amountsduefrom 
or to related parties 
.... 
~ 2 at FAS 57-2 and FAS 57-3. 
25. To comply with FAS 57, Escala was required to disclose the related"-party 
status 
ofBarrett & Worthen and the Brookman Catalogue. Escala failed to disclose this 
material information with respect to the Brookman Agreement and also failed to disclose: 
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a.  The nature ofthe relationship(s) involved; b. A description ofthe transactions, 
including transactions to which no amounts or nominal amounts were ascribed 
... and 
such other information deemed necessary to an understanding 
ofthe effects ofthe 
transactions on the financial statements; c.  The dollar amounts oftransactions for each of 
theperiods ...;d. Amountsduefrom ortorelatedparties....withrespecttotheBrookman 
Catalogue. Instead, Manning and Crawford knowingly or recklessly failed to disclose the 
existence
ofthe BrookmanAgreement, and hence the existenceofthe related partyto the 
Audit Committee, the auditors, and the public.
1 
By failing to disclose this information, 
Escala, Manning and Crawford knowingly or recklessly did not comply with the 
requirements 
of FAS 57 and thereby violated GAAP. The failure to disclose the 
·existence 
ofthe Brookman Agreement and that Barrett & Worthen was a Related Party 
was a material omission. 
E. The United Nations Archive 
26. The United Nations philatelic archive ("UN Archive") consisted of 
artwork, imperforates, die proofs, and progressives pertaining to stamp issues and ". 
philatelic materials produced by the United Nations Postal Administration from 1951 to 
2000, and presented an opportunity for Manning and Afinsa to use the Brookman 
Catalogue to implement their scheme. A business acquaintance ofManning's purchased 
most 
ofthe UN Archive at a public auction on May 12, 2003 for $3.1 million. A few 
weeks later, on June 1,2003, Manning purchased the UN Archive from the acquaintance 
1 In July 2004, Escala's in-house counsel told Escala's Audit Committee about the 
existence 
ofthe Brookman Agreement. 
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for $4.8 million. On June 2, 2003, Manning sold most of the Archive that he had 
purchased to Afmsa for $6.4 million, payable in three equal installments. 
27. Manning coveted the Archive to sell to Afinsa. During the business 
combination negotiations, Manning told Afinsa about the May 12,2003 public auction 
of 
what Manning described as "the entire philatelic archive ofthe United Nations." 
Manning emphasized: "Please note that this is all 
ofthe archive... we will be the only 
market maker in the world, as we will have the only supply" [emphasis in original]. 
Unbeknownst to Afinsa at the time it purchased the Archive from Manning, and contrary 
to Manning's assurances, Afinsa did not purchase the entire UN Archive collection from 
Manning. In fact, Manning held a portion back from Afinsa. 
1.	 The Impact of the UN Archive Transaction on Escala's 
Earnings 
28. .In May 2003, Manning calculated and apportioned a part ofthe proceeds 
from the sale 
ofthe UN Archive to occur during Escala's and CdC's 2003 fourth quarter 
sales. On June 2, 2003, Escala issued an invoice to Afinsa for the sale 
ofthe UN Archive 
for a total 
of $6.4 million -- 8 percent of a Brookman Catalogue value of $80 million. 
The transaction was booked in Escala's 2003 fourth quarter. 
2.	 The Rapidly Rising Catalogue Values of the UN Archive 
29. Even before Escala purchased the UN Archive, Manning told Afinsa ofhis 
plans to list the UN Archive in the Brookman Catalogue at prices that were many times 
higher than the actual purchase prices. Once the 
UN Archive was obtained, Manning 
kept increasing the catalogue values. 
In a single day, the catalogue value changed more 
14
 

than once with no indication of a cause or basis. On June 2, 2003, Manning faxed an 
Afinsa representative a letter saying that "[t]he total catalogue value may approach $150 
Million or possibly more." 
By June 4, Manning faxed the Afinsa representative another 
letter stating that: "The final catalogue inventory, I believe will be about $180 Million as 
previously stated." 
30. Afinsa was appreciative 
ofthe rapidly rising UN catalogue values because 
it had found more forged stamps in its vaults than Manning had 
pr~viously detected. 
Afinsa therefore urged Manning to "defend this valuation and, 
ifpossible, go for even 
more." 
By J~ly 16,2003 the total catalogue value ofthe UN Archive material delivered 
to Afinsa exceeded $215 million. 
3. UN Archive Prices in the Brookman Catalogue 
31. The UN Archive was published in the Brookman Catalogue at values 
established by Manning and edited by Afinsa. Crawford knew that Manning established 
the initial values 
of the archive. The UN stamps were published in the Brookman 
Catalogue to give them legitimacy, and because the Afinsa investment program would 
only sell stamps that were listed in the major catalogues. Therefore, with the purchase 
of 
the UN Archive and the signing of the Brookman Agreement, Afinsa got what it most 
wanted-·the ability to secretly set the prices of stamps used in its investment program in 
a philatelic-industry catalogue. 
32. The UN Archive Brookman Catalogue values established by Manning 
formed the basis for future Escala 
UN stamp sales to Afinsa. Escala sold UN 
progressives and imperforate proofs to Afinsa at 15 percent percent ofthe UN Archive 
15
 

catalogue values established in Brookman. Thus, Manning and Afmsa effectively set the 
price at which that additional UN material was sold by Escala to Afinsa. Afinsa 
determined the percentage that was used in pricing, and Manning with editorial input 
from Afinsa determined the actual catalogue values. The editors 
of Brookman had 
nothing 
to· do with the prices of the UN material published in the catalogue. They 
obtained that information from Manning and Afinsa. 
F. Escala's 2003 Annual Report 
33. On September 12,2003, Escala filed its SEC Form 10-K Annual Report 
for the 2003 fiscal year with the SEC. The report included the revenues associated with 
the UN Archive transaction. The UN Archive sale netted Escala $1.6 million in its 2003 
fourth quarter. The 
UN Archive accounted for approximately 6 percent, approximately 
11 percent and approximately 53 percent of total company revenue, gross profit and pre­
tax net income, respectively. The report did not mention the existence ofthe Brookman 
Agreement, Manning's role in negotiating it, or Escala's role in drafting it. The report 
also did not disclose Manning's role in setting the catalogue values for the UN Archive. 
G. The "Carlos Deal,,2 -  The First Attempt 
34. At thetime ofthe Escala/Afinsa business transaction during which CdC 
became a subsidiary 
ofEscala, Escala obtained a stamp inventory that was held at CdC. 
2 The parties to this transaction referred to it as the "Carlos Deal," named after Carlos de 
Figueiredo, a board member and administrator of Afinsa, whose father, Alberto de 
Figueiredo, was a founder and part owner (50 percent) ofAfinsa. As ofNovember 2005, 
Carlos de Figueiredo also held the position 
of Second Vice Chairman at Escala. 
16 

Escala represented in at least three public filings that it would not resell the CdC 
inventory back to Afinsa. 
35. In its SEC Form 14A Definitive Proxy Statement (filed with the SEC on 
August 13,2003), its SEC Form lO-K Annual Report (filed with the SEC on September 
12,2003), and its SEC Form 424B3 Prospectus (filed with the SEC on November 3, 
2003), Escala explained: 
"It is intended that CdC will use the inventory owned by it 
immediately following the consummation 
of the inventory purchase agreement to sell at 
various auctions run by other subsidiaries 
of [Escala]. Other than immaterial sales, such 
inventory will not be resold to [Afinsa] or its affiliates." These statements were 
materially false and misleading. Prior to making these statements and during the time 
period from August 13,2003 to November 
3,2003, Manning was engaged in active 
discussions with Afinsa representatives to have Escala sell the inventory back to Afinsa. 
36. On June 6, 2003, prior to the filing 
ofthe SEC Form 14A Definitive Proxy 
Statement (filed with the SEC on August 13,2003), Manning was conducting discussions 
ofthe sale back to Afinsa via e-mail with Emilio Ballester, Afinsa's Chief Accounting 
Officer. On September 11,2003, one day prior to the filing 
ofthe SEC Form lO-K 
Annual Report (filed with the SEC on September 12,2003), Manning was engaged in e­
mail discussions withEstebanPerez 
ofAfinsa setting forth the details ofthe transaction. 
That same day Perez scheduled a meeting between Afinsa, Manning and Crawford for 
September 23,2003, in which an agenda item was the "Carlos Operation." 
In additional 
e-mails dated September 29, October 2, October 3, and October 6, 2003, Manning and/or 
Crawford were engaged in additional conversations with Afinsa personnel about this very 
transaction. 
17
 

37. Once the Escala/Afinsa business combination transaction was completed, 
Afinsa sought to carry out the planned inventory round-trip or Carlos Deal through a 
series 
oftransactions. These transactions were planned for Escala's 2004 first quarter 
and second quarter which closed on September 30, 2003 and December 31,2003, 
respectively. The Carlos Deal involved selling back to Afinsa certain pre-business 
combination inventory that CdC held. The Carlos Deal would have resulted in over $2 
million in profit for fiscal.year 2004. Manning anticipated the receipt 
of revenues from 
this sale by the end 
ofthe year. 
38. The parties did, in fact, consummate the transaction, however, some time 
between October 19 and 22,2003, the managing partner 
of Escala's external auditing 
firm questioned Crawford and Manning about the legitimacy 
ofthe Carlos Deal 
transaction. At the time, Manning indicated that Escala needed the transaction for the 
quarter because it had given certain revenue guidance and the transaction would impact 
that guidance. After much discussion, the auditor convinced Manning to reverse the 
transaction. 
H. The Carlos Deal-The Second Attempt 
39. The auditing firm's intervention, however, did not prevent the scheme 
from moving 
forward-it only presented a delay. On November 11,2003, Manning met 
with Afinsa in Spain. At the meeting Afinsa discussed a new Carlos II transaction that 
would provide revenues in the second quarter. Afinsa representatives and others in the 
meeting explained that the stamps must be sold to a third party, and that, Filasyl, a stamp 
company that served as a supplier to CdC, was open to taking part in the second Carlos 
18
 

Operation for a commission. Thereafter, at a February 24, 2004 meeting ofthe 
management committee ofCdC, which Manning attended, a CdC official "announced 
that a buyer had been found for a portion 
ofthe 'original' inventory purchased from 
Afinsa and that this sale would probably happen 
in the first weeks of March." 
40. CdC entered into contracts with Filasyl, dated December 2003 and June 
20Q4, which documented the sale ofthe CdC inventory to Filasyl for an aggregate 
purchaseprice 
of$4.3million. Withina shortperiod oftime,andpriortoeach"sale" 
from CdC to Filasyl, Filasyl invoiced Afinsa for the amount 
ofeach sale, plus, a profit, 
which Afinsa paid. 
In short, Escala circumvented its own internal controls and its 
auditors and resold the CdC inventory to Afinsa at a profit 
by simply inserting a paid 
middleman---eontrary to its promise in its public filings. The CdC official that executed 
the sales contract with Filasyl revealed that he discussed the structuring 
ofthe second 
Carlos transaction with Manning. 
41. Escala booked the Carlos DeallFilasyl round-trip transactions in the 
second and fourth quarters 
of fiscal year 2004, recording revenue of$4.3 million and cost 
ofgoods sold of $1.9 million, for a net of$2.4 million. In the second quarter, these 
amounts constituted approximately 6 percent 
oftotal revenue, approximately 15 percent 
ofgross profit, and approximately 31 percent ofpre-tax net income. In the fourth quarter, 
these ,amounts constituted approximately 2 percent 
oftotal revenue, approximately 1 
percent 
ofgross profit, and approximately 2 percent ofpre-tax net income. For Escala's 
fiscal year 2004 annual report, the Filasyl transactions constituted approximately 2 
percent 
ofrevenue, approximately 4 percent of gross profit, and approximately 7 percent 
ofpre-tax net income. 
19
 

I. Washington Collection 
42. The Washington Collection was a collection of items purported to have 
belonged to George Washington that Escala had purchased in 1996 for $1.2 million. The 
collection was appraised in 1997 at $2 million. Escala could not sell the collection for 
many years. By June 2003, after holding the collection for seven years, Escala wrote 
down the value 
ofthe collection to $96,000 pursuant to Company policy because the 
collection had not been sold. Manning and Crawford knew that this collection had not 
been sold, and Escala board members had been questioning why it was still on the 
company's books. 
43. In October 2003, a few weeks after the close 
ofits fiscal year 2004 first 
quarter, Escala re-characterized $500,000 
of a reimbursement from Afinsa for business 
combination-related expenses as a first quarter sale 
of inventory in that amount. This 
transaction lacked economic substance and was 
not a bona fide sale. The transaction was 
recharacterized from its original purpose after the quarter ended. The purchase price 
greatly exceeded Escala's carrying cost for the inventory, and the inventory was not 
completely delivered? The business combination related expenses remained unpaid
.. 
3 StaffAccounting Bulletin ("SAB") 101 Revenue Recognition in Financial 
Statements 
(issued in December 1999) generally requires, among other things, that 
product be delivered to a customer or a customer-specified site before revenue may be 
recognized. (In its 2004 annual report, Escala stated that it accounted for revenue 
recognition in accordance with SAB 101.) Since all or part 
ofthe collection was not 
shipped to Afinsa (or its agent), Escala did not fully meet the criteria to recognize 
revenue for the Washington Collection. 
20 

