Former American Tissue CEO sentenced in $300 million fraud

CENTRAL ISLIP, N.Y. – The former CEO of one of the nation’s largest makers of paper products was sentenced Monday to 15 years in prison after being convicted last year of engineering a $300 million fraud in a fruitless bid to save the failing company from bankruptcy.

In seeking a stiff sentence, prosecutors had compared Mehdi Gabayzadeh’s misdeeds to those of more well-known white-collar corporate criminals, including Adelphia Communications Corp. founder John Rigas and former WorldCom Corp. chief Bernard Ebbers.

At the sentencing, U.S. District Court Judge Joanna Seybert said, “The purpose of this sentence is to demonstrate that white-collar crime hurts just as much as blue-collar crime.”

Gabayzadeh was convicted in April 2005 of all charges in an eight-count indictment, including bank and securities fraud and conspiracy, after a nine-week trial at the federal courthouse in Central Islip on Long Island.

His sentencing had been delayed numerous times because Gabayzadeh suffers from several ailments, his attorneys said. They sought to have his sentence reduced because of his health. Those efforts continued Monday with defense attorneys saying that Gabayzadeh suffers from diabetes, high cholesterol and bipolar schizophrenia and that he has lost more than 60 pounds since his conviction.

But Seybert said to him, “I can’t predict how long you’re going to live any more than the court could predict how long Mr. Rigas would live, any more than anyone could have predicted how long Mr. Lay was going to live.”

Kenneth Lay, the disgraced founder of Enron, died in July, several weeks after being convicted of fraud.

Gabayzadeh was ordered to pay $65 million in restitution and sentenced to five years’ probation after his prison term.

Gabayzadeh, 61, of Great Neck, was accused of swindling banks, financial institutions and investors of nearly $300 million while he was chief executive officer of American Tissue Inc., once the nation’s fourth-largest maker of toilet tissue and other paper products. The company’s failure caused mills in Berlin and Gorham, N.H., to close in September 2001, with more than 850 workers laid off.

Another company reopened the mills in June 2002, but in May 2006, the Berlin mill was permanently closed after the operator cited rising costs of wood, energy and chemicals. The millworkers’ union and others said they wrote to the judge, hoping he understood how Gabayzadeh’s crimes affected individual workers and their families.

An idle American Tissue mill in Augusta, Maine, is now known as Augusta Tissue.

Gabayzadeh’s participation in a series of complex deals – including the creation of phony documents indicating the company had sold million-dollar pulp contracts that didn’t exist – ultimately led to American Tissue’s collapse.

“Like Gabayzadeh, Rigas lied to public investors about Adelphia’s financial and operational performance,” U.S. Attorney Roslynn Mauskopf wrote in a presentencing letter. “Like Gabayzadeh, Ebbers claimed at trial that the frauds at his company were perpetrated solely by his employees, including the company’s [chief financial officer], and that he was unaware of them.”

Defense attorney Raymond Perini portrayed Gabayzadeh as a hardworking Iranian immigrant duped by others, but Assistant U.S. Attorney John G. Martin said in his closing arguments it was “simply unreasonable to believe, to accept or even consider that the CEO … simply steps back and doesn’t get involved.”

The bogus deals were documented in part to help American Tissue keep open a revolving line of credit it enjoyed with LaSalle Bank of Chicago, prosecutors said.