SEC v. James T. Dooley; and James E. Lorenz, III, District of Oregon (Aug. 31, 2002) — Complaint

HELANE L. MORRISON (Admitted in California) 
ROBERT L. MITCHELL (Admitted in California) 
PATRICK T. MURPHY (Admitted in New York) 
ROBERT S. LEACH (Admitted in California) 
44 Montgomery Street, Suite 2600 
San Francisco, CA  94104 
Telephone:  415-705-2500 
Facsimile:  415-705-2501 
 
Attorneys for Plaintiff 
SECURITIES AND EXCHANGE COMMISSION 
 
 
 
UNITED STATES DISTRICT COURT 
DISTRICT OF OREGON 
 
 
 
SECURITIES AND EXCHANGE 
COMMISSION, 
 
                        Plaintiff,            
 
            vs.            
 
JAMES T. DOOLEY and JAMES E. 
LORENZ, III, 
 
                        Defendants.            
___________________________________ 
CV. _____________
COMPLAINT
DEMAND FOR JURY TRAIL
 
Plaintiff Securities and Exchange Commission (“Commission”) alleges:  
SUMMARY OF THE ACTION
1. This matter involves financial reporting fraud by former executives of 
Electro Scientific Industries, Inc. (“ESI” or “Company”), a high technology manufacturer 
based in Portland, Oregon.  The fraud, which ran from at least August 2002 through 
December 2002, was carried out by James T. Dooley (“Dooley”), who served first as 
ESI’s Chief Financial Officer and Acting Chief Operating Officer, and then as Chief 
Executive Officer, and James E. Lorenz, III (“Lorenz”), ESI’s then Corporate Controller.  
COMPLAINT 
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2. Faced with a shortfall in earnings for the quarter ended August 31, 2002, 
Lorenz searched for ways to reduce ESI’s expenses and, thus, increase the Company’s 
net income.  In what he later called a “sleazy” “hunt for credits,” Lorenz improperly 
eliminated more than $1.4 million in expenses from ESI’s financial records, which 
artificially boosted the Company’s earnings by the same amount. 
3. Despite this, following the last minute discovery of a significant 
accounting error, ESI found itself short of its quarterly earnings goal.  As a result, Dooley 
and Lorenz improperly reduced ESI’s expenses and increased its earnings by another $1 
million by purporting unilaterally to eliminate vested retirement and severance benefits 
for ESI’s employees in Asia.  ESI did not inform the employees of this action 
beforehand, and made no effort to obtain legal advice or comply with Asian law 
governing the elimination of such benefits.  The purported unilateral elimination of the 
Asian employees’ retirement and severance benefits allowed ESI to falsely announce that 
it had met its earnings target for the quarter. 
4. Defendants continued their fraud in the following quarter, ended 
November 30, 2002, as Dooley and Lorenz again used fraudulent accounting devices to 
improperly reduce ESI’s expenses and increase its income, this time by more than $1.9 
million. 
5. In furtherance of the fraud, Dooley falsely told ESI’s Board of Directors 
and independent auditors that he had legal approval for the elimination of the Asian 
retirement and severance benefits when he did not.  In addition, Dooley submitted false 
Sarbanes-Oxley Act certifications asserting that earnings reports ESI filed with the 
Commission for the relevant quarters were truthful.  Dooley and Lorenz also made 
numerous other misrepresentations or omissions to ESI’s independent auditors, 
circumvented ESI’s internal accounting controls, and falsified its books and records. 
6. The Commission seeks a court order barring Dooley and Lorenz from 
serving as officers or directors of any public company; ordering them to disgorge all 
COMPLAINT 
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benefits received as a result of their violations of the securities laws; imposing civil 
monetary penalties; and enjoining them from future securities laws violations. 
JURISDICTION
7. This Court has jurisdiction over this action pursuant to Sections 20(c) and 
22(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77t(c) and 77v(a)] 
and Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 (“Exchange 
Act”) [15 U.S.C. §§ 78u(d), 78u(e), and 78aa].  Defendants, directly or indirectly, have 
made use of the means and instrumentalities of interstate commerce or of the mails or of 
the facilities of a national securities exchange in connection with the acts, transactions, 
practices, and courses of business alleged in this Complaint.    
AUTHORITY TO BRING THIS ACTION
8. The Commission brings this action pursuant to Sections 20(b) and 20(c) of 
the Securities Act [15 U.S.C. §§ 77t(b) and 77t(c)] and Sections 21(d) and 21(e) of the 
Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)]. 
DEFENDANTS
9. Dooley, age 50, resides in Cape Coral, Florida.  He was ESI’s Chief 
Executive Officer (“CEO”) from December 16, 2002 until April 15, 2003.  Prior to that, 
Dooley was ESI’s Chief Financial Officer (“CFO”) from June 2000 to December 2002, 
and also its Senior Vice President and Acting Chief Operating Officer from April 2002 to 
December 2002.  On April 15, 2003, ESI’s Board of Directors placed Dooley on 
administrative leave.  ESI terminated Dooley’s employment on June 9, 2003.   
10. Lorenz, age 41, resides in Portland, Oregon.  He was ESI’s Corporate 
Controller from November 2001 until February 2003.  After that, he served as ESI’s 
Director of Materials until he was fired in March 2003.  
OTHER RELEVANT ENTITY
11. ESI is an Oregon corporation with its principal place of business in 
Portland.  The Company makes manufacturing equipment for electronics and other high 
COMPLAINT 
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technology companies.  ESI common stock is registered with the Commission pursuant to 
Section 12(g) of the Exchange Act [15 U.S.C. § 78l(g)] and trades on the Nasdaq 
National Market.  ESI’s fiscal year 2003 ran from June 2, 2002, to May 31, 2003, with 
the four quarters ending on August 31, November 30, March 1, and May 31, respectively. 
FACTUAL ALLEGATIONS 
 
I. Pressure to Achieve Earnings Goals Provided a Motive for Dooley and 
Lorenz to Commit Fraud
12. In the year prior to Defendants’ fraud, ESI’s financial results had declined 
sharply.  After posting record revenue of $471 million in fiscal 2001, ESI reported only 
$166 million in revenue in fiscal 2002, which ended June 1, 2002.  ESI reported losses in 
each quarter of fiscal 2002. 
13. In early August 2002, Dooley provided optimistic estimates of ESI’s 
earnings for the quarter to institutional investors, Wall Street analysts, and ESI’s Board of 
Directors.  The projections showed that, after four consecutive losing quarters, ESI 
expected to report earnings of $0.01 to $0.03 per share for ESI’s first quarter of fiscal 
2003, ending August 31, 2002. 
14. Dooley stood to advance at ESI based on the Company’s successful 
financial performance.  After the unanticipated retirement of its CEO, ESI operated under 
an Acting CEO from April 2002 to December 2002 while the Board of Directors 
searched for a full-time replacement.  Dooley, who was then CFO and Acting COO, was 
a candidate for the CEO position.  Lorenz also had the opportunity to become CFO in the 
event Dooley was promoted. 
II. 
Fraudulent Conduct by Dooley and Lorenz for the Quarter Ended August 
31, 2002
15. As ESI’s first quarter of fiscal 2003 (ended August 31, 2002) progressed, 
Dooley and Lorenz received internal revenue and expense forecasts showing that ESI 
would report a loss for the quarter, not the profit the Company had projected.  In 
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response, Lorenz searched for accounting entries that could be made to ESI’s books and 
records to improve ESI’s results simply by changing the Company’s past accounting 
policies.  Lorenz later described the effort as “sleazy”—a so-called “hunt for credits” to 
insure that ESI achieved its projected quarterly income.  This process ultimately resulted 
in ESI recording fraudulent entries in its accounting records that improperly reduced its 
operating expenses for the first quarter by more than $1.4 million, and increased its 
income for the quarter by the same amount.  As discussed in parts (a) and (b) below, 
these included entries relating to the value of ESI’s inventory and its allowance for 
doubtful accounts receivable. 
16. Despite these efforts, a further last-minute problem threatened to prevent 
ESI from reporting a first quarter profit.  On September 12, 2002, after the end of the first 
quarter but before ESI had announced its financial results to the public, Dooley and 
Lorenz learned that the discovery by ESI’s independent auditors of a significant 
accounting error would cause ESI to fall short of its projected quarterly income.  In a 
late-night meeting with ESI finance personnel, Dooley and Lorenz decided to reduce 
ESI’s expenses and increase its bottom line even further by unilaterally eliminating 
nearly $1 million in vested retirement and severance benefits for ESI employees in Asia, 
without prior notice to the employees and in violation of applicable Asian laws.  As 
discussed further in part (c) below, this fraudulent transaction enabled ESI to avoid a loss 
and report a profit in line with expectations. 
a. 
Improper Increase in the Value of ESI’s Inventory 
17. As part of its business, ESI has to account for the value of inventory that is 
defective.  At all relevant times, under ESI’s policy the Company valued defective parts 
inventory at zero until such time as the Company evaluated the parts, determined that 
they were repairable, and shipped them for repair.  Only after performing this analysis 
and shipping the parts for repair was it appropriate for ESI to increase the value of 
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inventory listed as defective.  As ESI’s Corporate Controller, Lorenz was aware of ESI’s 
valuation policy for defective parts inventory. 
18. On or about September 4, 2002, Lorenz directed ESI personnel to change 
the Company’s accounting records for the quarter ended August 31, 2002 to increase the 
value of ESI’s defective parts inventory by $1.3 million.  This change, which occurred 
after the end of ESI’s first fiscal quarter, had the effect of reducing ESI’s expenses for the 
first quarter by $1.3 million and increasing its quarterly net income by the same amount. 
19. There was no basis for Lorenz to increase the value of the defective parts 
inventory.  At the time, ESI had not determined that this inventory was repairable and 
had not shipped it for repair. 
20. Lorenz knew, or was reckless in not knowing, that the increase in 
inventory value violated ESI’s accounting policy.  In addition, Lorenz knew, or was 
reckless in not knowing, that the increase violated generally accepted accounting 
principles (“GAAP”) because it was not consistent with how ESI had previously valued 
such inventory, and because the change in methodology was not disclosed in ESI’s Form 
10-Q for the first quarter of fiscal 2003, which ESI filed with the Commission on or 
about October 15, 2002.  
b. 
Reversal of Allowances for Doubtful Accounts Receivable
21. When a customer owes ESI money, the Company establishes in its 
financial records an item called an account receivable.  Over time, if ESI determines that 
the customer will not be able to pay the amount owed, the receivable becomes 
“doubtful,” and ESI’s accounting policy requires it to establish an allowance, or offset, 
against the receivable.  When ESI establishes an allowance for a doubtful account 
receivable, it increases ESI’s expenses and decreases its income in the period in which 
the allowance is made. 
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22.  Pursuant to this policy, on August 27, 2002, ESI’s credit manager 
recorded allowances of $129,544 for doubtful accounts receivable from three customers.  
When the credit manager made this accounting entry, it increased ESI’s expenses and 
decreased its income for the first quarter of fiscal 2003. 
23. However, also on August 27, 2002, in contravention of ESI’s policy, 
Lorenz directed that the allowances that the credit manager had recorded be reversed in 
their entirety.  Lorenz directed the reversal in order to improve ESI’s quarterly 
performance, and without any basis for believing that the accounts receivable would be 
collected.
 