44. On September 29,2003, just prior to the end of Escala's 2004 first quarter, 
Escala issued an invoice to Afinsa for $631,525 for "extraordinary expenses" that had 
alreadybeen incurred on behalf 
ofAfinsa for legal, accounting and due diligence services 
related to the business combination negotiations. On October 3, 2003, Afinsa wired 
$631,525 to Escala to pay for the expenses. On October 10, after receipt 
ofthese funds, 
Crawford told Escala's controller to book the $631,000 as "consignor payable." 
45. A few weeks after the quarter closed, Manning told Crawford that he had 
sold the Washington Collection to Afinsa for $500,000. Instead 
of creating a new invoice 
for $500,000, on October 17,2003, Manning instructed Crawford to use a portion 
ofthe 
"extraordinary expenses" previously received to book the sale. In order to comply with 
Mannings instructions to book the sale, Crawford had to destroy a previously issued 
invoice and issue a new one. Crawford told Escala's bookkeeper that the invoice for 
$631,525 "should be destroyed and replaced with 2 invoices. That invoice was in error. 
Use the original invoice number for an invoice for $500,000 [T]ype on the invoice 
'Invoice for all components 
ofthe Washington Collection' date the [invoice] no later 
than September 30." Crawford instructed the bookkeeper to "date this invoice no later 
than September 30." Crawford continued: "Type the second invoice for $131,525 to 
Afinsa and put on it 
'To bill you for shared costs ofthe Investor Relations expenses for 
the period October I-October 31, 2003. This includes shared expenses for the investment 
community function 
of October 24.2005.' You should date this invoice the same as the 
other one. These bills are not to be sent to Afinsa; the bills have already been paid." 
46. On Monday, October 20, the bookkeeper responded that "[t]he computer 
already assigned an invoice # and it cannot be used again 
... the Auditors already have all 
21
 

copies of billings to Afinsa as of last Thursday for the quarter .... What do you want me 
to 
do?" To which Crawford responded that same day: "I wouldlike you to do exactly 
what I asked you to do except make two new invoice numbers." New invoices were 
created and backdated to September 30,2003. Escala's re-characterization 
of the sale of 
the Washington Collection violated the provisions ofGAAP. 
47. When the Washington Collection was delivered to Afinsa's agent in the 
United States, not all 
ofthe items were delivered. Manning had instructed Escala's 
warehouse manager not to deliver a chair that was a part 
ofthe collection. In addition, on 
separate occasions, Manning and Crawford instructed the warehouse manager to hide the 
chair from Escala's outside auditors because they did not want the auditors to know that 
the chair was on Escala's premises. 
48. Escala's SEC Form lO-Q Quarterly Report for the first quarter 
of fiscal 
year 2004 (filed with the SEC on November 13, 2003) included revenues from the 
purported sale 
ofthe Washington Collection that contributed $500,000 to first quarter 
revenue and $400,000 to pre-tax net income. In the first quarter, this revenue constituted 
approximately 1.4 percent 
of revenue, approximately 5.4 percent of gross profit, and 
approximately 
14 percent of pre-tax net income. 
J. UN Archive Auction 
49. In November 2003, Manning held an auction of some additional materials 
from the UN Archive that Escala had set aside and not sent to Afinsa. The auction netted 
$1.25 million to Escala. 
22
 

50. Unbeknownst to Afinsa, Manning placed bids on Afinsa's behalf at this 
auction, purchasing for Afinsa more than $550,000 
ofArchive material. All lots at the 
auction were sold at or above the start bids that Escala set. Crawford knew that Manning 
placed bids 
on Afinsa's behalf at the auction. 
51. When Afinsa received the material from the UN Archive Auction, it 
expressed surprise, telling CdC that it thought it had already purchased the entire UN 
Archive. A CdC official passed this concern 
on to Manning. In response, and in a 
memorandum copied to Crawford, Manning pointed out the benefits 
ofthe auction to 
Escala's financial performance: "The profit from this sale was significant in [Escala's] 
fourth quarter 
of Fiscal 2003, The profit on the U.N. auction positively impacted 
[Escala's] second quarter 
ofFiscal 2004. I thought that Afinsa realized that [Escala] had 
retained specialized and unique U.N. material for auction." 
52. Escala's SEC Form 10-Q Quarterly Report for the second fiscal 2004 
quarterly report (filed on February 5, 2004) included revenues from the UN Archive 
Auction 
of $1.25 million and cost of goods sold of $400,000, netting $850,000. The UN 
Archive Auction constituted approximately 2 percent 
of total revenue, approximately 6 
percent
ofgrossprofit,andapproximately 13 percentofpre-taxnetincome. 
K. American Banknote Specimens 
53. As early as July 16,2003, and prior to the close ofthe Escala/Afinsa 
business combination transaction, Manning proposed that Escala purchase and supply to 
Afinsa American Banknote Corporation ("ABN") specimens. The specimens consisted 
of Latin American revenue and specimen postage stamps. Manning also proposed "a 
23
 

'special' American Banknote catalogue with the Brookman editors, who only await our 
instructions to produce the catalogue." 
54. The ABN specimens Manning proposed purchasing came from big bulk 
lots that were unloaded following a Christie's Auction House auction in the early 1990s 
where they failed to sell. Two brothers bought these lots for between $420,000 and 
$450,000 after the Christie's auctioneers offered the unsold lots at prices below opening 
bids. The two brothers, Arthur and 
Jeff Morowitz, put together a price list and attempted 
to market the ABN specimens to investors, but met with little success. In 2003 or early 
2004, one brother turned over his part 
ofthe ABN material to Escala, so that Manning 
could review it as part 
ofthe negotiations leading to Escala's purchase ofthe specimens, 
and in so doing commented that he had tried selling it without success. 
55. On March 
4,2004, Escala purchased one brother's share ofthe ABN 
material for $400,000. At Manning's direction, Escala then purchased the other brother's 
portion 
ofthe ABN material for approximately $100,000. Also at Manning's direction, 
Escala obtained another 
15 -  20 cartons ofABN material from a stamp dealer in Canada 
for between $300,000 and $350,000. The Canadian dealer had also purchased his portion 
ofthe ABN bulk lots at the Christie's auction in 1990 and according to Escala's Chief 
Operating Officer "still had a big pile left [after] all those years later, big pile." All told, 
Escala paid about $850,000 for its inventory 
ofABN material. 
1. The Rapidly Rising Catalogue Values of the ABN Specimens 
56. Manning determined the values for the ABN specimens which were to 
appear in a proposed future edition 
of the Brookman catalogue that ultimately was never 
24
 

published. Escala prepared spreadsheets containing these values. In the months before 
Escala's first shipment 
ofABN Specimens to Afinsa in February 2004, Manning had 
estimated supplying approximately €60 million (as 
of February 1,2004 €60 million 
equaled approximately $74.8 million) catalogue value but had told Afinsa that a 
Brookman Catalogue draft could be finished in January with a catalogue value 
of 
approximately €30 to 40 million (as ofFebruary 1,2004 €30 to 40 million equaled 
approximately $37.4 to $49.8 million). Manning also told Afinsa that "[t]he new 
[Brookman] catalogue will absolutely follow our suggestions about prices." As with the 
UN Archive, the catalogue values continued to rise. 
57. With respect to Escala's first sale 
ofABN specimens to Afinsa, Manning 
used a catalogue that the two brothers had prepared as a starting point for setting the 
catalogue values. But Manning dramatically increased the prices 
of each item. Thus an 
item listed in the Morowitz catalogue for $6 was listed in Escala's spreadsheet for €130 
(as 
ofFebruary 1,2004 €130 equaled approximately $162). 
58. In December 2004, after selling AfinsaABN specimens worth a purported 
$266 million in catalogue value, Manning responded to an Audit Committee request and 
calculated the total catalogue value 
ofABN specimens that Escala had remaining in 
inventory. The amount was a staggering $512,348,355. All told, the total alleged 
catalogue value set by Manning for the ABN specimens held by Escala, and purchased 
for approximately $850,000, approached $778 million. 
25
 

2. Impact of the ABN Specimens on Escala's Earnings 
59. Pursuant to its agreement to provide ABN Specimen stamps to Afinsa, on 
February 17,2004, Escala invoiced Afinsa $6,230,707 for its first shipment 
of ABN 
Specimenstamps. Thesalepricewas12.5percent
ofa cataloguevalue of$45,313,539 
that Manning had set. Between February 17,2004 and December 12,2005, Escala issued 
thirteen more invoices to Afinsa for ABN Specimen material. The sales netted Escala 
approximately $57 million in revenues. The purchase prices were calculated as a 
percentage 
of catalogue values totaling approximately $366 million. Over time, the 
percentage 
of catalogue value that Afinsa was charged for these sales increased from 12.5 
percent to 
15 percent; at the same time Manning continually increased the catalogue 
values for the materials. 
60. The sales 
ofABN Specimens allowed Escala to meet periodic earnings 
forecasts. Towards the last month 
of each quarter, Manning directed Escala's stamp 
expert to put together $10-$15 million worth 
ofABN specimens each quarter without 
regard to the type 
of stamp. These ABN sales allowed Escala to meet its forecast for that 
year. For its 2004 fiscal year, Escala exceeded the high end 
of its revenue forecast range 
by approximately $2 million based on ABN Specimen sales to Afinsa 
of $17,732,032. 
Without those ABN sales, Escala would have missed the low end 
ofits revenue forecast. 
range by approximately $10 million. Likewise, revenues from ABN sales allowed Escala 
to meet its revenue forecast for its fiscal year 2005 first quarter. 
61. For fiscal year 2004, the ABN collection was 8 percent, 28 percent and 
53 
percent of Escala's total company revenue, gross profit and pre-tax net income, 
26
 

respectively. In fiscal year 2005, the ABN collection was approximately 14 percent, 35 
percent and 58 percent of Escala's total company revenue, gross profit and pre-tax net 
income, respectively. For the first six months 
of fiscal year 2006, the ABN collection 
was approximately 3 percent, 7 percent and 
12 percent ofEscala's total company 
revenue, gross profit and pre-tax net income, respectively. 
L. UN Imperforates & Progressive Proofs 
62. Escala subsequently sold Afinsa additional UN material similar to that 
from the UN Archives. These were "imperforates and progressive 
proofs"-stamps in 
the process 
of production or design but not entered into circulation. In April 2004, Escala 
obtained this material for $2.8 million, a price negotiated by Manning. Between 
December 2004 and July 2005, Escala booked revenues 
of approximately $11.8 million 
on sales 
ofthis same material to Afinsa. Escala's sale prices to Afinsa were calculated as 
15 percentofa total catalogue value ofapproximately $70 millionfor the imperforates 
and progressive proofs. Manning derived the catalogue value for these sales from the UN 
catalogue values that he and Afinsa set in the Brookman Catalogue. 
63. For fiscal 2005, the UN imperforates and progressive proofs to Afinsa 
accounted for approximately 4 percent, 
11 percent and 19 percent ofEscala's total 
company revenue, gross profit and pre-tax net income, respectively. The transactions 
were booked in the second and third quarters 
ofFY 2005. For Escala's 2005 third 
quarter, these sales constituted 74 percent ofEscala's total pre-tax net income. 
27
 

M. In-House Counsel Informs the Audit Committee of the Existence of 
the Brookman Agreement 
64. In July 2004, Escala's in-house counsel told Escala's Audit Committee 
about the existence 
ofthe Brookman Agreement.   Prior to this time, neither Manning nor 
Crawford had told the Audit Committee about the Brookman Agreement. On July 15, 
2004, the Audit Committee met to discuss the agreement. This was the first time 
Escala's Audit Committee and Escala's auditor learned that the agreement existed. 
65. Significantly, neither the Audit Committee nor the auditors knew at this 
time that Manning set the catalogue values. To the contrary, Manning had represented to 
the auditors that he was not involved in setting catalogue prices. Others understood that 
he gave some direction 
on the value of stamps, or that from time to time he was consulted 
on specific stamps, but not that he was setting the catalogue values for the entire 
collection. 
66. Concerned that the Brookman Catalogue was not independent and about 
the values in the catalogue for the collections sold to Afinsa, the Audit Committee 
required Manning to obtain appraisals 
ofthe pricing in the Brookman Catalogue and any 
other catalogues that were not independent 
ofEscala. The Audit Committee also decided 
to update the Management's Discussion and Analysis (MD&A) section ofits quarterly 
reports to state that the prices for the materials it sold to its parent Afmsa were generally 
determined with reference to the prices in catalogues used throughout the industry and 
that 
in certain cases the company obtained independent appraisals ofcatalogue prices. 
Notably, when aware 
ofthe Brookman Agreement, neither Escala, Manning or Crawford 
disclosed this information. 
28
 

N. Escala's Fiscal 2005 Quarterly and Annual Reports 
67. Escala filed SEC Form lO-Q Quarterly Reports on November 8,  2004, 
February 9, 2005, and May 13,2005, and an SEC Form lO-K Annual Report on 
September 16, 2005 with the SEC. These reports included revenues from the ABN 
Specimen sales and the UN imperforate sales as described above. Escala's updated 
MD&A disclosure, contained in its quarterly reports, first appeared in the quarterly report 
for the fiscal 2005 second quarter. The revised MD&A discussion read as follows: 
Sales 
ofphilatelic material to Afinsa under the contracts are made via the 
fulfillment 
ofpurchase orders from Afinsa. The Company generally 
purchases, inspects, and processes the philatelic materials in a format 
specified by Afinsa.Currently, the prices for material sold by the Company 
to Afinsa under the contracts are based on Afinsa's "bid" prices, which are 
generally determined with reference to prices for such material contained in 
catalogues that are used throughout the industry. 
In certain cases the 
Company obtains independent appraisals of such catalogue prices. Although 
the actual percentage 
of catalogue value varies based on the type of material 
involved and related supply and demand factors, the Company believes that 
in any given case, the percentage is substantially equivalent to what would 
be charged by a clearly independent party. 
68. This MD&A discussion was false and materially misleading. The 
Brookman Catalogue was not independent and the prices in that catalogue were 
manipulated by Escala's management, i.e., Manning. There was no published catalogue 
used throughoutthe industry for the ABN specimens. Instead 
ofAfinsa proposing "bid" 
prices, Manning typically set the catalogue prices that Afinsa paid a percentage of. In 
addition, Manning undermined the appraisal process causing them not to be independent. 
69. Manning and Crawford knew that this MD&A discussion was false and 
materially misleading, but they approved this language anyway, and they signed quarterly 
reports that contained this language. 
29 

