American Tissue, Inc., Medhi Gabayzadeh, Edward Stein and John Lorenz

Litigation Release No. 18022 / March 10, 2003

Accounting and Auditing Enforcement
Release 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.

The SEC charges American Tissue with violations of the anti-fraud, reporting, books and records and internal controls provisions of the federal securities laws: Sections 10(b), 13(b)(2)(A) and (B) and 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 15d-1, and 15d-13 thereunder. Gabayzadeh, Stein and Lorenz are charged with violating or aiding and abetting violations of Sections 10(b), 13(b)(2(A) and (B), 13(b)(5), and 15(d) of the Exchange Act and Rules 10b-5, 12b-20, 13b2-1, 13b2-2, 15d-1 (except Gabayzadeh) and 15d-13 thereunder. The SEC seeks as relief permanent injunctions against all defendants, and civil money penalties and officer and director bars against Gabayzadeh, Stein and Lorenz and disgorgement of ill-gotten gains with prejudgment interest against Gabayzadeh and Stein.

The SEC's investigation is continuing.

The Commission acknowledges the assistance to its investigation of the United States Attorney for the Eastern District of New York. In a separate action, the United States Attorney today unsealed criminal charges against five individuals in connection with the American Tissue matter, including Gabayzadeh, Stein and Lorenz.

SEC Complaint in this matter