24. Lorenz knew, or was reckless in not knowing, that the reversal of the 
allowances for doubtful accounts violated ESI’s established accounting policy and GAAP 
because it was not based on any reasonable analysis of the collectibility of the accounts.  
c. Elimination of Asian Retirement and Severance Benefits
25. On or about September 12, 2002, ESI’s independent auditors notified 
Dooley and Lorenz of an error in ESI’s books, the correction of which resulted in an 
increase in ESI’s expenses of $2.4 million.  This increase in expenses prevented ESI from 
reaching its earnings target for the quarter (even with the improper accounting 
adjustments alleged above). 
26. Dooley and Lorenz immediately called a meeting of ESI Finance 
Department personnel, which lasted through the night of September 12 and into the early 
morning hours of September 13.  Dooley and Lorenz instructed Finance personnel to 
search ESI’s books for additional credits that could be used to offset the unexpected $2.4 
million in expenses. 
27. As part of this effort, later that night Dooley announced to Finance 
personnel that ESI would unilaterally eliminate all retirement and severance benefits for 
employees in its Asian offices (which included Japan, Taiwan, and Korea), and also 
COMPLAINT 
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eliminate an accrued liability that ESI had established in its accounting records to reflect 
the estimated costs of providing such benefits.  Eliminating the accrued liability had the 
effect of reducing ESI’s expenses and increasing its income for the first quarter by nearly 
$1 million.  Of this total, more than $800,000 related to ESI’s Japanese employees. 
28. On or about September 13, 2002, Dooley and Lorenz spoke with ESI’s 
independent auditors.  During this discussion Dooley falsely told the auditors that he had 
obtained legal approval for the elimination of benefits for ESI’s Asian employees.  In 
fact, at the time Dooley had not obtained any advice from legal counsel on this issue. 
29. Also during this discussion, Dooley told the auditors that ESI had reached 
the decision to eliminate the benefits prior to the end of the first quarter.  This was also 
false, because ESI did not move to eliminate the benefits until on or about September 12, 
2002. 
30.   On or about September 17, 2002, ESI’s Audit Committee (a subset of its 
Board of Directors) met to review ESI’s financial results for the quarter.  Certain ESI 
officers and employees, including Dooley and Lorenz, and ESI’s independent auditors 
attended the meeting.  ESI’s Audit Committee questioned management about the support 
for the decision to eliminate the retirement and severance benefits.  Again, Dooley falsely 
stated that the decision had been approved by legal counsel. 
31. Dooley (but not Lorenz) also attended a meeting of ESI’s Board of 
Directors the next day, September 18, 2002.  During this meeting, Dooley again falsely 
stated that he had verified the propriety of eliminating the Asian benefits accrual with the 
Company’s lawyers. 
32. On October 7, 2002, Dooley (along with ESI’s outside auditors and 
others) attended a meeting of ESI’s Disclosure Committee, which the Company had 
established pursuant to the Sarbanes-Oxley Act to ensure it complied with its financial 
reporting requirements.  During the meeting, another ESI employee initiated a discussion 
concerning whether ESI had the authority to unilaterally eliminate benefits for its 
COMPLAINT 
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Japanese employees.  Dooley interrupted the employee, and continued to assert that ESI 
had properly eliminated the benefits. 
33. Following this meeting, on October 7, the ESI employee gave Dooley a 
memo from ESI’s outside legal counsel in Japan.  The memo specified that ESI could not 
change the terms of the retirement benefits it provided for its Japanese workers without 
their consent unless the changes were “reasonable.”  The memo further indicated that 
simply eliminating a retirement benefits program was not reasonable.  Because ESI could 
not unilaterally eliminate the Japanese employees’ retirement benefits, the import of the 
memo was that ESI had not lawfully done so.  As a result, the Company’s reversal of the 
related accrual for those benefits in the first quarter violated GAAP.  Dooley did not 
disclose this legal advice to ESI’s Audit Committee, Board of Directors, or its 
independent auditors.  
34. Dooley signed a management representation letter to ESI’s auditors dated 
October 9, 2002, in connection with their review of ESI’s first quarter financial 
statements.  In the letter, Dooley falsely represented that information in the quarterly 
financial statements to be filed in ESI’s Form 10-Q was presented consistently with 
GAAP.  In addition, pursuant the auditors’ specific request, Dooley addressed the 
reversal of the accrual for Asian benefits, representing that “[m]anagement, with the 
appropriate authority, had resolved to terminate the supplemental retirement plan for its 
Japanese employees as of August 31, 2002.”  These statements were false because, 
among other reasons, the decision to terminate the Asian benefits occurred after August 
31, 2002, and Dooley concealed the legal advice, which unequivocally demonstrated that 
ESI lacked a legal basis to unilaterally eliminate the benefits and the associated accrued 
liabilities. 
COMPLAINT 
9