70. The MD&A disclosure falsely indicated that the prices Escala charged 
Afinsa were equivalent to those charged in arms-length transactions because the 
disclosure stated that those prices were determined with reference to industry catalogues 
and/or appraisals. Moreover, Afinsa's control over the Brookman Catalogue should have 
been disclosed because that control relationship materially affected Escala's operating 
results as 
it allowed Manning to set prices that would allow Escala to meet its forecasts. 
Finally, under FAS 57, Escala should have disclosed the revenues that it received by 
virtue 
ofthe catalogue prices in the Brookman Catalogue. 
o. Manning Undermined the Appraisal Process 
71. The appraisal process was undermined from the outset in two ways. The 
appraisers did not know that Manning had placed bids for Afinsa at the 
UN Archive 
Auction. Instead, Manning referred them to the prices obtained for 
UN material at that 
auction as a possible benchmark. In addition, the appraisers did not know that Afinsa 
controlled the Brookman Catalogue and that Manning set the Brookman Catalogue 
pnces. 
72. While the auditors did not know these two important facts, both Manning 
and Crawford did know them. 
As a result, Manning and Crawford cannot rely on the 
opinions that the appraisers provided to justify the catalogue prices. 
1. The August 2004 Appraisals 
73. In August 2004, Manning obtained letters from three appraisers. Each 
wrote that he had reviewed the Brookman Catalogue pricing for the 
UN Archives -- two 
wrote that they had also reviewed the American Banknote specimens -- and concluded 
30
 

that the pricing was fair or reasonable. As for the pricing ofthe UN Archives, each based 
his assessment on, among other things, the realization from Manning's auction 
of a 
portion
oftheUNArchivematerial. None oftheappraiserslookedatany oftheArchive 
or specimen material. Instead, they reviewed price lists provided by Manning or specific 
pages from the catalogue, and relied on Manning's representations concerning the 
condition
ofthematerials. Becausetheydidnotexamineany ofthematerial,all ofthe 
appraisers considered their letters to be "opinions" and not the more rigorous appraisals. 
In fact, Manning specifically asked two 
of the appraisers for an "opinion" and not an 
appraisal. 
74. One 
ofthe appraisers did not even draft the letter that he signed. Instead, 
Manning furnished the letter, which the appraiser signed and handed back to Manning. 
Finally, none 
ofthe appraisers were paid for their opinion letters, either because they 
spent 
just a few hours working on the project and did not deem it necessary to charge for 
it, or because they considered it a favor to a friend. 
2. The March 2005 Appraisals 
75. In March 2005, Manning obtained letters signed by two appraisers. One 
letter stated that the appraiser had performed 
"a complete review ofthe catalogue listings 
contained in the new Brookman Catalogue 
of specimen stamps" and that he agreed "with 
the pricing policy set forth in the specimen stamp catalogue." The appraiser also stated 
that he had reviewed the UN Archives and that the prices in the Brookman 2004 listings 
were·similarto the prices realized at Manning's auction 
ofthe UN Archives, and that in 
his opinion, "the editors ofBrookman ha[d] correctly evaluated the United Nations 
31
 

archive in their pricing." The other appraiser's letter stated that he had reviewed the 
catalogue pricing for the American Banknote specimens "that the Brookman Company is 
producing" and that "he had found the catalogue values to be reasonable." As for the 
pricing
ofthe UN Archive, the letter statedthatManning's auction ofthe UN Archive 
material "validated" the Brookman Catalogue UN Archive pricing. 
76. Neither appraiser authored the letters. Both traveled to 
New York and 
spent one day in Manning's offices. One appraiser later typed up Manning's handwritten 
notes, signed the typewritten letter, and returned it to Manning. According to the other 
appraiser, the entire substance 
ofthe letter that he signed was written by Manning. In 
addition, neither could verify the accuracy 
of certain statements in their letters. 
P. Escala's Fiscal 2006 Quarterly Reports 
77. Escala filed three SEC Form 10-Q Quarterly Reports in fiscal year 2006 
on November 8, 2005, February 9, and May 10,2006 with the SEC. These quarterly 
reports included revenues from the ABN Specimen sales. The first two ofthese quarterly 
reports included the same materially false and misleading MD&A disclosure discussed 
above. Escala has not filed a periodic report with the Commission since its March 31, 
2006 SEC Form 10-Q. 
Q. The Audit Committee Discovers that Manning Set the Prices in the 
Brookman Catalogue 
78. Sometime after May 2006, as a result of an internal investigation, the 
Audit Committee first learned that Manning had set the prices in the Brookman 
Catalogue. Manning, himself, did not admit to setting the prices until November 30, 
32
 

2006, when he wrote a memorandum to Escala's board of directors, in-house counsel, 
and outside auditor in which he stated 
"I established the Brookman Catalogue prices for 
the U.N. Archives and the proposed Brookman ABN catalogue prices." 
R. Escala Meets Earnings Forecasts 
79. Between September 2003 and September 2004, Escala provided guidance 
on its quarterly and annual net income and revenue expectations. Escala also issued a 
series 
of successive forecasts for its 2004 fiscal year-end results. Escala met all of its net 
income forecasts, and met all but two 
ofits revenue forecasts. During this time period, 
Escala met five 
of its net income forecasts due to income derived from the Archive or 
Washington Collection transactions with Afinsa. For example, Escala estimated net 
income 
ofbetween $4.8 and $5.2 million for its 2004 third quarter. Archive sales to 
Afinsa brought in $5.8 million in pre-tax profits to that quarter. Escala's share price 
increased 
18 percent on the news that it exceeded its forecast that quarter. Likewise, 
Escala met two 
of its revenue forecasts due to revenue derived from the Archive or 
Washington Collection transactions with Afinsa. For fiscal year 2004, Escala made five 
successive revenue forecasts, increasing the forecast over time from $135 million to a 
range between $205 and $210 million. Escala's actual revenue that year was 
$212,890,000; its Archive and Washington Collection transactions 
with Afinsa 
contributed over $18 million 
of that amount. Escala's share price increased 5.3 percent 
after it met that forecast. 
33
 

S. Manning's and Crawford's Ill-Gotten Gains 
80. From 2003 through 2005, Manning and Crawford earned performance-
based bonuses and stock options. To the extent that each received compensation that 
derived from Escala's meeting forecasts 
or from increases in Escala's share price due to 
its financial performance at times that each knew 
of the false and misleading disclosures 
and other misconduct described in this Complaint, this compensation constitutes unjust 
enrichment. 
T. Manning's and Crawford's Scienter 
81. Manning signed, as CEO, six successive SEC Form lO-Q Quarterly 
Reports (filed with the SEC on: November 13,2003, February 5, 2004, May 6, 2004, 
November 8, 2004, February 9, 2005 and May 13, 2005), and three successive SEC Form 
10-K Annual Reports (filed with the SEC on: September 12,2003, September 
9,2004 
and September 13, 2005 as amended September 16, 2005) which failed to disclose the 
Brookman Agreement and two SEC Form 10-Q Quarterly Reports (filed with the SEC 
on: February 
9, 2005 and May 13,2005) that contained the false and misleading 
disclosures about how Escala priced the archive collections that it sold to Afinsa. 
At the 
time, Manning knew that the failure to disclose the existence 
ofthe Brookman 
Agreement was material because, among other things, the related party status 
ofAfinsa 
was disclosed and the Audit Committee discussed and questioned the independence 
of 
Brookman several times. In addition, at the time Manning knew the disclosures 
regardingthe pricing ofthe archive collectionwere falsebecause he setthe prices inthe 
Brookman Catalogue and he subverted the appraisal process in order to provide opinions 
that
would support the catalogue prices he selected. 
34 

82. Manning also intentionally or recklessly: manipulated values for the 
material he sold Afinsa in the UN Archive, UN imperforates, and ABN specimen 
transactions; sold back to Afinsa in a round-trip transaction its pre-business combination 
inventory held at CdC in direct contravention 
ofEscala's promise not to do so; falsely 
reported a payment 
ofbusiness combination-related expenses as the "sale" ofthe 
Washington Collection; secretly placed bids for Afinsa at the 
UN Archive auction; and 
provided the Audit Committee with opinions that he wrote, edited, or otherwise 
improperly influenced instead 
of independent appraisals. These transactions had a 
material impact on Escala's financial statements. 
83. As CFO, Crawford signed eight successive SEC Form lO-Q Quarterly 
Reports (filed with the SEC on: November 13, 2003, February 5, 2004, May 6, 2004, 
November 8, 2004, February 9, 2005, May 13,2005, November 8,  2005 and February 
9, 
2006), and two successive SEC Form 10-K Annual Reports (filed with the SEC on: 
September 
9,2004 and September 13,2005 as amended September 16,2005) which 
failed to disclose the Brookman Agreement and four SEC Form 10-Q Quarterly Reports 
(filed with the SEC on: February 9, 2005, May 13,2005, November 8, 2005 and 
February 9, 2006) that contained the false and misleading disclosures about how Escala 
priced the archive collections that it sold to Afinsa. Crawford, a CPA, knew the 
requirements 
ofFAS 57 and that the failure to disclose the existence ofthe Brookman 
Agreementwas material because, among otherthings, the relatedparty status,ofAfinsa 
was disclosed and the Audit Committee discussed and questioned the independence 
of 
Brookman several times. In addition, he knowingly or recklessly read and approved the 
misleading MD&A disclosures in each ofEscala's four quarterly reports from October 
35
 

2004 through December 2005 concerning how Escala priced the materials it sold to 
Afinsa. Crawfordwasone 
ofthethreemembers ofEscala'sdisclosurecommittee,which 
was responsible for disclosure issues involved in Escala's filings. In particular, Crawford 
knew thatManning set the Brookman Catalogue prices, and that the Audit Committee did 
not know this important fact. Crawford also knew that the appraisers did not know about 
the existence 
ofthe Brookman Agreement and that Manning set the catalogue's prices as 
well as some ofthe bid prices at the UN Auction. Crawford knowingly or recklessly 
violated the antifraud provisions 
ofthe Exchange Act by booking the purported sale of 
the Washington Collection. As described above, this transaction was material. 
84. Escala's scienter is established by the scienter 
ofits then-CEO (Manning) 
and it's then-CFO (Crawford) as described above. 
FIRST CLAIM 
Violations of Section lO(b) of the Exchange Act [15 U.S.c. § 78j(b)] 
and Rule 10b-5 [17 C.F.R. § 240.10b-5] 
85. Paragraphs 1 through 84 are realleged and incorporated by reference. 
86. Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 
C.F.R. 
§ 240.10b-5] prohibit a person, in connection with the purchase or sale of a 
security, from: employing any device, scheme or artifice to defraud; making any untrue 
statement ofa material fact or omitting to state a material fact necessary to make 
statements made, in light ofthe circumstances under which they were made, not 
misleading; and engaging 
in any act, practice or course ofbusiness which operates or 
would operate as a fraud or deceit on any person. 
36
 

87. By reason of the foregoing; Escala, Manning, and Crawford each violated 
Section 
1O(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 
C.F.R. 
§ 240.10b-5]. 
SECOND CLAIM 
Violations of Section 13(a) of the Exchange Act
 
[15 
U.S.c. § 78m(a)] and Rules 12b-20, 13a-l and 13a-13
 
[17 C.F.R. 
§§ 240.12b-20, 13a-l, and 13a-13] and Aiding and Abetting those
 
violations
 
88. Paragraphs 1 through'87 are realleged and incorporated by reference. 
89. Escala filed with the SEC the annual reports on Form 
lO-K and quarterly 
reports on Form 
lO-Q described herein that contained untrue statements ofmaterial fact 
or omitted to state material facts required to be stated therein or necessary to make the 
statements made not misleading, concerning, among other things, Escala's gross profits, 
revenues, and/or net income. Manning and Crawford caused those untrue statements and 
knew that they were inCluded in the annual and quarterly reports. 
90. Byreason 
oftheforegoing,EscalaviolatedSection13(a) oftheExchange 
Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-l and 13a-13 thereunder [17 C.F.R 
§§ 
240.12b-20, 240.13a-l, and 240. 13a-13]. 
91. By reason 
ofthe foregoing, Manning and Crawford aided and abetted 
Escala's violations 
of Exchange Act Sections 13(a) and Rules 12b-20, 13a-l, 13a­
13. 
THIRD CLAIM
 
Violations of Section 13(b)(5) of the Exchange Act [15 U.S.c. § 78m(b)(5)]
 
92. Paragraphs 1 through 
91 are realleged and incorporated by reference.
 
37
 

93. Exchange Act Section 13(b)(5) provides that no person shall knowingly 
falsify any book, record, or account required under Section 13(b)(2) or circumvent 
internal controls. 
94. Manning and Crawford each violated Section 13(b)(5) 
ofthe Exchange 
Act [15 U.S.C. §78m(b)(5)], when each failed to identify the related-party nature ofthe 
Brookman Agreement. Manning directed Crawford to book, and Crawford did book 
$500,000 
ofa reimbursement from Afinsa for business combination-related expenses as 
the sale ofthe Washington Collection. Manning approved the Filasyl transactions as 
sales to a third party when he knew or was reckless in not knowing that the transactions 
were, in substance, round-trip transactions. 
95. By reason 
ofthe foregoing, Manning and Crawford each violated Section 
13(b)(5) 
ofthe Exchange Act [15 U.S.C. §78m(b)(5)]. 
FOURTH CLAIM 
Violations of Section 13(b)(2)(A) and (B)
 
of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)&(B)]
 
