American Tissue, Inc., Medhi Gabayzadeh, Edward Stein and John Lorenz
Litigation Release No. 18022 / March 10, 2003
Accounting and Auditing EnforcementRelease No. 1735 / March 10, 2003 SEC Charges American Tissue and Three Former American Tissue Officers With Accounting Fraud Securities and Exchange Commission v. American Tissue, Inc., Medhi Gabayzadeh, Edward Stein and John Lorenz, Civil Action No. 03-1162 (Seybert & Orenstein, M. J.) (E.D. New York, filed March 10, 2003) The Securities and Exchange Commission ("SEC") today filed a civil action against American Tissue, Inc. and three of its former officers: former president and chief executive officer Medhi Gabayzadeh, former chief financial officer Edward Stein and former vice president of finance John Lorenz. The SEC's complaint, filed in the United States District Court for the Eastern District of New York, alleges that:
- In 2000 and 2001, a period during which American Tissue offered and sold $165 million of securities to investors, defendants Gabayzadeh, Stein and Lorenz fraudulently and materially inflated American Tissue's revenues and earnings in periodic reports filed with the Commission by improperly capitalizing expenses as assets, overvaluing the Company's inventories and creating millions of dollars in phony revenue and accounts receivable through bogus "bill and hold" sales. By fraudulently overstating its assets, American Tissue induced its lenders to continue to extend commercial credit when the Company was no longer creditworthy.
- As a consequence of the accounting scheme, American Tissue's annual report on Form 10-K for the fiscal year ending September 30, 2000 reported net income for that year of $24.5 million. In fact, American Tissue had suffered a loss for the period of at least $3.6 million. Similarly, the quarterly report filed by American Tissue for the third fiscal quarter of 2001, ending June 30, 2001, overstated the Company's reported net income of $15.5 million for the first nine months of fiscal 2001 by at least $21.8 million, thereby hiding a loss of at least $6.3 million.