d. 
As a Result of Fraud by Dooley and Lorenz, ESI Issued False 
Financial Results for the First Quarter of Fiscal 2003
35. On or about October 15, 2002, ESI filed with the Commission a quarterly 
report on Form 10-Q for the first quarter ended August 31, 2002.  Lorenz reviewed the 
Form 10-Q prior to its filing, and Dooley signed it.  In the Form 10-Q, ESI reported net 
income of $158,000, and earnings per share of $0.01.  The Form 10-Q followed a press 
release issued by ESI on September 17, 2002 (the “September 17 press release”), which 
contained the same information concerning ESI’s net income and earnings per share for 
the first quarter.  ESI’s Form 10-Q for the quarter was also incorporated by reference in 
two previously filed registration statements on Form S-8, filed on February 6, 2001, and 
August 13, 2001, to register ESI’s offering of securities under an employee benefit plan.  
(So long as such S-8 statements are in effect, they incorporate any subsequently filed 
financial statements by the issuer.)         
36. The Form 10-Q included a certification signed by Dooley as required by 
Section 302 of the Sarbanes-Oxley Act, 18 U.S.C. § 7241.  Among other things, Dooley 
certified that the report did not contain any untrue statement or omission of material fact; 
the financial statements, and other financial information included in the report, fairly 
presented in all material respects ESI’s financial condition, results of operations, and cash 
flows; and he had disclosed to ESI’s independent auditors and ESI’s Audit Committee all 
significant deficiencies in the design or operation of ESI’s internal controls and any fraud 
that involved management or other employees who had a significant role in ESI’s internal 
controls. 
37.  The Form 10-Q, the September 17 press release, Dooley’s Sarbanes-
Oxley certification, and the Form S-8 filings were all false.  In fact, ESI had materially 
overstated its income for the first quarter of fiscal 2003 as a result, in part, of the illegal 
accounting adjustments described above that Dooley and Lorenz directed. 
COMPLAINT 
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38. On or about March 20, 2003, ESI announced that it would restate its 
financial results for the first quarter of fiscal 2003.  The restatement revealed that ESI had 
not achieved a $158,000 quarterly profit, but rather suffered a loss of $3.4 million.  As 
part of the restatement, ESI reversed in their entirety the improper accounting entries 
described above concerning ESI’s defective parts inventory, its allowances for doubtful 
accounts receivable, and expenses relating to vested retirement and severance benefits for 
ESI’s employees in Asia.  
III. 
Fraudulent Conduct by Dooley and Lorenz for the Quarter Ended November 
30, 2002
39. During the second quarter of fiscal 2003, ended November 30, 2002, 
Dooley and Lorenz continued their fraudulent scheme to reduce ESI’s expenses, and thus 
increase the Company’s earnings.  As described below, Defendants caused ESI to 
improperly eliminate more than $1.9 million in expenses for the quarter, and increase 
ESI’s earnings by the same amount, with fraudulent adjustments to ESI’s accounting for 
warranty expense and consignment inventory. 
40. In addition, Dooley and Lorenz caused ESI to continue to account 
improperly for its obligations to provide retirement and severance benefits for its 
employees in Asia.  By at least the end of the second quarter of fiscal 2003, Lorenz 
learned of the legal advice that Dooley had received indicating that ESI had improperly 
eliminated the liability for benefits in the first quarter.  Neither Dooley nor Lorenz 
disclosed this advice to ESI’s auditors, Audit Committee, or Board of Directors, and ESI 
did not include in its accounting records any liability for its obligation to provide such 
benefits. 
a. Improper Decrease in Warranty Expense   
41. As part of its business, ESI provided warranties to its customers to replace 
certain worn out or defective equipment.  In the second quarter of fiscal 2003, ESI 
COMPLAINT 
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incurred $2.6 million in expenses to provide new parts or equipment to fulfill its warranty 
obligations. 
42. On December 9, 2002, after the end of ESI’s second quarter but before the 
Company had announced its results to the public, Lorenz directed that accounting entries 
be made that slashed ESI’s recorded warranty expense by $1.3 million, or approximately 
50%. 
43. These entries violated GAAP because Lorenz had no reasonable basis to 
believe that such a substantial decrease in the amount of warranty expense was 
appropriate.  To the contrary, several ESI employees told Lorenz that there was no 
evidence that warranty expense was, in fact, lower than what had been recorded, and that 
reducing the expense absent such evidence was wrong. 
44. Dooley knew, or was reckless in not knowing, of Lorenz’s fraudulent 
reduction in ESI’s warranty expense.  Dooley was advised of the reduction during a 
review of ESI’s preliminary financial results, and knew that there was no support for it.  
b. 
Undisclosed Change in Valuation of Consignment Inventory   
45. In order to further boost ESI’s earnings, Lorenz directed that the Company 
change the way it accounted for consignment inventory—product that ESI had provided 
to a customer for a trial or demonstration period.  As a result of this change, which was 
not disclosed, Lorenz fraudulently reduced ESI’s expenses for the second quarter by 
approximately $650,000, and increased its earnings by the same amount. 
46. Since at least 1999, when ESI shipped product to a customer on 
consignment, it recognized an expense equal to the value of the inventory.  That is, it 
reduced the value of its inventory and increased its expenses.  By the second quarter of 
fiscal 2003, ESI had incurred approximately $650,000 in expenses through shipments of 
consignment inventory. 
COMPLAINT 
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47. During the second quarter, Lorenz caused ESI to change its accounting for 
consignment inventory.  Lorenz directed that approximately $650,000 in previously 
recognized consignment inventory expenses be reversed, and that ESI record an asset on 
its balance sheet for the same amount.  ESI would then recognize the related expenses 
only when the inventory was ultimately sold to the customer.  As a result of this change, 
during the second quarter ESI eliminated approximately $650,000 in previously 
recognized consignment inventory expense.  This had the effect of decreasing ESI’s 
expenses and increasing its earnings for the period. 
48. Lorenz knew or was reckless in not knowing that this change in 
accounting policy violated GAAP because it was not disclosed in ESI’s Form 10-Q for 
the second quarter, which ESI filed on or about January 13, 2003. 
c. 
As a Result of Fraud by Dooley and Lorenz, ESI Issued False 
Financial Results for the Second Quarter of Fiscal 2003  
49. In light of ESI’s positive results for its first quarter of fiscal 2003, Dooley 
was promoted to CEO on December 16, 2002.  On December 18, 2002, ESI issued a 
press release announcing its operating results for the three and six months ended 
November 30, 2002 (the “December 18 press release”).  The December 18 press release 
also repeated the false and misleading financial results reported for the first quarter of 
fiscal 2003.  In the release, ESI reported a net loss for the second quarter of $9.5 million, 
or a loss per share of $0.34.  ESI attributed much of the loss to special charges (i.e., 
expenses that would not occur regularly in the future); excluding such charges, ESI 
stated, it would have earned a profit of $0.8 million or $0.03 per share.   
50. On January 13, 2003, ESI filed with the Commission a quarterly report on 
Form 10-Q for the second quarter ended November 30, 2002.  The Form 10-Q included 
financial results identical to the December 18 press release.  Dooley and Lorenz reviewed 
the December 18 press release prior to its release and the Form 10-Q prior to its filing.  
ESI’s Form 10-Q for the quarter was also incorporated by reference in two previously 
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filed registration statements on Form S-8, filed on February 6, 2001, and August 13, 
2001, to register ESI’s offering of securities under an employee benefit plan.  (So long as 
such S-8 statements are in effect, they incorporate any subsequently filed financial 
statements by the issuer.) 
51. In addition, in the Form 10-Q Dooley provided a certification, pursuant to 
Section 302 of the Sarbanes-Oxley Act.  Among other things, Dooley certified that the 
report did not contain any untrue statement or omission of material fact; the financial 
statements, and other financial information included in the report, fairly presented in all 
material respects ESI’s financial condition, results of operations, and cash flows; and he 
had disclosed to ESI’s independent auditors and ESI’s Audit Committee all significant 
deficiencies in the design or operation of ESI’s internal controls and any fraud that 
involved management or other employees who had a significant role in ESI’s internal 
controls. 
52.  The Form 10-Q, the December 18 press release, Dooley’s Sarbanes-Oxley 
certification, and the Form S-8 filings were all false.  In fact, ESI had materially 
understated its net loss for the second quarter of fiscal 2003 as a result, in part, of the 
illegal accounting adjustments described above that Dooley and Lorenz directed. 
53. On or about March 20, 2003, ESI announced that it would restate its 
financial results for the second quarter of fiscal 2003.  The restatement revealed that ESI 
had not achieved a quarterly loss of $9.5 million, but rather had incurred a loss of $12.9 
million.  As part of the restatement, ESI reversed in their entirety the improper 
accounting entries described above decreasing the Company’s warranty expense and its 
accounting for consignment inventory, and also restored to ESI’s books the Company’s 
liability relating to retirement and severance benefits for ESI’s employees in Asia. 
d. 
False Representations to Auditors by Dooley and Lorenz
54. In connection with the auditors’ review of ESI’s financial statements for 
the quarter ended November 30, 2002, Dooley signed a management representation letter 
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dated December 18, 2002.  In the letter, Dooley falsely represented that information in 
the quarterly financial statements to be filed in ESI’s Form 10-Q was presented 
consistently with GAAP.  Dooley knew or was reckless in not knowing that these 
statements were false because, among other reasons, the financial statements improperly 
reflected the first quarter reversal of ESI’s liability to provide retirement and severance 
benefits for its employees in Asia and the second quarter unsupported reduction to 
warranty expense. 
55. As part of its review procedures for the second quarter, ESI’s auditors 
required Lorenz and others to complete a questionnaire making certain representations.  
In the questionnaire, dated December 9, 2002, Lorenz represented to ESI’s auditors that 
there were no extraordinary, unrecorded, or infrequently occurring transactions in excess 
of $250,000 during the second quarter other than a restructuring charge.  This 
representation was false because Lorenz did not disclose the reduction to warranty 
expense he had made.  Lorenz also falsely represented that the financial statements for 
the second quarter were prepared in conformity with GAAP applied on a consistent basis 
with the June 1, 2002 financial statements.  However, as Lorenz knew, the financial 
statements for the second quarter, among other things, accounted for consignment 
inventory differently than the June 1, 2002 financial statements. 
FIRST CLAIM FOR RELIEF 
Violations of Section 17(a) of the Securities Act Against All Defendants 
56. The Commission incorporates by reference Paragraphs 1 through 55. 
57. By engaging in the conduct described above, Dooley and Lorenz, directly 
or indirectly, in the offer or sale of securities, by the use of the means or instruments of 
transportation or communication in interstate commerce or by use of the mails: 
(a) with scienter, employed devices, schemes, or artifices to defraud; 
(b) obtained money or property by means of untrue statements of a 
material fact or omissions to state a material fact necessary in order 
COMPLAINT 
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to make the statements made, in the light of the circumstances 
under which they were made, not misleading; and 
(c) engaged in transactions, practices, or courses of business which 
operated or would operate as a fraud or deceit upon purchasers of 
securities. 
58. By reason of the foregoing, Dooley and Lorenz have violated and, unless 
restrained and enjoined, will continue to violate Section 17(a) of the Securities Act [15 
U.S.C. § 77q(a)]. 
SECOND CLAIM FOR RELIEF 
Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Against All 
Defendants 
59. The Commission incorporates by reference Paragraphs 1 through 55. 
60. By engaging in the conduct described above, Dooley and Lorenz, with 
scienter, directly or indirectly, in connection with the purchase or sale of securities, by 
the use of means or instrumentalities of interstate commerce or of the mails, or of 
facilities of a national securities exchange: 
(a) employed devices, schemes, or artifices to defraud; 
(b) made untrue statements of a material fact or omitted to state a 
material fact necessary in order to make the statements made, in 
the light of the circumstances under which they were made, not 
misleading; and 
(c) engaged in acts, practices, or courses of business which operated or 
would operate as a fraud or deceit upon other persons, including 
purchasers and sellers of securities. 
61. By reason of the foregoing, Dooley and Lorenz have violated and aided 
and abetted violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and 
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Rule 10b-5 [17 C.F.R. § 240.10b-5].  Unless restrained and enjoined, Dooley and Lorenz 
will continue to commit and aid and abet such violations. 
THIRD CLAIM FOR RELIEF 
False Statements and Omissions to Accountants – Violations of Rule 13b2-2 Under the 
Exchange Act Against All Defendants 
62. The Commission incorporates by reference Paragraphs 1 through 55. 
63. By engaging in the conduct described above, Dooley and Lorenz, directly 
or indirectly, made or caused to be made a materially false or misleading statement and 
omitted to state, or caused another person to omit to state, a material fact necessary in 
order to make statements made, in light of the circumstances under which such 
statements were made, not misleading to an accountant in connection with an audit or 
examination of the financial statements of ESI required to be made and the preparation 
and filing of documents and reports required to be filed with the Commission. 
64. By reason of the foregoing, Dooley and Lorenz have violated and, unless 
restrained and enjoined, will continue to violate Rule 13b2-2 [17 C.F.R. § 240.13b2-2]. 
FOURTH CLAIM FOR RELIEF 
Circumventing Internal Accounting Controls – Violations of Section 13(b)(5) of the 
Exchange Act and Rule 13b2-1 Thereunder Against All Defendants 
65. The Commission incorporates by reference Paragraphs 1 through 55. 
66. By engaging in the conduct described above, Dooley and Lorenz 
knowingly circumvented or knowingly failed to implement a system of internal 
accounting controls relating to ESI or knowingly falsified any book, record, or account of 
ESI. 
67. By reason of the foregoing, Dooley and Lorenz have violated and, unless 
restrained and enjoined, will continue to violate Section 13(b)(5) of the Exchange Act [15 
U.S.C. § 78m(b)(5)] and Rule 13b2-1 [17 C.F.R. § 240.13b2-1]. 
COMPLAINT 
17