96. Paragraphs 1 through 95 are realleged and incorporated 
by reference. 
97. Escala violated Section 13(b)(2)(A) ofthe Exchange Act [15 U.S.C. § 
78m(b)(2)(A)] by maintaining false and misleading books and records that, among other 
things, mischaracterized the economic substance 
ofthe purported sale ofthe Washington 
Collection and the Filasyl transactions, and failed to identify the related-party nature of 
Barrett & Worthen. 
98. Escala violated Section 13(b)(2)(B) 
ofthe Exchange Act [15 U.S.C. §  . 
78m(b)(2)(B)] by failing to devise and maintain a system 
ofinternal accounting controls 
38
 

sufficient to provide reasonable assurances that its transactions were recorded as 
necessary to permit preparation offinancial statements in conformity with GAAP. 
99. By reason 
ofthe foregoing, Manning and Crawford aided and abetted 
Escala's violations 
of Section 13(b)(2)(A) and (B). 
FIFTH CLAIM
 
Violations of Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1]
 
100. Paragraphs 1 through 99 are realleged and incorporated by reference. 
101. Rule 13b2-1 
ofthe Exchange Act makes it unlawful for any person to 
falsify, or cause to be falsified, any book, record or account subject to Section 
13(b)(2)(A). 
102. Manning and Crawford, directly or indirectly, falsified or caused to be 
falsified, Escala's books, records 
or accounts subject to Section 13(b)(2)(A) ofthe 
Exchange Act. Each failed to identify the related-party nature 
ofthe Brookman 
Agreement. Manning directed Crawford to book, and Crawford did book $500,000 ofa 
reimbursement from Afinsa for business combination-related expenses as the sale 
ofthe 
Washington Collection. Manning approved the Filasyl transactions as sales to a third 
party when he knew or was reckless in not knowing that the transactions were, in 
substance, round-trip transactions. 
103. 
By reason ofthe foregoing, Manning and Crawford each violated 
Exchange Act Rule 13b2-1 [17 C.F.R. §240.13b2-1]. 
SIXTH CLAIM
 
Violations of Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2]
 
104. Paragraphs 1 through 103 are realleged and incorporated 
by reference. 
39
 

105. Manning and Crawford, as officers and directors ofEscala, directly or 
indirectly, made materially false or misleading statements, or omitted to state, or caused 
another person to omit to state material facts necessary in order to make statements made, 
in light 
ofthe circumstances under which they were made, not misleading to Escala's 
accountants in connection with their audits 
of Escala's financial statements for fiscal 
years 2004, 2005, and 2006. Manning and Crawford each instructed Escala's warehouse 
manager not to disclose to Escala's auditors that a portion 
ofthe Washington Collection 
remained in Escala's possession. 
106. By reason 
of the foregoing, Manning and Crawford each violated 
Exchange Act Rule 13b2-2 [17 C.F.R. §240.13b2-2]. 
SEVENTH CLAIM
 
Violation of Exchange Act Rule 13a-14 [17 C.F.R. § 240.13a-14]
 
107. Paragraphs 1 through 106 are realleged and incorporated by reference. 
108. Manning and Crawford knowingly certified quarterly and annual reports 
that included revenues from these transactions, and failed to disclose material information 
concerning Escala's transactions with Afinsa, and made misleading statements about how 
Escala set its prices. By reason 
ofthe foregoing, Manning and Crawford each violated 
Exchange Act Rule 13a-14 [17 C.F.R. §240.13a-14]. 
40
 

PRAYER FOR RELIEF 
WHEREFORE, 
the SEC respectfully requests that this Court enter a Final 
Judgment: 
109. Permanently enjoining Escala, Manning, and Crawford from violating 
Section lO(b) 
of the Exchange Act [15 U.S.C. §§ 78j(b)] and Exchange Act Rule lOb-5 
[17 C.F.R. 
§§ 240.10b-5]; 
110. Permanently enjoining Escala from violating Sections 13(a), 13(b)(2)(A), 
and 13(b)(2)(B) 
ofthe Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 
78m(b)(2)(B),] and Exchange Act Rules 12b-20, 
13a-l, and 13a-13 [17 C.F.R. §§ 
240.12b-20, 13a-l, and 13a-13]; 
111. Permanently enjoining Manning and Crawford from violating Section 
13(b)(5) 
ofthe Exchange Act [15 U.S.C. §§ 78m(b)(5)] and Exchange Act Rules 13b2-1 
and 13b2-2 [17 C.F.R. §§ 240.13b2-1 and 13b2-2]; 
112. Permanently enjoining Manning and Crawford from aiding and abetting 
the violation 
ofExchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 
78m(a), 78m(b)(2)(A), and 78m(b)(2)(B),] and Rules 12b-20, 13a-l, 13a-13 [17 C.F.R. 
§§ 240.12b-20, 13a-l, and 13a-13]; 
113. Permanently enjoining Manning and Crawford from violating Exchange 
Act Rule 13a-14 [17 C.F.R. § 240.13a-14]; 
114. Ordering Crawford and Manning to pay disgorgement 
ofany unjust 
enrichment from the conduct alleged herein; 
41
 

115. Ordering Crawford and Manning to pay civil monetary penalties pursuant 
to Section 21(d)(3) 
ofthe Exchange Act [15 U.S.C. §78u(d)(3)] in respect oftheir 
violations; 
116. Permanently and unconditionally baiTing Manning and Crawford from 
serving as an officer or director 
of a public company pursuant to Section 21 (d)(2) ofthe 
Exchange Act 
[15 U.S.C. § 78u(d)(2)]; 
117. Granting such other relief as this Court may deem just and appropriate. 
Dated: March 
23 , 2009 
Respectfully submitted, 
/t1r~ aOMen 
Mark A. Adler (MA 8703) 
'" 
Jane M.E. Peterson (Trial Attorney) 
Cheryl J.  Scarboro 
C. Joshua Felker 
Deborah 
A. Tarasevich 
Devon 
A. Brown 
Matthew Skidmore 
Attorneys for Plaintiff 
Securities and Exchange Commission 
100 F Street, N.E. 
Mail Stop 4010 
Washington, D.C. 20549-4010 
Tele: (202) 551-4468 [Peterson] 
Fax: (202) 772-9245 [Peterson] 
42
 

------------------------------------------------------

UNITED STATES DISTRICT COURT 
SOUTHERN DISTRICT OF NEW YORK 

------------------~-----~--------------------------------------------------------l[ 
SECURITIES AND EXCHANGE COMMISSION, 

Plaintiff, 

v. 

ESCALA GROUP, INC., 09 Civ.
 
GREGORY MANNING,
 
LARRY LEE CRAWFORD, CPA,
 

Defendants. 
------~--------------------x. 

COMPLAINT 

Plaintiff Securities and Exchange Commission (the "SEC"), for its Complaint 

against Escala Group, Inc., ("Escala"), Gregory Manning ("Manning") and Larry Lee 

Crawford ("Crawford"), alleges that: 

NATURE OF THE ACTION 

1. This is a disclosure and accounting fraud case that concerns fraudulent 

related party transactions between Escala, then a Nasdaq-listed company in the 

collectibles market, and its parent company, Afinsa Bienes Tangibles, S.A. ("Afinsa"), a 

privately held Spanish company that sold investments in portfolios of starrlPS in Europe, 

in connection with sales that became part of what Spanish criminal authorities have 

called a ponzi or pyramid scheme. In a fraudulent business scheme based upon the secret 

and dramatic manipulation of collectible stamp values, Escala and its former CEO, 

Manning, violated the antifraud and reporting provisions of the Exchange Act by: (1) 

failing to disclose the related party status of Barrett & Worthen, Inc., resulting in control 



ofthe 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; (3) selling back to Afinsa in a 

round-trip transaction inventory acquired from Afinsa in direct contraventi?n of Escala's 

public promise not to do so; and (4) falsely reporting a payment for business 

combination-related expenses as the "sale" of certain antiques. Escala's form~r CFO 

Crawford likewise violated the antifraud and reporting provisions of the federal securities 

laws by: (1) failing to disclose the related party status ofBarrett & 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 price~ and influenced and edited the appraisals; and (3) 

improperly booking the sale of the antiques. 

2. These false and misleading disclosures and omissions were material. 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. 

As a result of these transactions, Escala went from trading at $1.47 per share on January 

23,2003, the day that Escala and Afinsa entered into the merger agreement, to a $32-per­

share company with a purported market cap of $898 millionOin the span of a few years. 

2
 



3. Because ofthese transactions, Afinsa was able to obtain a constant supply 

of stamps that it needed for two reasons: (1) to replace forgeries that Manning 

discovered in Afinsa's vault and (2) to feed the growing demand for stamp portfolios that 

it offered to investors in what the criminal authorities in Spain have called a giant 

pyramid scheme. The fraudulent related-party transactions ceased after May 2006, when 

Spanish authorities raided Afinsa's offices and charged Afinsl;\. and certain individmils 

with engaging in a massive unlawful pyramid scheme. 

4. By engaging in such conduct, and committing the acts described in this 

Complaint, defendant Escala directly and indirectly engaged in and, unless restrained and 

enjoined by the Court, will continue to engage in, transactions, acts, practices and courses 

ofbusiness that violate Sections lOeb), 13(a), 13(b)(2)(A) and (B) ofthe Securities 

Exchange Act of 1934 ("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], defendants Manning and Crawford directly and indirectly 

engaged in and, unless restrained and enjoined by the Court, will continue to engage in, 

transactions, acts, practices and courses ofbusiness that violate Sections 1O(b) and 

13(b)(5) ofthe Exchange Act [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Exchange Act 

Rules lOb-5, 13b2-1, 13b2-2, and 13a-14, [17 C.F.R. §§ 240.10b-5, 240.13b2-1, 

240.13b2-2 and 240.13a-14] aiding and abetting Escala's violations of Sections 13(a), 

and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 

and 13a-13. Unless enjoined by order ofthis Court, defendants are likely to commit future 

violations, and the SEC seeks a judgment permanently enjoining each defendant from 

future violations. From defendants Manning and Crawford, the SEC also seeks 

3
 



disgorgement of ill-gotten gains and prejudgment interest, an award ofcivil penalties 

pursuant to Section 21(d) of the Exchange Act [15 U.S.C. §78u(d)], and an officer and 

director bar pursuant to Section 21(d) ofthe Exchange Act [15 U.S.c. §78u(d)]. 

JURISDICTION 

5. This Court has jurisdiction over this action pursuant to Section 21 (d), 

21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78(u)(e) and 78aa]. The 

defendants, directly or indirectly, used the means or instrumentalities of interstate 

commerce or the mails, or the facilities ofa national securities exchange, in connection 

with the transactions, acts, practices, and courses of business described herein. 

6. Venue is proper in this District pursuant to Securities Exchange Act 

Section 27 [15 U.S.c. § 78aa], because certain ofthe transactions, acts, practices and 

courses of business occurred with the Southern District ofNew York. From 2005 to 

2007, defendant Escala was headquartered in New York City. As Escala officers, 

Manning and Crawford conducted business in and from Manhattan from time to time. 

Escala board meetings were held in Manhattan. 

DEFENDANTS 

7. Escala Group, Inc., which was known as Greg Manning Auctions, Inc. 

(GMAI) until September 28, 2005, is a Delaware corporation established in 1981 and 

currently headquartered in Bethel, Connecticut. Escala is a global netWork of companies 

in the collectibles market (stamps, coins, arms and armour) with operations in North 

America, Europe, and Asia as well as on the Internet. Escala's common stock is 

registered with the Commission pursuant to Section 12(g) of the Exchange Act [15 

U.S.C. §781(g)]. Its common stock was previously registered pursuant to Section 12(b) 

4
 



ofthe Exchange Act [15 U.S.C. §781(g)] and was listed on the NASDAQ National 

Market until February 7, 2007, when it was delisted and deregistered for failing to file its 

SEC Form lO-K Annual Report for the fiscal year ended June 30, 2006 and its SEC Form 

10-Q Quarterly Report for the quarter ended September 30, 2006. It is now traded over­

the-counter and quoted on the Pink Sheets. Escala's fiscal year runs from July 1 to June 

30. 

8. Gregory Manning, 62, is the founder of Escala. As of October 17,2005, 

he owned 7.7 percent of the common stock of the company. Manning was Chairman of 

the Board of the company from its inception in 1981 through December 2002, and served 

as the company's CEO from December 1992 to September 28,2005. He was the 

company's President from 1981 until August 12, 1993, and again from March 8, 1995 to 

September 27,2005. On September 28,2005, Manning was appointed as President, 

North American and Asian Philatelic Auction Division and also served as the First Vice 

Chairman of the Board. On December 15,2006, Manning resigned and automatically 

became a consultant to Escala pursuant to his employment contract. On April 24, 2007, 

the company terminated Manning's consulting agreement for cause. 

9. Larry Lee Crawford, 60, is a licensed CPA in North Carolina, New 

Jersey, and Pennsylvania. He was Escala's CFO and Executive Vice President from 

April 2001 until May 2006. Crawford was one of three members of Escala's disclosure 

committee, which was responsible for disclosure issues involved in Escala's filings with 

the Commission. From 1996 to 2001, Crawford was CFO ofa privately held company. 

From 1970 to 1975, Crawford served as a senior accountant at one of the "big four" 

accounting firms where, among other things, he worked as an auditor ofpublicly traded 

5
 



companies. Crawford has a Bachelor's Degree and a Masters of Business 

Administration. 

RELATED ENTITIES 

10. Afinsa Bienes Tangibles, S.A. ("Afinsa"),was a private company 

organized under the laws of Spain. Its principal place of business was in Madrid, Spain. 

