It seemed like a safe credit. American Tissue Corp. was once the fourth largest tissue paper and pulp manufacturing company in the U.S., employing nearly 5,000 people. A group of banks had loaned the company $145 million and bondholders had purchased $165 million in bonds in 1999. In September 2001, the company filed for Chapter 11 bankruptcy. It eventually was liquidated. What happened?

American Tissue was an acquisitive company with a complicated corporate structure. It was difficult to ascertain exactly how the company's cash flowed and how its profits were generated. Suspicious of inconsistencies in the company's borrowing base, the banks turned to Brandlin & Associates to conduct a review.

We quickly discovered the following illicit activities at the company:

• Diversion of funds approximating $29 million.
• Bill-and-hold invoices of $21 million.
• $30 million over-valuation of finished goods inventory.
• $8 million in unprocessed credit memos.

The banks' suspicions were well-warranted. It turns out that American Tissue had a scheme whereby it was selling the banks' collateral to an affiliate which, in turn, was converting it to cash. The affiliate was using the cash to pay operating expenses rather than to pay down the bank loan as required. The banks quickly turned off the credit spigot and brought in a turnaround firm that eventually liquidated the company.

The story doesn't end there. The suspected fraud led to a criminal investigation by the Department of Justice, FBI, U.S. Postal Inspection Service, and Securities and Exchange Commission. We were brought back in to develop forensic evidence for the prosecution of these cases.

Luckily, justice has been served on Mehdi Gabayzadeh, the former president and CEO of American Tissue. He recently was sentenced to 15 years of imprisonment and ordered to forfeit $65 million on his conviction for conspiring to commit $300 million in bank and securities fraud, and related offenses, that led to the company's bankruptcy.

Brandlin & Associates is an exclusive provider of investigative accounting, financial consulting and strategic consulting services. We pride ourselves on offering superior technical expertise, years of practical experience and unparalleled service to decipher financial and operational performance metrics. As a result, our clients are able to make informed decisions in a timely manner.

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