FIFTH CLAIM FOR RELIEF 
False Quarterly Reports – Aiding and Abetting Violations of Section 13(a) of the 
Exchange Act and Rules 12b-20 and 13a-13 Thereunder Against All Defendants 
68. The Commission incorporates by reference Paragraphs 1 through 55. 
69. Based on the conduct alleged above, ESI violated Section 13(a) of the 
Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-13 thereunder [17 C.F.R. 
§§ 240.12b-20 and 240.13a-13], which obligate issuers of securities registered pursuant 
to Section 12 [15 U.S.C. § 78l] of the Exchange Act to file with the Commission accurate 
quarterly reports. 
70. By engaging in the conduct described above, Dooley and Lorenz 
knowingly provided substantial assistance to ESI’s filing of materially false and 
misleading reports and filings with the Commission. 
71. By reason of the foregoing, Dooley and Lorenz have aided and abetted 
violations by ESI of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 
12b-20 and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-13] and, unless 
restrained and enjoined, will continue to aid and abet such violations. 
SIXTH CLAIM FOR RELIEF 
Inaccurate Books and Records – Aiding and Abetting Violations of Section 13(b)(2)(A) of 
the Exchange Act Against All Defendants 
72. The Commission incorporates by reference Paragraphs 1 through 55. 
73. Based on the conduct alleged above, ESI violated Section 13(b)(2)(A) of 
the Exchange Act [15 U.S.C. § 78m(b)(2)(A)], which obligates issuers of securities 
registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] to make and 
keep books, records, and accounts, which, in reasonable detail, accurately and fairly 
reflect the transactions and dispositions of the assets of the issuer. 
74. By engaging in the conduct described above, Dooley and Lorenz 
knowingly provided substantial assistance to ESI’s failure to make and keep books, 
COMPLAINT 
18

records, and accounts, which, in reasonable detail, accurately and fairly reflect the 
transactions and dispositions of the assets of ESI. 
75. By reason of the foregoing, Dooley and Lorenz have aided and abetted 
violations by ESI of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 
78m(b)(2)(A)] and, unless restrained and enjoined, will continue to aid and abet such 
violations. 
SEVENTH CLAIM FOR RELIEF 
Inadequate Internal Accounting Controls – Aiding and Abetting Violations of Section 
13(b)(2)(B) of the Exchange Act Against All Defendants 
76. The Commission incorporates by reference Paragraphs 1 through 55. 
77. Based on the conduct alleged above, ESI violated Section 13(b)(2)(B) of 
the Exchange Act [15 U.S.C. § 78m(b)(2)(B)], which obligates issuers of securities 
registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] to devise and 
maintain a sufficient system of internal accounting controls. 
78. By engaging in the conduct described above, Dooley and Lorenz 
knowingly provided substantial assistance to ESI’s failure to devise and maintain a 
sufficient system of internal accounting controls. 
79. By reason of the foregoing, Dooley and Lorenz have aided and abetted 
violations by ESI of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)] 
and, unless restrained and enjoined, will continue to aid and abet such violations. 
EIGHTH CLAIM FOR RELIEF 
False Sarbanes-Oxley Certifications – Violation of Rule 13a-14 Under the Exchange Act 
Against Dooley 
80. The Commission incorporates by reference Paragraphs 1 through 55. 
81. As ESI’s CFO and later its CEO, Dooley signed false certifications 
pursuant to Rule 13a-14 of the Exchange Act that were included in ESI’s quarterly 
reports on Form 10-Q for the quarters ended August 31, 2002, and November 30, 2002.  
COMPLAINT 
19

In such certifications, Dooley falsely stated, among other things, that: (a) the report did 
not contain any untrue statement of a material fact or omit to state a material fact 
necessary to make the statements made, in light of the circumstances under which such 
statements were made, not misleading; (b) the financial statements, and other financial 
information included in the report, fairly presented in all material respects the financial 
condition, results of operations, and cash flows of ESI as of, and for, the period presented 
in the report; and (c) he had disclosed to ESI’s auditors and ESI’s Audit Committee all 
significant deficiencies in the design or operation of ESI’s internal controls and any 
fraud, whether or not material, that involved management or other employees who had a 
significant role in ESI’s internal controls. 
82. By reason of the foregoing, Dooley has violated and, unless restrained and 
enjoined, will continue to violate Exchange Act Rule 13a-14 [17 C.F.R. § 240.13a-14]. 
NINTH CLAIM FOR RELIEF 
Dooley’s Liability Under Exchange Act Section 20(a) for ESI’s Violations 
83. The Commission incorporates by reference Paragraphs 1 through 55. 
84. Between approximately June 1, 2002, and June 9, 2003, Dooley was, 
directly or indirectly, a control person of ESI for purposes of Section 20(a) of the 
Exchange Act [15 U.S.C. § 78t(a)]. 
85. Between approximately June 1, 2002, and June 9, 2003, ESI violated 
Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 
C.F.R. § 240.10b-5], as well as Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the 
Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and Rules 13a-13 
and 12b-20 thereunder [17 C.F.R. §§ 240.13a-13 and 240.12b-20]. 
86. As a control person of ESI between approximately June 1, 2002, and June 
9, 2003, Dooley is jointly and severally liable with and to the same extent as ESI for 
ESI’s violations of the Exchange Act and rules thereunder. 
COMPLAINT 
20

PRAYER FOR RELIEF 
WHEREFORE, the Commission respectfully requests that the Court: 
1. Permanently enjoin Dooley and his agents, servants, employees, attorneys, 
and all persons in active concert or participation with them who receive actual notice of 
the judgment by personal service or otherwise from directly or indirectly violating, or 
aiding and abetting violations of, Section 17(a) of the Securities Act, Sections 10(b), 
13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-
20, 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder; 
2. Permanently enjoin Lorenz and his agents, servants, employees, attorneys, 
and all persons in active concert or participation with them who receive actual notice of 
the judgment by personal service or otherwise from directly or indirectly violating, or 
aiding and abetting violations of, Section 17(a) of the Securities Act, Sections 10(b), 
13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-
20, 13a-13, 13b2-1, and 13b2-2 thereunder; 
3. Permanently enjoin Defendants from serving as an officer or director of 
any entity having a class of securities registered with the Commission pursuant to Section 
12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports pursuant to 
Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)]; 
4. Order Defendants to disgorge all wrongfully obtained benefits, plus 
prejudgment interest;   
5. Order Defendants to pay civil penalties under Section 20(d) of the 
Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 
78u(d)];  
6. Retain jurisdiction of this action in accordance with the principles of 
equity and the Federal Rules of Civil Procedure in order to implement and carry out the 
terms of all orders and decrees that may be entered, or to entertain any suitable 
application or motion for additional relief within the jurisdiction of this Court; and 
COMPLAINT 
21

7. Grant such other and further relief as the Court may deem just, equitable, 
and appropriate. 
 
Dated:  September 23, 2004 
Respectfully submitted, 
By:  ________________________________ 
Helane L. Morrison 
Robert L. Mitchell 
Patrick T. Murphy 
Robert S. Leach 
 
Attorneys for Plaintiff 
SECURITIES AND EXCHANGE  
COMMISSION 
 
 
DEMAND FOR JURY TRIAL 
 Plaintiff hereby demands a jury trial. 
 