Afinsa was engaged in commercial and trading activities involving tangible investment 

products throughout Europe. Afinsa's primary business was a stamp investment 

program. According to a September 27,2005 article in the Financial Times, Afinsa sold 

€1.2 billion worth of stamps under its investment programs to 143,000 investors. From 

1996-2001, the company's revenues grew at a compounded annual rate of 18.3 percent, 

reaching €180 millionin 2001 (as of January 1,2001 €180 million equaled approximately 

$169.5 million). Further, its total assets grew at a compounded annual growth rate of 

36.1 percent since 1997, reaching €160.8 million in 2001 (as of January 1,2001 €160.8 

million equaled approximately $151.5 million). In May 2006, Afinsa owned 

approximately 70 percent ofEscala's outstanding common stock. That month, the 

operations of Afinsa ceased when Spanish authorities raided its business operations as 

part ofa criminal investigation. Afinsa is now operated under the control of trustees 

appointed by a Spanish court. 

11. Central de Compras Coleccionables, S.L. ("CdC") (flklal GMAI-

Auctentia Central de Compras) ,was an Afinsa subsidiary headquartered in Spain that 

held stamp and art inventory. On September 8, 2003, CdC became a subsidiary of 

Escala, and Escala and CdC became the exclusive suppliers of collectibles for Afinsa on 

6
 



a worldwide basis, selling directly to Afinsa as well as buying goods and procuring 

requested material for sale to Afinsa. 

12. Barrett & Worthen, Inc., ("Barrett & Worthen") is a small privately held 

publishing company located in Bedford, New Hampshire owned by Arlene Dunn 

Driscoll, a close family friend of Manning. In 1983, Barrett & Worthen purchased all 

rights to the Brookman Catalogue from Manning. Barrett & Worthen has published the 

Brookman Catalogue since then, including a series of Brookman Catalogues for Afinsa. 

On June 16,2003, Afinsa entered into a confidential agreement with Barrett & Worthen, 

where, in exchange for the payment of $650,000, payable at $65,000 per year for ten 

years, Barrett & Worthen gave Afinsa "full and final editorial review and control" of the 

Brookman Catalogue, including "final review of all pricing." This agreement contained a 

confidentiality clause providing for non-disclosure of its contents. 

13. The Brookman Catalogue ("Brookman"), is a stamp catalogue 

published by Barrett & Worthen. The catalogue and publishing rights were sold to 

. different owners over the years and were sold to Manning in 1973. In 1983, Manning 

sold the Brookman Catalogue to Arlene Dunn Driscoll, owner of Barrett& Worthen.
 

FACTS
 

A. Afinsa's Stamp Investment Programs 

14. Afinsa sold investment contracts based on portfolios of stamps to 

thousands of individual investors in Europe. Afinsa offered a guaranteed, fixed rate of 

return equal to or greater than 7 percent per year for the stamp investments, promising 

investors that it would either find a buyer for the stamps at the original purchase price, or 

buy the stamps back itself at the end of the contract term. Alternatively, investors could 

7
 



choose to invest the returns in more stamps. Because the investment was supposedly 

based upon the pristine condition of the stamps, Afinsa offered investors the option to 

hold the stamps in its custody in a cost-free vault on its premises. 

15. The prices investors paid for these stamp portfolios were based on values 

published in stamp catalogues. The sale price to the investors always equaled the 

catalogue prices, but Afinsa purchased the stamps at a fraction of the catalogue prices, 

sometimes as low as 8 percent of the catalogue values. When Afinsa repurchased the 

stamps from the investors, the guaranteed price was equal to the catalogue price paid by 

the investor plus the promised return or interest. In order to sustain its business, Afinsa 

had to sell stamps in increasingly larger quantities, because the catalogue values for 

stamps tended not to increase annually in amounts sufficient to cover payments on 

maturing contracts and other expenses. The Spanish authorities have alleged that Afinsa 

in fact sold interests in "batches of stamps which were completely overvalued, when not 

actually forgeries" and that the promised return or interest that Afinsa paid its investors 

came from the investments of new investors in a manner that the Spanish authorities have 

alleged was a pyramid or ponzi scheme. 

B. The Escala/Armsa Business Combination Transaction 

16. In April 2002, Manning initiated discussions with Afinsa of a possible 

business combination ofEscala and Afinsa. An agreement was signed on January 23, 

2003, consisting of three transactions, a Share Purchase Agreement, an Inventory 

Purchase Agreement and a Subscription Agreement. Inthe spring of2003, before the 

transaction had closed, Manning examined in Afinsa's vaults stamps used in Afinsa's 

8
 



investment programs and discovered that stamps with an alleged estimated value of $200 

to $300 million had been forged. In August 2003, after Afinsa confirmed Manning's 

discovery, Afinsa terminated its previous supplier of stamps and entered into agreements 

that made Escala its exclusive stamp supplier. 

17. On September 8, 2003, the Escala/Afinsa business combination 

transaction closed. In exchange for, among other things, 13,000,000 shares of Escala 

stock, Escala acquired Afinsa's subsidiary, CdC, and Escala and CdC became the 

exclusive suppliers ofcollectibles for Afinsa. At the time ofthe merger, CdC held 

approximately $11 million worth of stamp and art inventory. As a result of the 

transaction, Afinsa became the beneficial owner of72 percent of Escala's outstanding 

stock. 

18. Despite h~ving discovered stamps with an alleged estimated value of 

$200 to $300 million to be forgeries in Afinsa's vault, Manning completed the 

Escala/Afinsa business combination transaction without disclosing the existence of the 

forgeries to others at Escala. 

C. The Afinsa Supply Agreement 

19. Escala was under tremendous pressure as the exclusive supplier of stamps 

to Afinsa. Afinsa's stamp needs were enormous and critical to its continued operation. 

Because it promised to buy back its stamp portfolios at 100 percent of the initial sale 

price plus interest, Afinsa required increasing numbers of investors and, in turn, 

increasing volumes of stamps to sell to them. For each subsequent year, Afinsa had to 

increase the volume of stamps it sold in order to make new profits and to cover losses 

9
 



incurred for repurchases and interest. In other words, more new sales each year meant 

more repurchases in future years which in turn required more new sales. Manning 

understood the tremendous pressure Afinsa was under to maintain its ponzi-like 

investment program. 

D. The Brookman Agreement 

20. To ensure that it could keep increasing the catalogue value ofthe stamp 

portfolios that it marketed to investors, Afinsa wished to control a pre-existing, 

international stamp catalogue. In an internal Afinsa report, the company stated: "Steps 

are being taken to control an international catalogue or to create our own in order to be 

able to fix prices in accordancewith our philosophy." In the words of a principal of 

Afinsa: "If we allow a third party to put out the prices, we are really in his hands, which 

cannot be admissible given the nature of our business." 

21. Afinsa's discussions about controlling its own catalogue were occurri,ng in 

the early stages of the Escala/Afinsa business combination negotiations-and included 

Manning. Recognizing Afinsa's interest, Manning proposed that Afinsa consider 

entering into an arrangement with Barrett & Worthen, the current owner of the Brookman 

Catalogue - a stamp catalogue that Manning had owned before he sold it to a close 

family friend in 1983. Manning told Mmsa: "I believe that a deal could be set up with 

[the current owners] staying on to run the e,ntire operation .... We would have complete 

editorial control over the prices in the catalogue, but we can still use the current editors 

for the bulk of the work." 

10
 



22. On behalfofAfinsa, Manning actively engaged in the negotiations with 

Barrett & Worthen focusing on editorial control of the Brookman Catalogue. On June 

16,2003, Afinsa and Barrett & Worthen signed an agreement (the "Brookman 

Agreement") that Afinsa would pay $650,000 in annual payments of $65,000 for ten 

years.to Barrett & Worthen and would gain "full and final editorial review and control of 

the content and form of each edition of the Brookman Catalogue published during the 

term of [the] agreement," and that this "control and review shall include, but not be 

limited to, the final review of all pricing, the preparation and revision of all descriptions 

and the deletion and/or addition of material, in each case as [Afinsa], in its sole 

discretion, may determine ...." The Brookman Agreement provided for confidentiality 

and non-disclosure of its contents. Manning negotiated the Brookman agreement, and it 

was drafted in-house at Escala. Crawford learned ofthe agreement while it was being 

drafted in-house. 

23. Neither Manning nor Crawford told Escala's Audit Committee about the 

Brookman Agreement. Escala did not disclose the agreement publicly or mention it in 

any of its quarterly or annual reports that it filed with the SEC. To the contrary, Escala 

remained silent on the matter and Afinsa sought to portray the Brookman Catalogue as an 

independent entity. In October 2003, an Afinsa representative thanked Manning for 

negotiating the Brookman deal and reminded him that "our name must not appear" in any 

Brookman Catalogue. 

24. In fact, once the parties executed the Brookman Agreement, Barrett & 

Worthen became an affiliate and a related party ofEscala's because both Escala and 

Barrett & Worthen and the Brookman Catalogue were then under common control of 

11
 



Afinsa. (Escala was under Afinsa's control by virtue of Afmsa's majority share 

ownership, and Barrett & Worthen and the Brookman Catalogue were also under 

Afmsa's control by virtue of the Brookman Agreement.) Generally Accepted Accounting 

. Principals ("GAAP") Statement ofFinancial Accounting Standards No. 57, Related Party 

Disclosures (FAS 57), defines control as the possession, direct or indirect, of the power to 

direct or cause the direction of the management and policies ofan enterprise through 

ownership, by contract, or otherwise;" (Appendix B, definitions, at FAS 57-6). FAS 57 

then provides that: 

If the reporting enterprise and one or more other enterprises are under 
common ownership or management control and the existence of that 
control could result in operating results or fmancial position of the 
reporting enterprise significantly different from those that would have 
been obtained ifthe enterprises were autonomous, the nature of the control 
relationship shall be disclosed even though there are no transactions 
between the enterprises. 

~ 4 at FAS 57-3. FAS 57 further provides that: 

Financial statements shall include disclosures of material related party 
transactions .... The disclosures shall include: a. The nature of the 
relationship(s) involved; b. A description ofthe transactions, including 
transactions to which no amounts or nominal amounts were ascribed ... 
and such other information deemed necessary to an understanding of the 
effects of the transactions on the financial statements; c. The dollar 
amounts of transactions for each of the periods ... ; d. Amounts due from 
or to related parties .... 

~ 2 at FAS 57-2 and FAS 57-3. 

25. To comply with FAS 57, Escala was required to disclose the related"-party 

status ofBarrett & Worthen and the Brookman Catalogue. Escala failed to disclose this 

material information with respect to the Brookman Agreement and also failed to disclose: 

12
 



a. The nature of the relationship(s) involved; b. A description ofthe transactions, 

including transactions to which no amounts or nominal amounts were ascribed ... and 

such other information deemed necessary to an understanding of the effects of the 

transactions on the financial statements; c. The dollar amounts of transactions for each of 

the periods ... ; d. Amounts due from or to related parties....with respect to the Brookman 

Catalogue. Instead, Manning and Crawford knowingly or recklessly failed to disclose the 

existence of the Brookman Agreement, and hence the existence of the related party to the 

Audit Committee, the auditors, and the public. 1 By failing to disclose this information, 

Escala, Manning and Crawford knowingly or recklessly did not comply with the 

requirements of FAS 57 and thereby violated GAAP. The failure to disclose the 

·existence of the Brookman Agreement and that Barrett & Worthen was a Related Party 

was a material omission. 

E. The United Nations Archive 

26. The United Nations philatelic archive ("UN Archive") consisted of 

artwork, imperforates, die proofs, and progressives pertaining to stamp issues and ". 

philatelic materials produced by the United Nations Postal Administration from 1951 to 

2000, and presented an opportunity for Manning and Afinsa to use the Brookman 

Catalogue to implement their scheme. A business acquaintance ofManning's purchased 

most of the UN Archive at a public auction on May 12, 2003 for $3.1 million. A few 

weeks later, on June 1,2003, Manning purchased the UN Archive from the acquaintance 

1 In July 2004, Escala's in-house counsel told Escala's Audit Committee about the 
existence of the Brookman Agreement. 

13
 



for $4.8 million. On June 2, 2003, Manning sold most of the Archive that he had 

purchased to Afmsa for $6.4 million, payable in three equal installments. 

27. Manning coveted the Archive to sell to Afinsa. During the business 

combination negotiations, Manning told Afinsa about the May 12,2003 public auction of 

what Manning described as "the entire philatelic archive ofthe United Nations." 

Manning emphasized: "Please note that this is all of the archive... we will be the only 

market maker in the world, as we will have the only supply" [emphasis in original]. 

Unbeknownst to Afinsa at the time it purchased the Archive from Manning, and contrary 

to Manning's assurances, Afinsa did not purchase the entire UN Archive collection from 

Manning. In fact, Manning held a portion back from Afinsa. 

1.	 The Impact of the UN Archive Transaction on Escala's 
Earnings 

28. .In May 2003, Manning calculated and apportioned a part of the proceeds 

from the sale ofthe UN Archive to occur during Escala's and CdC's 2003 fourth quarter 

sales. On June 2, 2003, Escala issued an invoice to Afinsa for the sale ofthe UN Archive 

for a total of $6.4 million -- 8 percent of a Brookman Catalogue value of $80 million. 

The transaction was booked in Escala's 2003 fourth quarter. 

2.	 The Rapidly Rising Catalogue Values of the UN Archive 

29. Even before Escala purchased the UN Archive, Manning told Afinsa ofhis 

plans to list the UN Archive in the Brookman Catalogue at prices that were many times 

higher than the actual purchase prices. Once the UN Archive was obtained, Manning 

kept increasing the catalogue values. In a single day, the catalogue value changed more 

14
 



than once with no indication of a cause or basis. On June 2, 2003, Manning faxed an 

Afinsa representative a letter saying that "[t]he total catalogue value may approach $150 

Million or possibly more." By June 4, Manning faxed the Afinsa representative another 

letter stating that: "The final catalogue inventory, I believe will be about $180 Million as 

previously stated." 

30. Afinsa was appreciative of the rapidly rising UN catalogue values because 

it had found more forged stamps in its vaults than Manning had pr~viously detected. 

Afinsa therefore urged Manning to "defend this valuation and, if possible, go for even 

more." By J~ly 16,2003 the total catalogue value ofthe UN Archive material delivered 

to Afinsa exceeded $215 million. 

