Tissue Tigers? American Tissue Execs Charged with Fraud

Company allegedly treated expenses as assets; nice work if you can get it. Elsewhere: Waksal settles with SEC, ex-CFO at Hexagon does same, and Royal Ahold names an interim finance chief.

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It hasn’t been a great week for a number of finance executives.

Several former executives of American Tissue, including the company’s former chief executive officer and president, were charged in U.S. District Court with accounting fraud in connection with the company’s bankruptcy. A member of American Tissue’s independent audit team was also brought up on charges.

Brendon McDonald, a former Arthur Andersen auditor, was arrested on charges that in September 2001 he deleted E-mail messages, shredded documents, and helped American Tissue destroy records that might have supported accusations of accounting fraud.

“The paper trail of phony sales transactions, bogus supporting documentation and numerous accounting irregularities ended quite literally with the destruction of the falsified documents by American Tissue’s auditor,” Kevin P. Donovan, an assistant director of the FBI, reportedly said in a statement.

In addition, conspiracy and bank-fraud charges were brought against Mehdi Gabayzadeh, the company’s former chief executive, and Ali Amzad, its purchasing manager.

The Securities and Exchange Commission also filed a complaint against Gabayzadeh, former chief financial officer Edward Stein, and former vice president of finance John Lorenz.

If convicted of the criminal charges, Amzad faces 35 years in prison, while Gabayzadeh, who is also charged with securities fraud, could face 45 years, according to published accounts. McDonald faces as much as 10 years in jail.

Stein and Lorenz had previously pleaded guilty to various charges related to the case, according to published reports. Both men could face jail terms of five years.

As CFO.com reported in September 2001, Stein resigned as chief financial officer at American Tissue after it became apparent that the company’s consolidated financial statements contained ”material inaccuracies.”

According to the SEC’s complaint, in 2000 and 2001 (when American Tissue sold $165 million of securities to investors), Stein, Gabayzadeh, and Lorenz fraudulently inflated American Tissue’s revenues and earnings 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,” the SEC added.

As a result of the fraud, American Tissue reported a profit of $24.5 million for the fiscal year 2000. The SEC says the company actually suffered a loss of at least $3.6 million that year.

In addition, for the fiscal quarter ending June 30, 2001, the company allegedly overstated net income by at least $21.8 million, thus hiding a loss of at least $6.3 million.

American Tissue was formed by two Iranian immigrants: Gabayzadeh and Nourollah Elghanayan. Elghanayan, who is 86 years old, was not named in the indictments.

By 2001, American Tissue was the fourth-largest maker of tissues in the country.

But the company apparently had frequent cash-flow problems. According to accounts of the indictment, American Tissue and its executives, beginning in 1999, recorded bogus sales, diverted money to subsidiaries, and otherwise doctored the books in a futile effort to gain new financing.

SEC Settles with Former CFO

In another legal matter, the SEC yesterday settled administrative proceedings against Barbara L. Berry, the former CFO of Hexagon Consolidated Companies of America Inc. (HCCA). The settlement stemmed from alleged fraud violations.

Berry served as CFO at Hexagon from November 1996 until August 1997, and as an outside accounting consultant to HCCA until January 1998.

According to the commission, Berry signed HCCA’s 1996 annual report and participated in the preparation of other HCCA filings “when she knew, or was reckless not knowing, that they contained financial statements with asset values that were materially overstated.”

Without admitting or denying the commission’s findings, Berry agreed not to commit any violations in the future.

In yet another unrelated matter, final judgments were entered against three former executives of Acrodyne Communications Inc. for allegedly disseminating false financial information.

They include former CFO Ronald Lanchoney, former controller Shamir Ally, and former CEO and president A. Robert Mancuso.

The SEC imposed civil penalties of $50,000 against Mancuso, $10,000 against Lanchoney, and $10,000 against Ally.

The commission alleged that the three were aware of numerous and significant problems with Acrodyne’s accounting controls, but failed to assure that the company’s financial transactions were accurately recorded. Acrodyne makes transmission equipment for television broadcasters and cable companies.

As a result of the alleged actions of Mancuso, Lanchoney, and Ally, Acrodyne engaged in inaccurate and improper cost accounting and revenue recognition, the commission added.