Dated:  September 23, 2004 
 
By:  ________________________________ 
Helane L. Morrison 
Robert L. Mitchell 
Patrick T. Murphy 
Robert S. Leach 
 
Attorneys for Plaintiff 
SECURITIES AND EXCHANGE  
COMMISSION 
COMPLAINT 
22

HELANE L. MORRISON (Admitted in California) 
ROBERT L. MITCHELL (Admitted in California) 
PATRICK T. MURPHY (Admitted in New York) 
ROBERT S. LEACH (Admitted in California) 
44 Montgomery Street, Suite 2600 
San Francisco, CA  94104 
Telephone:  415-705-2500 
Facsimile:  415-705-2501 
 
Attorneys for Plaintiff 
SECURITIES AND EXCHANGE COMMISSION 
 
 
 

UNITED STATES DISTRICT COURT 

DISTRICT OF OREGON 
 
 
 
SECURITIES AND EXCHANGE 
COMMISSION, 
 
  Plaintiff, 
 
 vs. 
 
JAMES T. DOOLEY and JAMES E. 
LORENZ, III, 
 
  Defendants. 
___________________________________ 

CV. _____________

COMPLAINT

DEMAND FOR JURY TRAIL

 

Plaintiff Securities and Exchange Commission (“Commission”) alleges:  

SUMMARY OF THE ACTION

1. This matter involves financial reporting fraud by former executives of 

Electro Scientific Industries, Inc. (“ESI” or “Company”), a high technology manufacturer 

based in Portland, Oregon.  The fraud, which ran from at least August 2002 through 

December 2002, was carried out by James T. Dooley (“Dooley”), who served first as 

ESI’s Chief Financial Officer and Acting Chief Operating Officer, and then as Chief 

Executive Officer, and James E. Lorenz, III (“Lorenz”), ESI’s then Corporate Controller.  

COMPLAINT 1



2. Faced with a shortfall in earnings for the quarter ended August 31, 2002, 

Lorenz searched for ways to reduce ESI’s expenses and, thus, increase the Company’s 

net income.  In what he later called a “sleazy” “hunt for credits,” Lorenz improperly 

eliminated more than $1.4 million in expenses from ESI’s financial records, which 

artificially boosted the Company’s earnings by the same amount. 

3. Despite this, following the last minute discovery of a significant 

accounting error, ESI found itself short of its quarterly earnings goal.  As a result, Dooley 

and Lorenz improperly reduced ESI’s expenses and increased its earnings by another $1 

million by purporting unilaterally to eliminate vested retirement and severance benefits 

for ESI’s employees in Asia.  ESI did not inform the employees of this action 

beforehand, and made no effort to obtain legal advice or comply with Asian law 

governing the elimination of such benefits.  The purported unilateral elimination of the 

Asian employees’ retirement and severance benefits allowed ESI to falsely announce that 

it had met its earnings target for the quarter. 

4. Defendants continued their fraud in the following quarter, ended 

November 30, 2002, as Dooley and Lorenz again used fraudulent accounting devices to 

improperly reduce ESI’s expenses and increase its income, this time by more than $1.9 

million. 

5. In furtherance of the fraud, Dooley falsely told ESI’s Board of Directors 

and independent auditors that he had legal approval for the elimination of the Asian 

retirement and severance benefits when he did not.  In addition, Dooley submitted false 

Sarbanes-Oxley Act certifications asserting that earnings reports ESI filed with the 

Commission for the relevant quarters were truthful.  Dooley and Lorenz also made 

numerous other misrepresentations or omissions to ESI’s independent auditors, 

circumvented ESI’s internal accounting controls, and falsified its books and records. 

6. The Commission seeks a court order barring Dooley and Lorenz from 

serving as officers or directors of any public company; ordering them to disgorge all 

COMPLAINT 2



benefits received as a result of their violations of the securities laws; imposing civil 

monetary penalties; and enjoining them from future securities laws violations. 

JURISDICTION

7. This Court has jurisdiction over this action pursuant to Sections 20(c) and 

22(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77t(c) and 77v(a)] 

and Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 (“Exchange 

Act”) [15 U.S.C. §§ 78u(d), 78u(e), and 78aa].  Defendants, directly or indirectly, have 

made use of the means and instrumentalities of interstate commerce or of the mails or of 

the facilities of a national securities exchange in connection with the acts, transactions, 

practices, and courses of business alleged in this Complaint.    

AUTHORITY TO BRING THIS ACTION

8. The Commission brings this action pursuant to Sections 20(b) and 20(c) of 

the Securities Act [15 U.S.C. §§ 77t(b) and 77t(c)] and Sections 21(d) and 21(e) of the 

Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)]. 

DEFENDANTS

9. Dooley, age 50, resides in Cape Coral, Florida.  He was ESI’s Chief 

Executive Officer (“CEO”) from December 16, 2002 until April 15, 2003.  Prior to that, 

Dooley was ESI’s Chief Financial Officer (“CFO”) from June 2000 to December 2002, 

and also its Senior Vice President and Acting Chief Operating Officer from April 2002 to 

December 2002.  On April 15, 2003, ESI’s Board of Directors placed Dooley on 

administrative leave.  ESI terminated Dooley’s employment on June 9, 2003.   

10. Lorenz, age 41, resides in Portland, Oregon.  He was ESI’s Corporate 

Controller from November 2001 until February 2003.  After that, he served as ESI’s 

Director of Materials until he was fired in March 2003.  

OTHER RELEVANT ENTITY

11. ESI is an Oregon corporation with its principal place of business in 

Portland.  The Company makes manufacturing equipment for electronics and other high 

COMPLAINT 3



technology companies.  ESI common stock is registered with the Commission pursuant to 

Section 12(g) of the Exchange Act [15 U.S.C. § 78l(g)] and trades on the Nasdaq 

National Market.  ESI’s fiscal year 2003 ran from June 2, 2002, to May 31, 2003, with 

the four quarters ending on August 31, November 30, March 1, and May 31, respectively. 

FACTUAL ALLEGATIONS 

 
I. Pressure to Achieve Earnings Goals Provided a Motive for Dooley and 

Lorenz to Commit Fraud

12. In the year prior to Defendants’ fraud, ESI’s financial results had declined 

sharply.  After posting record revenue of $471 million in fiscal 2001, ESI reported only 

$166 million in revenue in fiscal 2002, which ended June 1, 2002.  ESI reported losses in 

each quarter of fiscal 2002. 

13. In early August 2002, Dooley provided optimistic estimates of ESI’s 

earnings for the quarter to institutional investors, Wall Street analysts, and ESI’s Board of 

Directors.  The projections showed that, after four consecutive losing quarters, ESI 

expected to report earnings of $0.01 to $0.03 per share for ESI’s first quarter of fiscal 

2003, ending August 31, 2002. 

14. Dooley stood to advance at ESI based on the Company’s successful 

financial performance.  After the unanticipated retirement of its CEO, ESI operated under 

an Acting CEO from April 2002 to December 2002 while the Board of Directors 

searched for a full-time replacement.  Dooley, who was then CFO and Acting COO, was 

a candidate for the CEO position.  Lorenz also had the opportunity to become CFO in the 

event Dooley was promoted. 

II. Fraudulent Conduct by Dooley and Lorenz for the Quarter Ended August 
31, 2002

15. As ESI’s first quarter of fiscal 2003 (ended August 31, 2002) progressed, 

Dooley and Lorenz received internal revenue and expense forecasts showing that ESI 

would report a loss for the quarter, not the profit the Company had projected.  In 

COMPLAINT 4



response, Lorenz searched for accounting entries that could be made to ESI’s books and 

records to improve ESI’s results simply by changing the Company’s past accounting 

policies.  Lorenz later described the effort as “sleazy”—a so-called “hunt for credits” to 

insure that ESI achieved its projected quarterly income.  This process ultimately resulted 

in ESI recording fraudulent entries in its accounting records that improperly reduced its 

operating expenses for the first quarter by more than $1.4 million, and increased its 

income for the quarter by the same amount.  As discussed in parts (a) and (b) below, 

these included entries relating to the value of ESI’s inventory and its allowance for 

doubtful accounts receivable. 

16. Despite these efforts, a further last-minute problem threatened to prevent 

ESI from reporting a first quarter profit.  On September 12, 2002, after the end of the first 

quarter but before ESI had announced its financial results to the public, Dooley and 

Lorenz learned that the discovery by ESI’s independent auditors of a significant 

accounting error would cause ESI to fall short of its projected quarterly income.  In a 

late-night meeting with ESI finance personnel, Dooley and Lorenz decided to reduce 

ESI’s expenses and increase its bottom line even further by unilaterally eliminating 

nearly $1 million in vested retirement and severance benefits for ESI employees in Asia, 

without prior notice to the employees and in violation of applicable Asian laws.  As 

discussed further in part (c) below, this fraudulent transaction enabled ESI to avoid a loss 

and report a profit in line with expectations. 

a. Improper Increase in the Value of ESI’s Inventory 

17. As part of its business, ESI has to account for the value of inventory that is 

defective.  At all relevant times, under ESI’s policy the Company valued defective parts 

inventory at zero until such time as the Company evaluated the parts, determined that 

they were repairable, and shipped them for repair.  Only after performing this analysis 

and shipping the parts for repair was it appropriate for ESI to increase the value of 

COMPLAINT 5



inventory listed as defective.  As ESI’s Corporate Controller, Lorenz was aware of ESI’s 

valuation policy for defective parts inventory. 