3. UN Archive Prices in the Brookman Catalogue 

31. The UN Archive was published in the Brookman Catalogue at values 

established by Manning and edited by Afinsa. Crawford knew that Manning established 

the initial values of the archive. The UN stamps were published in the Brookman 

Catalogue to give them legitimacy, and because the Afinsa investment program would 

only sell stamps that were listed in the major catalogues. Therefore, with the purchase of 

the UN Archive and the signing of the Brookman Agreement, Afinsa got what it most 

wanted-·the ability to secretly set the prices of stamps used in its investment program in 

a philatelic-industry catalogue. 

32. The UN Archive Brookman Catalogue values established by Manning 

formed the basis for future Escala UN stamp sales to Afinsa. Escala sold UN 

progressives and imperforate proofs to Afinsa at 15 percent percent of the UN Archive 

15
 



catalogue values established in Brookman. Thus, Manning and Afmsa effectively set the 

price at which that additional UN material was sold by Escala to Afinsa. Afinsa 

determined the percentage that was used in pricing, and Manning with editorial input 

from Afinsa determined the actual catalogue values. The editors of Brookman had 

nothing to· do with the prices of the UN material published in the catalogue. They 

obtained that information from Manning and Afinsa. 

F. Escala's 2003 Annual Report 

33. On September 12,2003, Escala filed its SEC Form 10-K Annual Report 

for the 2003 fiscal year with the SEC. The report included the revenues associated with 

the UN Archive transaction. The UN Archive sale netted Escala $1.6 million in its 2003 

fourth quarter. The UN Archive accounted for approximately 6 percent, approximately 

11 percent and approximately 53 percent of total company revenue, gross profit and pre­

tax net income, respectively. The report did not mention the existence of the Brookman 

Agreement, Manning's role in negotiating it, or Escala's role in drafting it. The report 

also did not disclose Manning's role in setting the catalogue values for the UN Archive. 

G. The "Carlos Deal,,2 - The First Attempt 

34. At thetime of the Escala/Afinsa business transaction during which CdC 

became a subsidiary ofEscala, Escala obtained a stamp inventory that was held at CdC. 

2 The parties to this transaction referred to it as the "Carlos Deal," named after Carlos de 
Figueiredo, a board member and administrator of Afinsa, whose father, Alberto de 
Figueiredo, was a founder and part owner (50 percent) ofAfinsa. As ofNovember 2005, 
Carlos de Figueiredo also held the position of Second Vice Chairman at Escala. 

16 



Escala represented in at least three public filings that it would not resell the CdC 

inventory back to Afinsa. 

35. In its SEC Form 14A Definitive Proxy Statement (filed with the SEC on 

August 13,2003), its SEC Form lO-K Annual Report (filed with the SEC on September 

12,2003), and its SEC Form 424B3 Prospectus (filed with the SEC on November 3, 

2003), Escala explained: "It is intended that CdC will use the inventory owned by it 

immediately following the consummation of the inventory purchase agreement to sell at 

various auctions run by other subsidiaries of [Escala]. Other than immaterial sales, such 

inventory will not be resold to [Afinsa] or its affiliates." These statements were 

materially false and misleading. Prior to making these statements and during the time 

period from August 13,2003 to November 3,2003, Manning was engaged in active 

discussions with Afinsa representatives to have Escala sell the inventory back to Afinsa. 

36. On June 6, 2003, prior to the filing ofthe SEC Form 14A Definitive Proxy 

Statement (filed with the SEC on August 13,2003), Manning was conducting discussions 

of the sale back to Afinsa via e-mail with Emilio Ballester, Afinsa's Chief Accounting 

Officer. On September 11,2003, one day prior to the filing of the SEC Form lO-K 

Annual Report (filed with the SEC on September 12,2003), Manning was engaged in e­

mail discussions with Esteban Perez ofAfinsa setting forth the details of the transaction. 

That same day Perez scheduled a meeting between Afinsa, Manning and Crawford for 

September 23,2003, in which an agenda item was the "Carlos Operation." In additional 

e-mails dated September 29, October 2, October 3, and October 6, 2003, Manning and/or 

Crawford were engaged in additional conversations with Afinsa personnel about this very 

transaction. 

17
 



37. Once the Escala/Afinsa business combination transaction was completed, 

Afinsa sought to carry out the planned inventory round-trip or Carlos Deal through a 

series of transactions. These transactions were planned for Escala's 2004 first quarter 

and second quarter which closed on September 30, 2003 and December 31,2003, 

respectively. The Carlos Deal involved selling back to Afinsa certain pre-business 

combination inventory that CdC held. The Carlos Deal would have resulted in over $2 

million in profit for fiscal.year 2004. Manning anticipated the receipt of revenues from 

this sale by the end of the year. 

38. The parties did, in fact, consummate the transaction, however, some time 

between October 19 and 22,2003, the managing partner of Escala's external auditing 

firm questioned Crawford and Manning about the legitimacy of the Carlos Deal 

transaction. At the time, Manning indicated that Escala needed the transaction for the 

quarter because it had given certain revenue guidance and the transaction would impact 

that guidance. After much discussion, the auditor convinced Manning to reverse the 

transaction. 

H. The Carlos Deal- The Second Attempt 

39. The auditing firm's intervention, however, did not prevent the scheme 

from moving forward-it only presented a delay. On November 11,2003, Manning met 

with Afinsa in Spain. At the meeting Afinsa discussed a new Carlos II transaction that 

would provide revenues in the second quarter. Afinsa representatives and others in the 

meeting explained that the stamps must be sold to a third party, and that, Filasyl, a stamp 

company that served as a supplier to CdC, was open to taking part in the second Carlos 

18
 



Operation for a commission. Thereafter, at a February 24, 2004 meeting ofthe 

management committee of CdC, which Manning attended, a CdC official "announced 

that a buyer had been found for a portion of the 'original' inventory purchased from 

Afinsa and that this sale would probably happen in the first weeks of March." 

40. CdC entered into contracts with Filasyl, dated December 2003 and June 

20Q4, which documented the sale of the CdC inventory to Filasyl for an aggregate 

purchase price of $4.3 million. Within a short period of time, and prior to each "sale" 

from CdC to Filasyl, Filasyl invoiced Afinsa for the amount of each sale, plus, a profit, 

which Afinsa paid. In short, Escala circumvented its own internal controls and its 

auditors and resold the CdC inventory to Afinsa at a profit by simply inserting a paid 

middleman---eontrary to its promise in its public filings. The CdC official that executed 

the sales contract with Filasyl revealed that he discussed the structuring of the second 

Carlos transaction with Manning. 

41. Escala booked the Carlos DeallFilasyl round-trip transactions in the 

second and fourth quarters of fiscal year 2004, recording revenue of$4.3 million and cost 

of goods sold of $1.9 million, for a net of $2.4 million. In the second quarter, these 

amounts constituted approximately 6 percent oftotal revenue, approximately 15 percent 

ofgross profit, and approximately 31 percent of pre-tax net income. In the fourth quarter, 

these ,amounts constituted approximately 2 percent of total revenue, approximately 1 

percent of gross profit, and approximately 2 percent of pre-tax net income. For Escala's 

fiscal year 2004 annual report, the Filasyl transactions constituted approximately 2 

percent of revenue, approximately 4 percent of gross profit, and approximately 7 percent 

ofpre-tax net income. 

19
 



I. Washington Collection 

42. The Washington Collection was a collection of items purported to have 

belonged to George Washington that Escala had purchased in 1996 for $1.2 million. The 

collection was appraised in 1997 at $2 million. Escala could not sell the collection for 

many years. By June 2003, after holding the collection for seven years, Escala wrote 

down the value of the collection to $96,000 pursuant to Company policy because the 

collection had not been sold. Manning and Crawford knew that this collection had not 

been sold, and Escala board members had been questioning why it was still on the 

company's books. 

43. In October 2003, a few weeks after the close of its fiscal year 2004 first 

quarter, Escala re-characterized $500,000 of a reimbursement from Afinsa for business 

combination-related expenses as a first quarter sale of inventory in that amount. This 

transaction lacked economic substance and was not a bona fide sale. The transaction was 

recharacterized from its original purpose after the quarter ended. The purchase price 

greatly exceeded Escala's carrying cost for the inventory, and the inventory was not 

completely delivered? The business combination related expenses remained unpaid.. 

3 StaffAccounting Bulletin ("SAB") 101 Revenue Recognition in Financial 
Statements (issued in December 1999) generally requires, among other things, that 
product be delivered to a customer or a customer-specified site before revenue may be 
recognized. (In its 2004 annual report, Escala stated that it accounted for revenue 
recognition in accordance with SAB 101.) Since all or part ofthe collection was not 
shipped to Afinsa (or its agent), Escala did not fully meet the criteria to recognize 
revenue for the Washington Collection. 

2044. On September 29,2003, just prior to the end of Escala's 2004 first quarter, 

Escala issued an invoice to Afinsa for $631,525 for "extraordinary expenses" that had 

already been incurred on behalf ofAfinsa for legal, accounting and due diligence services 

related to the business combination negotiations. On October 3, 2003, Afinsa wired 

$631,525 to Escala to pay for the expenses. On October 10, after receipt of these funds, 

Crawford told Escala's controller to book the $631,000 as "consignor payable." 

45. A few weeks after the quarter closed, Manning told Crawford that he had 

sold the Washington Collection to Afinsa for $500,000. Instead of creating a new invoice 

for $500,000, on October 17,2003, Manning instructed Crawford to use a portion of the 

"extraordinary expenses" previously received to book the sale. In order to comply with 

Mannings instructions to book the sale, Crawford had to destroy a previously issued 

invoice and issue a new one. Crawford told Escala's bookkeeper that the invoice for 

$631,525 "should be destroyed and replaced with 2 invoices. That invoice was in error. 

Use the original invoice number for an invoice for $500,000 [T]ype on the invoice 

'Invoice for all components ofthe Washington Collection' date the [invoice] no later 

than September 30." Crawford instructed the bookkeeper to "date this invoice no later 

than September 30." Crawford continued: "Type the second invoice for $131,525 to 

Afinsa and put on it 'To bill you for shared costs of the Investor Relations expenses for 

the period October I-October 31, 2003. This includes shared expenses for the investment 

community function of October 24.2005.' You should date this invoice the same as the 

other one. These bills are not to be sent to Afinsa; the bills have already been paid." 

46. On Monday, October 20, the bookkeeper responded that "[t]he computer 

already assigned an invoice # and it cannot be used again ... the Auditors already have all 

21
 



copies of billings to Afinsa as of last Thursday for the quarter .... What do you want me 

to do?" To which Crawford responded that same day: "I wouldlike you to do exactly 

what I asked you to do except make two new invoice numbers." New invoices were 

created and backdated to September 30,2003. Escala's re-characterization of the sale of 

the Washington Collection violated the provisions ofGAAP. 

47. When the Washington Collection was delivered to Afinsa's agent in the 

United States, not all of the items were delivered. Manning had instructed Escala's 

warehouse manager not to deliver a chair that was a part of the collection. In addition, on 

separate occasions, Manning and Crawford instructed the warehouse manager to hide the 

chair from Escala's outside auditors because they did not want the auditors to know that 

the chair was on Escala's premises. 

48. Escala's SEC Form lO-Q Quarterly Report for the first quarter of fiscal 

year 2004 (filed with the SEC on November 13, 2003) included revenues from the 

purported sale of the Washington Collection that contributed $500,000 to first quarter 

revenue and $400,000 to pre-tax net income. In the first quarter, this revenue constituted 

approximately 1.4 percent of revenue, approximately 5.4 percent of gross profit, and 

approximately 14 percent of pre-tax net income. 

J. UN Archive Auction 

49. In November 2003, Manning held an auction of some additional materials 

from the UN Archive that Escala had set aside and not sent to Afinsa. The auction netted 

$1.25 million to Escala. 

22
 



50. Unbeknownst to Afinsa, Manning placed bids on Afinsa's behalf at this 

auction, purchasing for Afinsa more than $550,000 ofArchive material. All lots at the 

auction were sold at or above the start bids that Escala set. Crawford knew that Manning 

placed bids on Afinsa's behalf at the auction. 

51. When Afinsa received the material from the UN Archive Auction, it 

expressed surprise, telling CdC that it thought it had already purchased the entire UN 

Archive. A CdC official passed this concern on to Manning. In response, and in a 

memorandum copied to Crawford, Manning pointed out the benefits of the auction to 

Escala's financial performance: "The profit from this sale was significant in [Escala's] 

fourth quarter of Fiscal 2003, The profit on the U.N. auction positively impacted 

[Escala's] second quarter ofFiscal 2004. I thought that Afinsa realized that [Escala] had 

retained specialized and unique U.N. material for auction." 

52. Escala's SEC Form 10-Q Quarterly Report for the second fiscal 2004 

quarterly report (filed on February 5, 2004) included revenues from the UN Archive 

Auction of $1.25 million and cost of goods sold of $400,000, netting $850,000. The UN 

Archive Auction constituted approximately 2 percent of total revenue, approximately 6 

percent of gross profit, and approximately 13 percent ofpre-tax net income. 

K. American Banknote Specimens 

53. As early as July 16,2003, and prior to the close of the Escala/Afinsa 

business combination transaction, Manning proposed that Escala purchase and supply to 

Afinsa American Banknote Corporation ("ABN") specimens. The specimens consisted 

of Latin American revenue and specimen postage stamps. Manning also proposed "a 

23
 



'special' American Banknote catalogue with the Brookman editors, who only await our 

instructions to produce the catalogue." 

