U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 19417 / October 6, 2005

Accounting and Auditing Enforcement
Release No. 2332 / October 6, 2005

SECURITIES AND EXCHANGE COMMISSION v. FRED GOLD, JOHN D. PARSON AND BRENDON P. MCDONALD, Civil Action No. 05 CV 4713 (JS) (E.D.N.Y. 2005) (filed October 6, 2005)

SEC SUES THREE FORMER ARTHUR ANDERSEN AUDITORS FOR FRAUD IN CONNECTION WITH THE AUDIT OF AMERICAN TISSUE, INC.

The Securities and Exchange Commission today announced that it filed a civil action in federal district court against Fred Gold, a former partner at Arthur Andersen, LLP ("Andersen"), John D. Parson, a former Andersen audit manager, and Brendon P. McDonald, a former Andersen experienced senior accountant, for fraud in connection with Andersen's fiscal year 2000 audit of American Tissue, Inc., a manufacturer of tissue and paper products that filed for bankruptcy in 2001. The Commission previously filed a separate federal civil action against American Tissue and three of its principal officers for fraud. SEC v. American Tissue, Inc., et al., Civil Action No. 03-1162 (E.D.N.Y., filed March 10, 2003), Litigation Release No. 18022, Accounting and Auditing Enforcement Release No. 1735. That action has been stayed pending sentencing of the three officers in a related criminal proceeding.

Without admitting or denying the allegations in the complaint, Parson and McDonald have agreed to settlements with the Commission that impose injunctions, civil penalties, and suspensions from appearing or practicing before the Commission as accountants. Gold has not reached a settlement with the Commission.

SEC COMPLAINT

The Commission's complaint alleges:

During its fiscal year 2000, American Tissue fraudulently inflated reported assets and earnings by improperly capitalizing $15.6 million of previously expensed supplies and overvaluing its finished goods inventory by at least $12.5 million. Gold and Parson supervised, reviewed and approved Andersen's audit of American Tissue's fiscal year 2000 financial statements. McDonald supervised and participated in the audit. The defendants failed to request sufficient accounting documentation to verify the financial information provided by the company or to conduct required testing of American Tissue's finished goods inventory figures. Consequently, they knew or were reckless in not knowing that American Tissue's finished goods inventory was overstated. Nevertheless, they issued an unqualified audit report on the company's fiscal 2000 financial statements, failing to exercise the due professional care and skepticism required by generally accepted auditing standards. All three defendants also knew, or were reckless in not knowing, that supplies that American Tissue used in its manufacturing processes had been improperly classified as inventory instead of as expenses.

The Commission's complaint further alleges that, in July 2001, when the defendants learned their fiscal 2000 American Tissue audit had been selected for a peer review by another accounting firm, they intentionally altered audit work papers in an attempt to conceal the failures of their audit work. In September 2001, when the defendants learned that another accounting firm had discovered that the company had overvalued inventory and would have to restate financial results for fiscal 2000, they destroyed documents and e-mails in a further attempt to conceal their audit failures.

For all three defendants, the Commission's complaint seeks (1) permanent injunctions against violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and against aiding and abetting violations of Section 15(d) of that Act and Rules 12b-20 and 15d-1 thereunder and (2) civil money penalties.

SEC SETTLEMENT

• Parson consented to entry of a final judgment that imposes the injunction sought by the Commission and a civil money penalty of $50,000. Parson also consented, without admitting or denying the Commission's findings, to a suspension from appearing or practicing before the Commission as an accountant pursuant to Rule 102(e) of the Commission's Rules of Practice, in a related administrative proceeding to be instituted once the injunction against him is entered.
   
• McDonald consented to entry of a final judgment that imposes the injunction sought by the Commission and a civil money penalty of $30,000. McDonald also consented, without admitting or denying the Commission's findings, to a suspension from appearing or practicing before the Commission as an accountant pursuant to Rule 102(e) of the Commission's Rules of Practice with a right to apply for reinstatement after five years, in a related administrative proceeding to be instituted once the injunction against him is entered.
   

The Commission acknowledges the assistance of the Office of the United States Attorney for the Eastern District of New York in this matter.

http://www.sec.gov/litigation/litreleases/lr19417.htm