18. On or about September 4, 2002, Lorenz directed ESI personnel to change 

the Company’s accounting records for the quarter ended August 31, 2002 to increase the 

value of ESI’s defective parts inventory by $1.3 million.  This change, which occurred 

after the end of ESI’s first fiscal quarter, had the effect of reducing ESI’s expenses for the 

first quarter by $1.3 million and increasing its quarterly net income by the same amount. 

19. There was no basis for Lorenz to increase the value of the defective parts 

inventory.  At the time, ESI had not determined that this inventory was repairable and 

had not shipped it for repair. 

20. Lorenz knew, or was reckless in not knowing, that the increase in 

inventory value violated ESI’s accounting policy.  In addition, Lorenz knew, or was 

reckless in not knowing, that the increase violated generally accepted accounting 

principles (“GAAP”) because it was not consistent with how ESI had previously valued 

such inventory, and because the change in methodology was not disclosed in ESI’s Form 

10-Q for the first quarter of fiscal 2003, which ESI filed with the Commission on or 

about October 15, 2002.  

b. Reversal of Allowances for Doubtful Accounts Receivable

21. When a customer owes ESI money, the Company establishes in its 

financial records an item called an account receivable.  Over time, if ESI determines that 

the customer will not be able to pay the amount owed, the receivable becomes 

“doubtful,” and ESI’s accounting policy requires it to establish an allowance, or offset, 

against the receivable.  When ESI establishes an allowance for a doubtful account 

receivable, it increases ESI’s expenses and decreases its income in the period in which 

the allowance is made. 

COMPLAINT 6



22.  Pursuant to this policy, on August 27, 2002, ESI’s credit manager 

recorded allowances of $129,544 for doubtful accounts receivable from three customers.  

When the credit manager made this accounting entry, it increased ESI’s expenses and 

decreased its income for the first quarter of fiscal 2003. 

23. However, also on August 27, 2002, in contravention of ESI’s policy, 

Lorenz directed that the allowances that the credit manager had recorded be reversed in 

their entirety.  Lorenz directed the reversal in order to improve ESI’s quarterly 

performance, and without any basis for believing that the accounts receivable would be 

collected. 

24. Lorenz knew, or was reckless in not knowing, that the reversal of the 

allowances for doubtful accounts violated ESI’s established accounting policy and GAAP 

because it was not based on any reasonable analysis of the collectibility of the accounts.  

c. Elimination of Asian Retirement and Severance Benefits

25. On or about September 12, 2002, ESI’s independent auditors notified 

Dooley and Lorenz of an error in ESI’s books, the correction of which resulted in an 

increase in ESI’s expenses of $2.4 million.  This increase in expenses prevented ESI from 

reaching its earnings target for the quarter (even with the improper accounting 

adjustments alleged above). 

26. Dooley and Lorenz immediately called a meeting of ESI Finance 

Department personnel, which lasted through the night of September 12 and into the early 

morning hours of September 13.  Dooley and Lorenz instructed Finance personnel to 

search ESI’s books for additional credits that could be used to offset the unexpected $2.4 

million in expenses. 

27. As part of this effort, later that night Dooley announced to Finance 

personnel that ESI would unilaterally eliminate all retirement and severance benefits for 

employees in its Asian offices (which included Japan, Taiwan, and Korea), and also 

COMPLAINT 7



eliminate an accrued liability that ESI had established in its accounting records to reflect 

the estimated costs of providing such benefits.  Eliminating the accrued liability had the 

effect of reducing ESI’s expenses and increasing its income for the first quarter by nearly 

$1 million.  Of this total, more than $800,000 related to ESI’s Japanese employees. 

28. On or about September 13, 2002, Dooley and Lorenz spoke with ESI’s 

independent auditors.  During this discussion Dooley falsely told the auditors that he had 

obtained legal approval for the elimination of benefits for ESI’s Asian employees.  In 

fact, at the time Dooley had not obtained any advice from legal counsel on this issue. 

29. Also during this discussion, Dooley told the auditors that ESI had reached 

the decision to eliminate the benefits prior to the end of the first quarter.  This was also 

false, because ESI did not move to eliminate the benefits until on or about September 12, 

2002. 

30.   On or about September 17, 2002, ESI’s Audit Committee (a subset of its 

Board of Directors) met to review ESI’s financial results for the quarter.  Certain ESI 

officers and employees, including Dooley and Lorenz, and ESI’s independent auditors 

attended the meeting.  ESI’s Audit Committee questioned management about the support 

for the decision to eliminate the retirement and severance benefits.  Again, Dooley falsely 

stated that the decision had been approved by legal counsel. 

31. Dooley (but not Lorenz) also attended a meeting of ESI’s Board of 

Directors the next day, September 18, 2002.  During this meeting, Dooley again falsely 

stated that he had verified the propriety of eliminating the Asian benefits accrual with the 

Company’s lawyers. 

32. On October 7, 2002, Dooley (along with ESI’s outside auditors and 

others) attended a meeting of ESI’s Disclosure Committee, which the Company had 

established pursuant to the Sarbanes-Oxley Act to ensure it complied with its financial 

reporting requirements.  During the meeting, another ESI employee initiated a discussion 

concerning whether ESI had the authority to unilaterally eliminate benefits for its 

COMPLAINT 8



Japanese employees.  Dooley interrupted the employee, and continued to assert that ESI 

had properly eliminated the benefits. 

33. Following this meeting, on October 7, the ESI employee gave Dooley a 

memo from ESI’s outside legal counsel in Japan.  The memo specified that ESI could not 

change the terms of the retirement benefits it provided for its Japanese workers without 

their consent unless the changes were “reasonable.”  The memo further indicated that 

simply eliminating a retirement benefits program was not reasonable.  Because ESI could 

not unilaterally eliminate the Japanese employees’ retirement benefits, the import of the 

memo was that ESI had not lawfully done so.  As a result, the Company’s reversal of the 

related accrual for those benefits in the first quarter violated GAAP.  Dooley did not 

disclose this legal advice to ESI’s Audit Committee, Board of Directors, or its 

independent auditors.  

34. Dooley signed a management representation letter to ESI’s auditors dated 

October 9, 2002, in connection with their review of ESI’s first quarter financial 

statements.  In the letter, Dooley falsely represented that information in the quarterly 

financial statements to be filed in ESI’s Form 10-Q was presented consistently with 

GAAP.  In addition, pursuant the auditors’ specific request, Dooley addressed the 

reversal of the accrual for Asian benefits, representing that “[m]anagement, with the 

appropriate authority, had resolved to terminate the supplemental retirement plan for its 

Japanese employees as of August 31, 2002.”  These statements were false because, 

among other reasons, the decision to terminate the Asian benefits occurred after August 

31, 2002, and Dooley concealed the legal advice, which unequivocally demonstrated that 

ESI lacked a legal basis to unilaterally eliminate the benefits and the associated accrued 

liabilities. 

COMPLAINT 9



d. As a Result of Fraud by Dooley and Lorenz, ESI Issued False 
Financial Results for the First Quarter of Fiscal 2003

35. On or about October 15, 2002, ESI filed with the Commission a quarterly 

report on Form 10-Q for the first quarter ended August 31, 2002.  Lorenz reviewed the 

Form 10-Q prior to its filing, and Dooley signed it.  In the Form 10-Q, ESI reported net 

income of $158,000, and earnings per share of $0.01.  The Form 10-Q followed a press 

release issued by ESI on September 17, 2002 (the “September 17 press release”), which 

contained the same information concerning ESI’s net income and earnings per share for 

the first quarter.  ESI’s Form 10-Q for the quarter was also incorporated by reference in 

two previously filed registration statements on Form S-8, filed on February 6, 2001, and 

August 13, 2001, to register ESI’s offering of securities under an employee benefit plan.  

(So long as such S-8 statements are in effect, they incorporate any subsequently filed 

financial statements by the issuer.)         

36. The Form 10-Q included a certification signed by Dooley as required by 

Section 302 of the Sarbanes-Oxley Act, 18 U.S.C. § 7241.  Among other things, Dooley 

certified that the report did not contain any untrue statement or omission of material fact; 

the financial statements, and other financial information included in the report, fairly 

presented in all material respects ESI’s financial condition, results of operations, and cash 

flows; and he had disclosed to ESI’s independent auditors and ESI’s Audit Committee all 

significant deficiencies in the design or operation of ESI’s internal controls and any fraud 

that involved management or other employees who had a significant role in ESI’s internal 

controls. 

37.  The Form 10-Q, the September 17 press release, Dooley’s Sarbanes-

Oxley certification, and the Form S-8 filings were all false.  In fact, ESI had materially 

overstated its income for the first quarter of fiscal 2003 as a result, in part, of the illegal 

accounting adjustments described above that Dooley and Lorenz directed. 

COMPLAINT 10



38. On or about March 20, 2003, ESI announced that it would restate its 

financial results for the first quarter of fiscal 2003.  The restatement revealed that ESI had 

not achieved a $158,000 quarterly profit, but rather suffered a loss of $3.4 million.  As 

part of the restatement, ESI reversed in their entirety the improper accounting entries 

described above concerning ESI’s defective parts inventory, its allowances for doubtful 

accounts receivable, and expenses relating to vested retirement and severance benefits for 

ESI’s employees in Asia.  

III. Fraudulent Conduct by Dooley and Lorenz for the Quarter Ended November 
30, 2002

39. During the second quarter of fiscal 2003, ended November 30, 2002, 

Dooley and Lorenz continued their fraudulent scheme to reduce ESI’s expenses, and thus 

increase the Company’s earnings.  As described below, Defendants caused ESI to 

improperly eliminate more than $1.9 million in expenses for the quarter, and increase 

ESI’s earnings by the same amount, with fraudulent adjustments to ESI’s accounting for 

warranty expense and consignment inventory. 