54. The ABN specimens Manning proposed purchasing came from big bulk 

lots that were unloaded following a Christie's Auction House auction in the early 1990s 

where they failed to sell. Two brothers bought these lots for between $420,000 and 

$450,000 after the Christie's auctioneers offered the unsold lots at prices below opening 

bids. The two brothers, Arthur and Jeff Morowitz, put together a price list and attempted 

to market the ABN specimens to investors, but met with little success. In 2003 or early 

2004, one brother turned over his part of the ABN material to Escala, so that Manning 

could review it as part of the negotiations leading to Escala's purchase of the specimens, 

and in so doing commented that he had tried selling it without success. 

55. On March 4,2004, Escala purchased one brother's share ofthe ABN 

material for $400,000. At Manning's direction, Escala then purchased the other brother's 

portion ofthe ABN material for approximately $100,000. Also at Manning's direction, 

Escala obtained another 15 - 20 cartons ofABN material from a stamp dealer in Canada 

for between $300,000 and $350,000. The Canadian dealer had also purchased his portion 

ofthe ABN bulk lots at the Christie's auction in 1990 and according to Escala's Chief 

Operating Officer "still had a big pile left [after] all those years later, big pile." All told, 

Escala paid about $850,000 for its inventory ofABN material. 

1. The Rapidly Rising Catalogue Values of the ABN Specimens 

56. Manning determined the values for the ABN specimens which were to 

appear in a proposed future edition of the Brookman catalogue that ultimately was never 

24
 



published. Escala prepared spreadsheets containing these values. In the months before 

Escala's first shipment ofABN Specimens to Afinsa in February 2004, Manning had 

estimated supplying approximately €60 million (as of February 1,2004 €60 million 

equaled approximately $74.8 million) catalogue value but had told Afinsa that a 

Brookman Catalogue draft could be finished in January with a catalogue value of 

approximately €30 to 40 million (as ofFebruary 1,2004 €30 to 40 million equaled 

approximately $37.4 to $49.8 million). Manning also told Afinsa that "[t]he new 

[Brookman] catalogue will absolutely follow our suggestions about prices." As with the 

UN Archive, the catalogue values continued to rise. 

57. With respect to Escala's first sale ofABN specimens to Afinsa, Manning 

used a catalogue that the two brothers had prepared as a starting point for setting the 

catalogue values. But Manning dramatically increased the prices of each item. Thus an 

item listed in the Morowitz catalogue for $6 was listed in Escala's spreadsheet for €130 

(as ofFebruary 1,2004 €130 equaled approximately $162). 

58. In December 2004, after selling AfinsaABN specimens worth a purported 

$266 million in catalogue value, Manning responded to an Audit Committee request and 

calculated the total catalogue value ofABN specimens that Escala had remaining in 

inventory. The amount was a staggering $512,348,355. All told, the total alleged 

catalogue value set by Manning for the ABN specimens held by Escala, and purchased 

for approximately $850,000, approached $778 million. 

25
 



2. Impact of the ABN Specimens on Escala's Earnings 

59. Pursuant to its agreement to provide ABN Specimen stamps to Afinsa, on 

February 17,2004, Escala invoiced Afinsa $6,230,707 for its first shipment of ABN 

Specimen stamps. The sale price was 12.5 percentof a catalogue value of $45,313,539 

that Manning had set. Between February 17,2004 and December 12,2005, Escala issued 

thirteen more invoices to Afinsa for ABN Specimen material. The sales netted Escala 

approximately $57 million in revenues. The purchase prices were calculated as a 

percentage of catalogue values totaling approximately $366 million. Over time, the 

percentage of catalogue value that Afinsa was charged for these sales increased from 12.5 

percent to 15 percent; at the same time Manning continually increased the catalogue 

values for the materials. 

60. The sales ofABN Specimens allowed Escala to meet periodic earnings 

forecasts. Towards the last month of each quarter, Manning directed Escala's stamp 

expert to put together $10-$15 million worth ofABN specimens each quarter without 

regard to the type of stamp. These ABN sales allowed Escala to meet its forecast for that 

year. For its 2004 fiscal year, Escala exceeded the high end of its revenue forecast range 

by approximately $2 million based on ABN Specimen sales to Afinsa of $17,732,032. 

Without those ABN sales, Escala would have missed the low end of its revenue forecast. 

range by approximately $10 million. Likewise, revenues from ABN sales allowed Escala 

to meet its revenue forecast for its fiscal year 2005 first quarter. 

61. For fiscal year 2004, the ABN collection was 8 percent, 28 percent and 53 

percent of Escala's total company revenue, gross profit and pre-tax net income, 

26
 



respectively. In fiscal year 2005, the ABN collection was approximately 14 percent, 35 

percent and 58 percent of Escala's total company revenue, gross profit and pre-tax net 

income, respectively. For the first six months of fiscal year 2006, the ABN collection 

was approximately 3 percent, 7 percent and 12 percent ofEscala's total company 

revenue, gross profit and pre-tax net income, respectively. 

L. UN Imperforates & Progressive Proofs 

62. Escala subsequently sold Afinsa additional UN material similar to that 

from the UN Archives. These were "imperforates and progressive proofs"-stamps in 

the process of production or design but not entered into circulation. In April 2004, Escala 

obtained this material for $2.8 million, a price negotiated by Manning. Between 

December 2004 and July 2005, Escala booked revenues of approximately $11.8 million 

on sales of this same material to Afinsa. Escala's sale prices to Afinsa were calculated as 

15 percent ofa total catalogue value ofapproximately $70 million for the imperforates 

and progressive proofs. Manning derived the catalogue value for these sales from the UN 

catalogue values that he and Afinsa set in the Brookman Catalogue. 

63. For fiscal 2005, the UN imperforates and progressive proofs to Afinsa 

accounted for approximately 4 percent, 11 percent and 19 percent ofEscala's total 

company revenue, gross profit and pre-tax net income, respectively. The transactions 

were booked in the second and third quarters ofFY 2005. For Escala's 2005 third 

quarter, these sales constituted 74 percent ofEscala's total pre-tax net income. 

27
 



M. In-House Counsel Informs the Audit Committee of the Existence of 
the Brookman Agreement 

64. In July 2004, Escala's in-house counsel told Escala's Audit Committee 

about the existence of the Brookman Agreement. Prior to this time, neither Manning nor 

Crawford had told the Audit Committee about the Brookman Agreement. On July 15, 

2004, the Audit Committee met to discuss the agreement. This was the first time 

Escala's Audit Committee and Escala's auditor learned that the agreement existed. 

65. Significantly, neither the Audit Committee nor the auditors knew at this 

time that Manning set the catalogue values. To the contrary, Manning had represented to 

the auditors that he was not involved in setting catalogue prices. Others understood that 

he gave some direction on the value of stamps, or that from time to time he was consulted 

on specific stamps, but not that he was setting the catalogue values for the entire 

collection. 

66. Concerned that the Brookman Catalogue was not independent and about 

the values in the catalogue for the collections sold to Afinsa, the Audit Committee 

required Manning to obtain appraisals ofthe pricing in the Brookman Catalogue and any 

other catalogues that were not independent ofEscala. The Audit Committee also decided 

to update the Management's Discussion and Analysis (MD&A) section of its quarterly 

reports to state that the prices for the materials it sold to its parent Afmsa were generally 

determined with reference to the prices in catalogues used throughout the industry and 

that in certain cases the company obtained independent appraisals of catalogue prices. 

Notably, when aware of the Brookman Agreement, neither Escala, Manning or Crawford 

disclosed this information. 

28
 



N. Escala's Fiscal 2005 Quarterly and Annual Reports 

67. Escala filed SEC Form lO-Q Quarterly Reports on November 8, 2004, 

February 9, 2005, and May 13,2005, and an SEC Form lO-K Annual Report on 

September 16, 2005 with the SEC. These reports included revenues from the ABN 

Specimen sales and the UN imperforate sales as described above. Escala's updated 

MD&A disclosure, contained in its quarterly reports, first appeared in the quarterly report 

for the fiscal 2005 second quarter. The revised MD&A discussion read as follows: 

Sales of philatelic material to Afinsa under the contracts are made via the 
fulfillment ofpurchase orders from Afinsa. The Company generally 
purchases, inspects, and processes the philatelic materials in a format 
specified by Afinsa.Currently, the prices for material sold by the Company 
to Afinsa under the contracts are based on Afinsa's "bid" prices, which are 
generally determined with reference to prices for such material contained in 
catalogues that are used throughout the industry. In certain cases the 
Company obtains independent appraisals of such catalogue prices. Although 
the actual percentage of catalogue value varies based on the type of material 
involved and related supply and demand factors, the Company believes that 
in any given case, the percentage is substantially equivalent to what would 
be charged by a clearly independent party. 

68. This MD&A discussion was false and materially misleading. The 

Brookman Catalogue was not independent and the prices in that catalogue were 

manipulated by Escala's management, i.e., Manning. There was no published catalogue 

used throughoutthe industry for the ABN specimens. Instead ofAfinsa proposing "bid" 

prices, Manning typically set the catalogue prices that Afinsa paid a percentage of. In 

addition, Manning undermined the appraisal process causing them not to be independent. 

69. Manning and Crawford knew that this MD&A discussion was false and 

materially misleading, but they approved this language anyway, and they signed quarterly 

reports that contained this language. 

29 



70. The MD&A disclosure falsely indicated that the prices Escala charged 

Afinsa were equivalent to those charged in arms-length transactions because the 

disclosure stated that those prices were determined with reference to industry catalogues 

and/or appraisals. Moreover, Afinsa's control over the Brookman Catalogue should have 

been disclosed because that control relationship materially affected Escala's operating 

results as it allowed Manning to set prices that would allow Escala to meet its forecasts. 

Finally, under FAS 57, Escala should have disclosed the revenues that it received by 

virtue of the catalogue prices in the Brookman Catalogue. 

o. Manning Undermined the Appraisal Process 

71. The appraisal process was undermined from the outset in two ways. The 

appraisers did not know that Manning had placed bids for Afinsa at the UN Archive 

Auction. Instead, Manning referred them to the prices obtained for UN material at that 

auction as a possible benchmark. In addition, the appraisers did not know that Afinsa 

controlled the Brookman Catalogue and that Manning set the Brookman Catalogue 

pnces. 

72. While the auditors did not know these two important facts, both Manning 

and Crawford did know them. As a result, Manning and Crawford cannot rely on the 

opinions that the appraisers provided to justify the catalogue prices. 

1. The August 2004 Appraisals 

73. In August 2004, Manning obtained letters from three appraisers. Each 

wrote that he had reviewed the Brookman Catalogue pricing for the UN Archives -- two 

wrote that they had also reviewed the American Banknote specimens -- and concluded 

30
 



that the pricing was fair or reasonable. As for the pricing of the UN Archives, each based 

his assessment on, among other things, the realization from Manning's auction of a 

portion ofthe UN Archive material. None of the appraisers looked at any of the Archive 

or specimen material. Instead, they reviewed price lists provided by Manning or specific 

pages from the catalogue, and relied on Manning's representations concerning the 

condition ofthe materials. Because they did not examine any of the material, all of the 

appraisers considered their letters to be "opinions" and not the more rigorous appraisals. 

In fact, Manning specifically asked two of the appraisers for an "opinion" and not an 

appraisal. 

74. One of the appraisers did not even draft the letter that he signed. Instead, 

Manning furnished the letter, which the appraiser signed and handed back to Manning. 

Finally, none of the appraisers were paid for their opinion letters, either because they 

spent just a few hours working on the project and did not deem it necessary to charge for 

it, or because they considered it a favor to a friend. 

2. The March 2005 Appraisals 

75. In March 2005, Manning obtained letters signed by two appraisers. One 

letter stated that the appraiser had performed "a complete review of the catalogue listings 

contained in the new Brookman Catalogue of specimen stamps" and that he agreed "with 

the pricing policy set forth in the specimen stamp catalogue." The appraiser also stated 

that he had reviewed the UN Archives and that the prices in the Brookman 2004 listings 

were· similar to the prices realized at Manning's auction of the UN Archives, and that in 

his opinion, "the editors ofBrookman ha[d] correctly evaluated the United Nations 

31
 



archive in their pricing." The other appraiser's letter stated that he had reviewed the 

catalogue pricing for the American Banknote specimens "that the Brookman Company is 

producing" and that "he had found the catalogue values to be reasonable." As for the 

pricing of the UN Archive, the letter stated that Manning's auction of the UN Archive 

material "validated" the Brookman Catalogue UN Archive pricing. 

76. Neither appraiser authored the letters. Both traveled to New York and 

spent one day in Manning's offices. One appraiser later typed up Manning's handwritten 

notes, signed the typewritten letter, and returned it to Manning. According to the other 

appraiser, the entire substance ofthe letter that he signed was written by Manning. In 

addition, neither could verify the accuracy of certain statements in their letters. 

P. Escala's Fiscal 2006 Quarterly Reports 

77. Escala filed three SEC Form 10-Q Quarterly Reports in fiscal year 2006 

on November 8, 2005, February 9, and May 10,2006 with the SEC. These quarterly 

reports included revenues from the ABN Specimen sales. The first two of these quarterly 

reports included the same materially false and misleading MD&A disclosure discussed 

above. Escala has not filed a periodic report with the Commission since its March 31, 

2006 SEC Form 10-Q. 

Q. The Audit Committee Discovers that Manning Set the Prices in the 
Brookman Catalogue 

78. Sometime after May 2006, as a result of an internal investigation, the 

Audit Committee first learned that Manning had set the prices in the Brookman 

Catalogue. Manning, himself, did not admit to setting the prices until November 30, 

32
 



2006, when he wrote a memorandum to Escala's board of directors, in-house counsel, 

and outside auditor in which he stated "I established the Brookman Catalogue prices for 

the U.N. Archives and the proposed Brookman ABN catalogue prices." 