The SEC also alleged that, starting in the second quarter of 1999 and continuing through the first quarter of 2000, Ally directed that unsupported journal entries be made to the cost of sales and inventory accounts to bring Acrodyne’s financial statements in line with the gross margin percentage he had estimated for the period.

The commission claimed that Mancuso approved these fraudulent adjustments for the first quarter of 2000.

The SEC also asserted that Mancuso recklessly provided false information to Acrodyne’s auditors relating to the company’s guarantee of a customer’s debt.

Waksal Settles Suit

The SEC also settled its insider-trading case with Samuel Waksal yesterday. Waksal is the former CEO of ImClone Systems Inc.

Without admitting or denying the allegations, Waksal agreed to pay $800,000 and to be barred from acting as an officer or director for public companies.

The drama at ImClone has drawn national attention. In its amended complaint, the commission alleges that in late September 2001, Waksal tried to sell shares of ImClone worth nearly $5 million. The SEC claims Waksal tried to unload his shares because he knew that the Food and Drug Administration was about to issue a decision denying a review of ImClone’s pending application to market its cancer-treatment drug, Erbitux. That news had not been made public.

In addition, Waksal allegedly directed his daughter, Aliza, to sell all of her ImClone stock before the FDA announcement. Moreover, the commission claims Waksal purchased 210 ImClone put-option contracts through a Swiss account. The SEC suit also alleges that Waksal tipped a family member, who sold his own ImClone stock as well as ImClone stock of another Waksal family member.

In a separate criminal proceeding, Waksal pleaded guilty to a number of charges, including criminal charges. Those charges stem from his attempt to sell ImClone stock in late December 2001, as well as sales of ImClone stock from the account of his daughter around the same time.

“The remainder of the commission’s case against Waksal—including charges that Waksal tipped a family member with inside information, and the commission’s request for civil penalties relating to all of the allegations in the amended complaint—will be stayed pending resolution of that criminal proceeding,” the SEC stated.

Ahold Names New CFO

Royal Ahold named Dudley Eustace as interim chief financial officer, effective immediately.

A British national, Eustace has a reputation for helping troubled companies.

He served as CFO and vice chairman at Royal Philips Electronics NV between 1992 and 1999.

“We are pleased that we have been able to attract a highly respected executive as interim CFO,” said Henny de Ruiter, chairman of the Ahold supervisory board. “Dudley Eustace has an outstanding track record and an excellent reputation in the financial markets.”

Eustace is currently nonexecutive chairman of Smith & Nephew plc, a London-based maker of medical devices. He will continue to fulfill his duties at Smith & Nephew while overseeing the financial restructuring at Ahold, the embattled Dutch supermarket giant.

Before serving at Royal Phillips, Eustace was director of finance at British Aerospace plc and treasurer of Alcan Aluminium Ltd.

“My priority is to stabilize the financial fundamentals of Ahold and to assist in the recruitment of a permanent full-time chief financial officer for the business, hopefully by the end of the year,” said Eustace in a statement.

Eustace replaces Michael Meurs, who resigned last month amid an accounting scandal at Royal Ahold’s subsidiary, US Foodservices. The Dutch retailing giant announced in late February that it would be lowering 2001 and 2002 earnings by $500 million as a result of the bookkeeping problems at that unit.

Short Takes

  • In another major but unrelated CFO hiring on Tuesday, International Paper said Chris Liddell, currently vice president, finance, has been promoted to senior vice president and chief financial officer. Liddell was chief executive officer of Carter Holt Harvey prior to joining International Paper and being named vice president of finance in 2002.
  • Verizon Virginia issued $1 billion in 10-year global notes, priced to yield 4.646 percent, or 108 basis points over comparable Treasuries. The telco’s paper was rated Aa3 by Moody’s and A-plus by Standard & Poor’s.
  • The California Public Employees’ Retirement System (Calpers) will vote next week on whether to ask the SEC to give shareholders more say in selecting corporate boards of directors, according to Dow Jones.
  • Nash Finch Co. said Tuesday that it received a favorable response from the SEC indicating that the agency will not object to the company’s accounting for certain vendor charges, based upon the food retailer and distributor’s oral and written representations.

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