Legal Elements of Fraud

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CJUS360-1104A-01: Legal Elements of Fraud
Instructor: Jeffrey Beck
Phase 2 DB 1: Legal Sources for Fraud
Nina A. Lugo
October 12, 2011

In Madrid Spain, Escala, a Connecticut based business with a global network of companies and parent company Afinsa Bienes Tangibles, a Spanish company involved in commercial and trading activities were caught in a fraudulent scheme which allowed them to increase their revenues to over eighty million in 2004 and 2005. These transactions allowed them to meet their earnings forecast for 2004 and first quarter in 2005. As a result of these transactions, Escala’s share prices rose from 1.47 per share to 32.00 per share, when merged with Afinsa. Both companies were able to get these results by committing fraudulent acts which included the manipulation of collectable stamp values and their appraisals. Escala and Afinsa failed to disclose their involvement with Barrett & Warren, a small publishing company in which they initially gained control of the stamp collection. Escala was guilty of selling Afinsa’s investors the stamps at arm’s length prices. Escala also was guilty of selling back inventory to Afinsa which is considered a round trip transaction. They were also guilty of falsely reporting a payment for business combination related expense as the sale of certain antiques. Escala violated the antifraud and reporting provisions of the federal securities law according the SEC complaints. The SEC charged Escala with accounting and disclosure fraud concerning related party transactions with its parent company. They were also charged with violations’ of the Exchange Act. Afinsa was charged with aiding and abetting Escala’s violations. Nine executives and owners of Afinsa were arrested by the anti-corruption prosecutor. It seems that this was one of the biggest ponzi schemes ever reported and it was going on…...

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