40. In addition, Dooley and Lorenz caused ESI to continue to account 

improperly for its obligations to provide retirement and severance benefits for its 

employees in Asia.  By at least the end of the second quarter of fiscal 2003, Lorenz 

learned of the legal advice that Dooley had received indicating that ESI had improperly 

eliminated the liability for benefits in the first quarter.  Neither Dooley nor Lorenz 

disclosed this advice to ESI’s auditors, Audit Committee, or Board of Directors, and ESI 

did not include in its accounting records any liability for its obligation to provide such 

benefits. 

a. Improper Decrease in Warranty Expense   

41. As part of its business, ESI provided warranties to its customers to replace 

certain worn out or defective equipment.  In the second quarter of fiscal 2003, ESI 

COMPLAINT 11



incurred $2.6 million in expenses to provide new parts or equipment to fulfill its warranty 

obligations. 

42. On December 9, 2002, after the end of ESI’s second quarter but before the 

Company had announced its results to the public, Lorenz directed that accounting entries 

be made that slashed ESI’s recorded warranty expense by $1.3 million, or approximately 

50%. 

43. These entries violated GAAP because Lorenz had no reasonable basis to 

believe that such a substantial decrease in the amount of warranty expense was 

appropriate.  To the contrary, several ESI employees told Lorenz that there was no 

evidence that warranty expense was, in fact, lower than what had been recorded, and that 

reducing the expense absent such evidence was wrong. 

44. Dooley knew, or was reckless in not knowing, of Lorenz’s fraudulent 

reduction in ESI’s warranty expense.  Dooley was advised of the reduction during a 

review of ESI’s preliminary financial results, and knew that there was no support for it.  

b. Undisclosed Change in Valuation of Consignment Inventory   

45. In order to further boost ESI’s earnings, Lorenz directed that the Company 

change the way it accounted for consignment inventory—product that ESI had provided 

to a customer for a trial or demonstration period.  As a result of this change, which was 

not disclosed, Lorenz fraudulently reduced ESI’s expenses for the second quarter by 

approximately $650,000, and increased its earnings by the same amount. 

46. Since at least 1999, when ESI shipped product to a customer on 

consignment, it recognized an expense equal to the value of the inventory.  That is, it 

reduced the value of its inventory and increased its expenses.  By the second quarter of 

fiscal 2003, ESI had incurred approximately $650,000 in expenses through shipments of 

consignment inventory. 

COMPLAINT 12



47. During the second quarter, Lorenz caused ESI to change its accounting for 

consignment inventory.  Lorenz directed that approximately $650,000 in previously 

recognized consignment inventory expenses be reversed, and that ESI record an asset on 

its balance sheet for the same amount.  ESI would then recognize the related expenses 

only when the inventory was ultimately sold to the customer.  As a result of this change, 

during the second quarter ESI eliminated approximately $650,000 in previously 

recognized consignment inventory expense.  This had the effect of decreasing ESI’s 

expenses and increasing its earnings for the period. 

48. Lorenz knew or was reckless in not knowing that this change in 

accounting policy violated GAAP because it was not disclosed in ESI’s Form 10-Q for 

the second quarter, which ESI filed on or about January 13, 2003. 

c. As a Result of Fraud by Dooley and Lorenz, ESI Issued False 
Financial Results for the Second Quarter of Fiscal 2003  

49. In light of ESI’s positive results for its first quarter of fiscal 2003, Dooley 

was promoted to CEO on December 16, 2002.  On December 18, 2002, ESI issued a 

press release announcing its operating results for the three and six months ended 

November 30, 2002 (the “December 18 press release”).  The December 18 press release 

also repeated the false and misleading financial results reported for the first quarter of 

fiscal 2003.  In the release, ESI reported a net loss for the second quarter of $9.5 million, 

or a loss per share of $0.34.  ESI attributed much of the loss to special charges (i.e., 

expenses that would not occur regularly in the future); excluding such charges, ESI 

stated, it would have earned a profit of $0.8 million or $0.03 per share.   

50. On January 13, 2003, ESI filed with the Commission a quarterly report on 

Form 10-Q for the second quarter ended November 30, 2002.  The Form 10-Q included 

financial results identical to the December 18 press release.  Dooley and Lorenz reviewed 

the December 18 press release prior to its release and the Form 10-Q prior to its filing.  

ESI’s Form 10-Q for the quarter was also incorporated by reference in two previously 

COMPLAINT 13



filed registration statements on Form S-8, filed on February 6, 2001, and August 13, 

2001, to register ESI’s offering of securities under an employee benefit plan.  (So long as 

such S-8 statements are in effect, they incorporate any subsequently filed financial 

statements by the issuer.) 

51. In addition, in the Form 10-Q Dooley provided a certification, pursuant to 

Section 302 of the Sarbanes-Oxley Act.  Among other things, Dooley certified that the 

report did not contain any untrue statement or omission of material fact; the financial 

statements, and other financial information included in the report, fairly presented in all 

material respects ESI’s financial condition, results of operations, and cash flows; and he 

had disclosed to ESI’s independent auditors and ESI’s Audit Committee all significant 

deficiencies in the design or operation of ESI’s internal controls and any fraud that 

involved management or other employees who had a significant role in ESI’s internal 

controls. 

52.  The Form 10-Q, the December 18 press release, Dooley’s Sarbanes-Oxley 

certification, and the Form S-8 filings were all false.  In fact, ESI had materially 

understated its net loss for the second quarter of fiscal 2003 as a result, in part, of the 

illegal accounting adjustments described above that Dooley and Lorenz directed. 

53. On or about March 20, 2003, ESI announced that it would restate its 

financial results for the second quarter of fiscal 2003.  The restatement revealed that ESI 

had not achieved a quarterly loss of $9.5 million, but rather had incurred a loss of $12.9 

million.  As part of the restatement, ESI reversed in their entirety the improper 

accounting entries described above decreasing the Company’s warranty expense and its 

accounting for consignment inventory, and also restored to ESI’s books the Company’s 

liability relating to retirement and severance benefits for ESI’s employees in Asia. 

d. False Representations to Auditors by Dooley and Lorenz

54. In connection with the auditors’ review of ESI’s financial statements for 

the quarter ended November 30, 2002, Dooley signed a management representation letter 

COMPLAINT 14



dated December 18, 2002.  In the letter, Dooley falsely represented that information in 

the quarterly financial statements to be filed in ESI’s Form 10-Q was presented 

consistently with GAAP.  Dooley knew or was reckless in not knowing that these 

statements were false because, among other reasons, the financial statements improperly 

reflected the first quarter reversal of ESI’s liability to provide retirement and severance 

benefits for its employees in Asia and the second quarter unsupported reduction to 

warranty expense. 

55. As part of its review procedures for the second quarter, ESI’s auditors 

required Lorenz and others to complete a questionnaire making certain representations.  

In the questionnaire, dated December 9, 2002, Lorenz represented to ESI’s auditors that 

there were no extraordinary, unrecorded, or infrequently occurring transactions in excess 

of $250,000 during the second quarter other than a restructuring charge.  This 

representation was false because Lorenz did not disclose the reduction to warranty 

expense he had made.  Lorenz also falsely represented that the financial statements for 

the second quarter were prepared in conformity with GAAP applied on a consistent basis 

with the June 1, 2002 financial statements.  However, as Lorenz knew, the financial 

statements for the second quarter, among other things, accounted for consignment 

inventory differently than the June 1, 2002 financial statements. 

FIRST CLAIM FOR RELIEF 

Violations of Section 17(a) of the Securities Act Against All Defendants 

56. The Commission incorporates by reference Paragraphs 1 through 55. 

57. By engaging in the conduct described above, Dooley and Lorenz, directly 

or indirectly, in the offer or sale of securities, by the use of the means or instruments of 

transportation or communication in interstate commerce or by use of the mails: 

(a) with scienter, employed devices, schemes, or artifices to defraud; 

(b) obtained money or property by means of untrue statements of a 

material fact or omissions to state a material fact necessary in order 

COMPLAINT 15



to make the statements made, in the light of the circumstances 

under which they were made, not misleading; and 

(c) engaged in transactions, practices, or courses of business which 

operated or would operate as a fraud or deceit upon purchasers of 

securities. 

58. By reason of the foregoing, Dooley and Lorenz have violated and, unless 

restrained and enjoined, will continue to violate Section 17(a) of the Securities Act [15 

U.S.C. § 77q(a)]. 

SECOND CLAIM FOR RELIEF 

Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Against All 

Defendants 

59. The Commission incorporates by reference Paragraphs 1 through 55. 

60. By engaging in the conduct described above, Dooley and Lorenz, with 

scienter, directly or indirectly, in connection with the purchase or sale of securities, by 

the use of means or instrumentalities of interstate commerce or of the mails, or of 

facilities of a national securities exchange: 

(a) employed devices, schemes, or artifices to defraud; 

(b) made untrue statements of a material fact or omitted to state a 

material fact necessary in order to make the statements made, in 

the light of the circumstances under which they were made, not 

misleading; and 

(c) engaged in acts, practices, or courses of business which operated or 

would operate as a fraud or deceit upon other persons, including 

purchasers and sellers of securities. 