R. Escala Meets Earnings Forecasts 

79. Between September 2003 and September 2004, Escala provided guidance 

on its quarterly and annual net income and revenue expectations. Escala also issued a 

series of successive forecasts for its 2004 fiscal year-end results. Escala met all of its net 

income forecasts, and met all but two of its revenue forecasts. During this time period, 

Escala met five of its net income forecasts due to income derived from the Archive or 

Washington Collection transactions with Afinsa. For example, Escala estimated net 

income of between $4.8 and $5.2 million for its 2004 third quarter. Archive sales to 

Afinsa brought in $5.8 million in pre-tax profits to that quarter. Escala's share price 

increased 18 percent on the news that it exceeded its forecast that quarter. Likewise, 

Escala met two of its revenue forecasts due to revenue derived from the Archive or 

Washington Collection transactions with Afinsa. For fiscal year 2004, Escala made five 

successive revenue forecasts, increasing the forecast over time from $135 million to a 

range between $205 and $210 million. Escala's actual revenue that year was 

$212,890,000; its Archive and Washington Collection transactions with Afinsa 

contributed over $18 million of that amount. Escala's share price increased 5.3 percent 

after it met that forecast. 

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S. Manning's and Crawford's Ill-Gotten Gains 

80. From 2003 through 2005, Manning and Crawford earned performance-

based bonuses and stock options. To the extent that each received compensation that 

derived from Escala's meeting forecasts or from increases in Escala's share price due to 

its financial performance at times that each knew of the false and misleading disclosures 

and other misconduct described in this Complaint, this compensation constitutes unjust 

enrichment. 

T. Manning's and Crawford's Scienter 

81. Manning signed, as CEO, six successive SEC Form lO-Q Quarterly 

Reports (filed with the SEC on: November 13,2003, February 5, 2004, May 6, 2004, 

November 8, 2004, February 9, 2005 and May 13, 2005), and three successive SEC Form 

10-K Annual Reports (filed with the SEC on: September 12,2003, September 9,2004 

and September 13, 2005 as amended September 16, 2005) which failed to disclose the 

Brookman Agreement and two SEC Form 10-Q Quarterly Reports (filed with the SEC 

on: February 9, 2005 and May 13,2005) that contained the false and misleading 

disclosures about how Escala priced the archive collections that it sold to Afinsa. At the 

time, Manning knew that the failure to disclose the existence of the Brookman 

Agreement was material because, among other things, the related party status ofAfinsa 

was disclosed and the Audit Committee discussed and questioned the independence of 

Brookman several times. In addition, at the time Manning knew the disclosures 

regarding the pricing ofthe archive collection were false because he set the prices in the 

Brookman Catalogue and he subverted the appraisal process in order to provide opinions 

thatwould support the catalogue prices he selected. 

34 



82. Manning also intentionally or recklessly: manipulated values for the 

material he sold Afinsa in the UN Archive, UN imperforates, and ABN specimen 

transactions; sold back to Afinsa in a round-trip transaction its pre-business combination 

inventory held at CdC in direct contravention ofEscala's promise not to do so; falsely 

reported a payment of business combination-related expenses as the "sale" of the 

Washington Collection; secretly placed bids for Afinsa at the UN Archive auction; and 

provided the Audit Committee with opinions that he wrote, edited, or otherwise 

improperly influenced instead of independent appraisals. These transactions had a 

material impact on Escala's financial statements. 

83. As CFO, Crawford signed eight successive SEC Form lO-Q Quarterly 

Reports (filed with the SEC on: November 13, 2003, February 5, 2004, May 6, 2004, 

November 8, 2004, February 9, 2005, May 13,2005, November 8, 2005 and February 9, 

2006), and two successive SEC Form 10-K Annual Reports (filed with the SEC on: 

September 9,2004 and September 13,2005 as amended September 16,2005) which 

failed to disclose the Brookman Agreement and four SEC Form 10-Q Quarterly Reports 

(filed with the SEC on: February 9, 2005, May 13,2005, November 8, 2005 and 

February 9, 2006) that contained the false and misleading disclosures about how Escala 

priced the archive collections that it sold to Afinsa. Crawford, a CPA, knew the 

requirements ofFAS 57 and that the failure to disclose the existence of the Brookman 

Agreement was material because, among other things, the related party status,of Afinsa 

was disclosed and the Audit Committee discussed and questioned the independence of 

Brookman several times. In addition, he knowingly or recklessly read and approved the 

misleading MD&A disclosures in each ofEscala's four quarterly reports from October 

35
 



2004 through December 2005 concerning how Escala priced the materials it sold to 

Afinsa. Crawford was one of the three members of Escala's disclosure committee, which 

was responsible for disclosure issues involved in Escala's filings. In particular, Crawford 

knew thatManning set the Brookman Catalogue prices, and that the Audit Committee did 

not know this important fact. Crawford also knew that the appraisers did not know about 

the existence of the Brookman Agreement and that Manning set the catalogue's prices as 

well as some of the bid prices at the UN Auction. Crawford knowingly or recklessly 

violated the antifraud provisions of the Exchange Act by booking the purported sale of 

the Washington Collection. As described above, this transaction was material. 

84. Escala's scienter is established by the scienter of its then-CEO (Manning) 

and it's then-CFO (Crawford) as described above. 

FIRST CLAIM 

Violations of Section lO(b) of the Exchange Act [15 U.S.c. § 78j(b)] 
and Rule 10b-5 [17 C.F.R. § 240.10b-5] 

85. Paragraphs 1 through 84 are realleged and incorporated by reference. 

86. Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 

C.F.R. § 240.10b-5] prohibit a person, in connection with the purchase or sale of a 

security, from: employing any device, scheme or artifice to defraud; making any untrue 

statement of a material fact or omitting to state a material fact necessary to make 

statements made, in light of the circumstances under which they were made, not 

misleading; and engaging in any act, practice or course of business which operates or 

would operate as a fraud or deceit on any person. 

36
 



87. By reason of the foregoing; Escala, Manning, and Crawford each violated 

Section 1O(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 

C.F.R. § 240.10b-5]. 

SECOND CLAIM 

Violations of Section 13(a) of the Exchange Act
 
[15 U.S.c. § 78m(a)] and Rules 12b-20, 13a-l and 13a-13
 

[17 C.F.R. §§ 240.12b-20, 13a-l, and 13a-13] and Aiding and Abetting those
 
violations
 

88. Paragraphs 1 through'87 are realleged and incorporated by reference. 

89. Escala filed with the SEC the annual reports on Form lO-K and quarterly 

reports on Form lO-Q described herein that contained untrue statements ofmaterial fact 

or omitted to state material facts required to be stated therein or necessary to make the 

statements made not misleading, concerning, among other things, Escala's gross profits, 

revenues, and/or net income. Manning and Crawford caused those untrue statements and 

knew that they were inCluded in the annual and quarterly reports. 

90. By reason of the foregoing, Escala violated Section 13(a) of the Exchange 

Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-l and 13a-13 thereunder [17 C.F.R §§ 

240.12b-20, 240.13a-l, and 240. 13a-13]. 

91. By reason of the foregoing, Manning and Crawford aided and abetted 

Escala's violations of Exchange Act Sections 13(a) and Rules 12b-20, 13a-l, 13a­

13. 

THIRD CLAIM
 

Violations of Section 13(b)(5) of the Exchange Act [15 U.S.c. § 78m(b)(5)]
 

92. Paragraphs 1 through 91 are realleged and incorporated by reference.
 

37
 



93. Exchange Act Section 13(b)(5) provides that no person shall knowingly 

falsify any book, record, or account required under Section 13(b)(2) or circumvent 

internal controls. 

94. Manning and Crawford each violated Section 13(b)(5) of the Exchange 

Act [15 U.S.C. §78m(b)(5)], when each failed to identify the related-party nature of the 

Brookman Agreement. Manning directed Crawford to book, and Crawford did book 

$500,000 of a reimbursement from Afinsa for business combination-related expenses as 

the sale of the Washington Collection. Manning approved the Filasyl transactions as 

sales to a third party when he knew or was reckless in not knowing that the transactions 

were, in substance, round-trip transactions. 

95. By reason ofthe foregoing, Manning and Crawford each violated Section 

13(b)(5) of the Exchange Act [15 U.S.C. §78m(b)(5)]. 

FOURTH CLAIM 

Violations of Section 13(b)(2)(A) and (B)
 
of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)&(B)]
 

96. Paragraphs 1 through 95 are realleged and incorporated by reference. 

97. Escala violated Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 

78m(b)(2)(A)] by maintaining false and misleading books and records that, among other 

things, mischaracterized the economic substance of the purported sale of the Washington 

Collection and the Filasyl transactions, and failed to identify the related-party nature of 

Barrett & Worthen. 

98. Escala violated Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § . 

78m(b)(2)(B)] by failing to devise and maintain a system of internal accounting controls 

38
 



sufficient to provide reasonable assurances that its transactions were recorded as 

necessary to permit preparation of financial statements in conformity with GAAP. 

99. By reason of the foregoing, Manning and Crawford aided and abetted 

Escala's violations of Section 13(b)(2)(A) and (B). 

FIFTH CLAIM
 

Violations of Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1]
 

100. Paragraphs 1 through 99 are realleged and incorporated by reference. 

101. Rule 13b2-1 of the Exchange Act makes it unlawful for any person to 

falsify, or cause to be falsified, any book, record or account subject to Section 

13(b)(2)(A). 

102. Manning and Crawford, directly or indirectly, falsified or caused to be 

falsified, Escala's books, records or accounts subject to Section 13(b)(2)(A) of the 

Exchange Act. Each failed to identify the related-party nature of the Brookman 

Agreement. Manning directed Crawford to book, and Crawford did book $500,000 of a 

reimbursement from Afinsa for business combination-related expenses as the sale of the 

Washington Collection. Manning approved the Filasyl transactions as sales to a third 

party when he knew or was reckless in not knowing that the transactions were, in 

substance, round-trip transactions. 

103. By reason of the foregoing, Manning and Crawford each violated 

Exchange Act Rule 13b2-1 [17 C.F.R. §240.13b2-1]. 

SIXTH CLAIM
 

Violations of Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2]
 

104. Paragraphs 1 through 103 are realleged and incorporated by reference. 

39
 



105. Manning and Crawford, as officers and directors ofEscala, directly or 

indirectly, made materially false or misleading statements, or omitted to state, or caused 

another person to omit to state material facts necessary in order to make statements made, 

in light of the circumstances under which they were made, not misleading to Escala's 

accountants in connection with their audits of Escala's financial statements for fiscal 

years 2004, 2005, and 2006. Manning and Crawford each instructed Escala's warehouse 

manager not to disclose to Escala's auditors that a portion of the Washington Collection 

remained in Escala's possession. 

106. By reason of the foregoing, Manning and Crawford each violated 

Exchange Act Rule 13b2-2 [17 C.F.R. §240.13b2-2]. 

SEVENTH CLAIM
 

Violation of Exchange Act Rule 13a-14 [17 C.F.R. § 240.13a-14]
 

107. Paragraphs 1 through 106 are realleged and incorporated by reference. 

108. Manning and Crawford knowingly certified quarterly and annual reports 

that included revenues from these transactions, and failed to disclose material information 

concerning Escala's transactions with Afinsa, and made misleading statements about how 

Escala set its prices. By reason of the foregoing, Manning and Crawford each violated 

Exchange Act Rule 13a-14 [17 C.F.R. §240.13a-14]. 

40PRAYER FOR RELIEF 

WHEREFORE, the SEC respectfully requests that this Court enter a Final 

Judgment: 

109. Permanently enjoining Escala, Manning, and Crawford from violating 

Section lO(b) of the Exchange Act [15 U.S.C. §§ 78j(b)] and Exchange Act Rule lOb-5 

[17 C.F.R. §§ 240.10b-5]; 

110. Permanently enjoining Escala from violating Sections 13(a), 13(b)(2)(A), 

and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 

78m(b)(2)(B),] and Exchange Act Rules 12b-20, 13a-l, and 13a-13 [17 C.F.R. §§ 

240.12b-20, 13a-l, and 13a-13]; 

111. Permanently enjoining Manning and Crawford from violating Section 

13(b)(5) of the Exchange Act [15 U.S.C. §§ 78m(b)(5)] and Exchange Act Rules 13b2-1 

and 13b2-2 [17 C.F.R. §§ 240.13b2-1 and 13b2-2]; 

112. Permanently enjoining Manning and Crawford from aiding and abetting 

the violation ofExchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 

78m(a), 78m(b)(2)(A), and 78m(b)(2)(B),] and Rules 12b-20, 13a-l, 13a-13 [17 C.F.R. 

§§ 240.12b-20, 13a-l, and 13a-13]; 

113. Permanently enjoining Manning and Crawford from violating Exchange 

Act Rule 13a-14 [17 C.F.R. § 240.13a-14]; 

114. Ordering Crawford and Manning to pay disgorgement ofany unjust 

enrichment from the conduct alleged herein; 

41
 



115. Ordering Crawford and Manning to pay civil monetary penalties pursuant 

to Section 21(d)(3) of the Exchange Act [15 U.S.C. §78u(d)(3)] in respect oftheir 

violations; 

116. Permanently and unconditionally baiTing Manning and Crawford from 

serving as an officer or director of a public company pursuant to Section 21 (d)(2) of the 

Exchange Act [15 U.S.C. § 78u(d)(2)]; 

117. Granting such other relief as this Court may deem just and appropriate. 

Dated: March 23 , 2009 

Respectfully submitted, 

/t1r~ aOMen 
Mark A. Adler (MA 8703) '" 
Jane M.E. Peterson (Trial Attorney) 
Cheryl J. Scarboro 
C. Joshua Felker 
Deborah A. Tarasevich 
Devon A. Brown 
Matthew Skidmore 

Attorneys for Plaintiff 
Securities and Exchange Commission 
100 F Street, N.E. 
Mail Stop 4010 
Washington, D.C. 20549-4010 
Tele: (202) 551- 4468 [Peterson] 
Fax: (202) 772-9245 [Peterson] 

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