61. By reason of the foregoing, Dooley and Lorenz have violated and aided 

and abetted violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and 

COMPLAINT 16



Rule 10b-5 [17 C.F.R. § 240.10b-5].  Unless restrained and enjoined, Dooley and Lorenz 

will continue to commit and aid and abet such violations. 

THIRD CLAIM FOR RELIEF 

False Statements and Omissions to Accountants – Violations of Rule 13b2-2 Under the 

Exchange Act Against All Defendants 

62. The Commission incorporates by reference Paragraphs 1 through 55. 

63. By engaging in the conduct described above, Dooley and Lorenz, directly 

or indirectly, made or caused to be made a materially false or misleading statement and 

omitted to state, or caused another person to omit to state, a material fact necessary in 

order to make statements made, in light of the circumstances under which such 

statements were made, not misleading to an accountant in connection with an audit or 

examination of the financial statements of ESI required to be made and the preparation 

and filing of documents and reports required to be filed with the Commission. 

64. By reason of the foregoing, Dooley and Lorenz have violated and, unless 

restrained and enjoined, will continue to violate Rule 13b2-2 [17 C.F.R. § 240.13b2-2]. 

FOURTH CLAIM FOR RELIEF 

Circumventing Internal Accounting Controls – Violations of Section 13(b)(5) of the 

Exchange Act and Rule 13b2-1 Thereunder Against All Defendants 

65. The Commission incorporates by reference Paragraphs 1 through 55. 

66. By engaging in the conduct described above, Dooley and Lorenz 

knowingly circumvented or knowingly failed to implement a system of internal 

accounting controls relating to ESI or knowingly falsified any book, record, or account of 

ESI. 

67. By reason of the foregoing, Dooley and Lorenz have violated and, unless 

restrained and enjoined, will continue to violate Section 13(b)(5) of the Exchange Act [15 

U.S.C. § 78m(b)(5)] and Rule 13b2-1 [17 C.F.R. § 240.13b2-1]. 

COMPLAINT 17



FIFTH CLAIM FOR RELIEF 

False Quarterly Reports – Aiding and Abetting Violations of Section 13(a) of the 

Exchange Act and Rules 12b-20 and 13a-13 Thereunder Against All Defendants 

68. The Commission incorporates by reference Paragraphs 1 through 55. 

69. Based on the conduct alleged above, ESI violated Section 13(a) of the 

Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-13 thereunder [17 C.F.R. 

§§ 240.12b-20 and 240.13a-13], which obligate issuers of securities registered pursuant 

to Section 12 [15 U.S.C. § 78l] of the Exchange Act to file with the Commission accurate 

quarterly reports. 

70. By engaging in the conduct described above, Dooley and Lorenz 

knowingly provided substantial assistance to ESI’s filing of materially false and 

misleading reports and filings with the Commission. 

71. By reason of the foregoing, Dooley and Lorenz have aided and abetted 

violations by ESI of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 

12b-20 and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-13] and, unless 

restrained and enjoined, will continue to aid and abet such violations. 

SIXTH CLAIM FOR RELIEF 

Inaccurate Books and Records – Aiding and Abetting Violations of Section 13(b)(2)(A) of 

the Exchange Act Against All Defendants 

72. The Commission incorporates by reference Paragraphs 1 through 55. 

73. Based on the conduct alleged above, ESI violated Section 13(b)(2)(A) of 

the Exchange Act [15 U.S.C. § 78m(b)(2)(A)], which obligates issuers of securities 

registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] to make and 

keep books, records, and accounts, which, in reasonable detail, accurately and fairly 

reflect the transactions and dispositions of the assets of the issuer. 

74. By engaging in the conduct described above, Dooley and Lorenz 

knowingly provided substantial assistance to ESI’s failure to make and keep books, 

COMPLAINT 18



records, and accounts, which, in reasonable detail, accurately and fairly reflect the 

transactions and dispositions of the assets of ESI. 

75. By reason of the foregoing, Dooley and Lorenz have aided and abetted 

violations by ESI of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 

78m(b)(2)(A)] and, unless restrained and enjoined, will continue to aid and abet such 

violations. 

SEVENTH CLAIM FOR RELIEF 

Inadequate Internal Accounting Controls – Aiding and Abetting Violations of Section 

13(b)(2)(B) of the Exchange Act Against All Defendants 

76. The Commission incorporates by reference Paragraphs 1 through 55. 

77. Based on the conduct alleged above, ESI violated Section 13(b)(2)(B) of 

the Exchange Act [15 U.S.C. § 78m(b)(2)(B)], which obligates issuers of securities 

registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] to devise and 

maintain a sufficient system of internal accounting controls. 

78. By engaging in the conduct described above, Dooley and Lorenz 

knowingly provided substantial assistance to ESI’s failure to devise and maintain a 

sufficient system of internal accounting controls. 

79. By reason of the foregoing, Dooley and Lorenz have aided and abetted 

violations by ESI of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)] 

and, unless restrained and enjoined, will continue to aid and abet such violations. 

EIGHTH CLAIM FOR RELIEF 

False Sarbanes-Oxley Certifications – Violation of Rule 13a-14 Under the Exchange Act 

Against Dooley 

80. The Commission incorporates by reference Paragraphs 1 through 55. 

81. As ESI’s CFO and later its CEO, Dooley signed false certifications 

pursuant to Rule 13a-14 of the Exchange Act that were included in ESI’s quarterly 

reports on Form 10-Q for the quarters ended August 31, 2002, and November 30, 2002.  

COMPLAINT 19



In such certifications, Dooley falsely stated, among other things, that: (a) the report did 

not contain any untrue statement of a material fact or omit to state a material fact 

necessary to make the statements made, in light of the circumstances under which such 

statements were made, not misleading; (b) the financial statements, and other financial 

information included in the report, fairly presented in all material respects the financial 

condition, results of operations, and cash flows of ESI as of, and for, the period presented 

in the report; and (c) he had disclosed to ESI’s auditors and ESI’s Audit Committee all 

significant deficiencies in the design or operation of ESI’s internal controls and any 

fraud, whether or not material, that involved management or other employees who had a 

significant role in ESI’s internal controls. 

82. By reason of the foregoing, Dooley has violated and, unless restrained and 

enjoined, will continue to violate Exchange Act Rule 13a-14 [17 C.F.R. § 240.13a-14]. 

NINTH CLAIM FOR RELIEF 

Dooley’s Liability Under Exchange Act Section 20(a) for ESI’s Violations 

83. The Commission incorporates by reference Paragraphs 1 through 55. 

84. Between approximately June 1, 2002, and June 9, 2003, Dooley was, 

directly or indirectly, a control person of ESI for purposes of Section 20(a) of the 

Exchange Act [15 U.S.C. § 78t(a)]. 

85. Between approximately June 1, 2002, and June 9, 2003, ESI violated 

Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 

C.F.R. § 240.10b-5], as well as Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the 

Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and Rules 13a-13 

and 12b-20 thereunder [17 C.F.R. §§ 240.13a-13 and 240.12b-20]. 

86. As a control person of ESI between approximately June 1, 2002, and June 

9, 2003, Dooley is jointly and severally liable with and to the same extent as ESI for 

ESI’s violations of the Exchange Act and rules thereunder. 

COMPLAINT 20PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that the Court: 

1. Permanently enjoin Dooley and his agents, servants, employees, attorneys, 

and all persons in active concert or participation with them who receive actual notice of 

the judgment by personal service or otherwise from directly or indirectly violating, or 

aiding and abetting violations of, Section 17(a) of the Securities Act, Sections 10(b), 

13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-

20, 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder; 

2. Permanently enjoin Lorenz and his agents, servants, employees, attorneys, 

and all persons in active concert or participation with them who receive actual notice of 

the judgment by personal service or otherwise from directly or indirectly violating, or 

aiding and abetting violations of, Section 17(a) of the Securities Act, Sections 10(b), 

13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-

20, 13a-13, 13b2-1, and 13b2-2 thereunder; 

3. Permanently enjoin Defendants from serving as an officer or director of 

any entity having a class of securities registered with the Commission pursuant to Section 

12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports pursuant to 

Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)]; 

4. Order Defendants to disgorge all wrongfully obtained benefits, plus 

prejudgment interest;   

5. Order Defendants to pay civil penalties under Section 20(d) of the 

Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 

78u(d)];  

6. Retain jurisdiction of this action in accordance with the principles of 

equity and the Federal Rules of Civil Procedure in order to implement and carry out the 

terms of all orders and decrees that may be entered, or to entertain any suitable 

application or motion for additional relief within the jurisdiction of this Court; and 

COMPLAINT 21



7. Grant such other and further relief as the Court may deem just, equitable, 

and appropriate. 

 

Dated:  September 23, 2004 

Respectfully submitted, 

By:  ________________________________ 
Helane L. Morrison 
Robert L. Mitchell 
Patrick T. Murphy 
Robert S. Leach 
 

Attorneys for Plaintiff 
SECURITIES AND EXCHANGE  
COMMISSION 
 
 

DEMAND FOR JURY TRIAL 

 Plaintiff hereby demands a jury trial. 

 

Dated:  September 23, 2004 

 

By:  ________________________________ 
Helane L. Morrison 
Robert L. Mitchell 
Patrick T. Murphy 
Robert S. Leach 
 

Attorneys for Plaintiff 
SECURITIES AND EXCHANGE  
COMMISSION 

COMPLAINT 22