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Counsel of Record:
LOCAL COUNSEL:
UNITED STATES DISTRICT COURT
COMPLAINT AND JURY DEMAND Plaintiff, United States Securities and Exchange Commission ("Commission"), for its Complaint alleges as follows: SUMMARY 1. Defendant John P. Gallo ("Gallo"), the former President and Chief Operating Officer of IGI, Inc. ("IGI"), directed his subordinates to engage in fraudulent accounting practices to inflate IGI's assets, revenues, and net income during fiscal years 1995, 1996, and 1997. The fraud occurred primarily to insure that IGI met its budgeted or targeted earnings. 2. IGI, an animal health and skin care products company located in Buena, New Jersey was, at all relevant times, a leading manufacturer of poultry vaccines, including the Mareks vaccine ("Mareks") which is used to inoculate chickens against cancer. 3. Mareks was the most important poultry vaccine that IGI produced because sales of other poultry vaccines were dependent on successful vaccination of chickens against cancer. From 1995 through 1997, IGI derived approximately 60% of its revenues from the sale of animal health products, primarily poultry vaccines. 4. From 1995 through 1997, Gallo directed his subordinates to: (1) not record the cost of Mareks inventory that was either defective or destroyed; (2) record sales revenue in improper accounting periods; and (3) process and record sales credits due customers in an untimely manner. As a result of Gallo's unlawful conduct, IGI filed materially false and misleading financial statements on Forms 10-K for the fiscal years ended December 31, 1995 and December 31, 1996, and on Forms 10-Q for the quarters ended March 31, June 30, and September 30, 1997. These actions violated the antifraud, reporting, books and records, internal controls and lying-to-auditors provisions of the federal securities laws. 5. On April 4, 1998, IGI announced that it had delayed filing its annual Form 10-K for fiscal year 1997, which was due March 30, 1998, because it was conducting an internal investigation into financial irregularities. As a result of IGI's failure to file its Form 10-K, the American Stock Exchange suspended trading in IGI's common Stock. 6. On August 24, 1998, in its 1997 Form 10-K, IGI restated its previously reported financial results for fiscal years 1995 and 1996, and for the first three quarters of fiscal years 1997, because the improper conduct described in paragraph 4 above caused the company to materially overstate its financial results during fiscal years 1995, 1996 and 1997. 7. On September 8, 1998, trading in IGI's common stock resumed after the company had filed its 1997 Form 10-K, which included restatements covering its financial results for fiscal years 1995 through 1997. 8. IGI's restated results showed that its previously reported operating results were materially false and misleading. For example, in fiscal year 1995, IGI reported a net loss of $2.526 million. The restatement showed IGI's actual net loss for fiscal year 1995 was $2.705 million, and that the company had understated its previously reported net loss by 7%. In fiscal year 1996, IGI reported net income of $93,000. The restatement showed that the company actually sustained a net loss of $138,000, and that the company had overstated its net income by $231,000. The restatement also showed that IGI had overstated its net income in each of the first three quarters in fiscal year 1997. For the first quarter of fiscal year 1997, IGI overstated its net income by $308,000, or 560%. For the second quarter it overstated its net income by $138,000, or 63%. For the third quarter, IGI had reported net income of $380,000. The restatement showed it actually sustained a net loss of $498,000, and that it had overstated its net income for the quarter by $878,000. 9. From 1995 through 1997, the period during which Gallo was directing the fraud and managing IGI's earnings, IGI stock traded between $4.00 and $10.00 per share. On March 30, 1998, the last trading day before the trading suspension, IGI's common stock closed at $31/8 per share. On September 8, 1998, when trading resumed following IGI's restatement, IGI's common stock traded at $2.00 per share, a decline of $11/8, or 37.5% per share, from its pre-trading suspension close. 10. As a result of the fraud directed by Gallo, IGI's public investors and potential investors were deceived into believing that IGI's revenue and net income were materially better than they actually were. 11. The Commission seeks an Order of Permanent Injunction restraining and enjoining Gallo from, directly or indirectly, violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.13b-1, and 240.13b2-2], and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act [15 U.S.C. §§ 78m(a) and 78m(b)(2)(A) and (B)] and Exchange Act Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13]. 12. The Commission also seeks an Order requiring Gallo to (1) to prepare an accurate accounting of (a) all compensation and other remuneration he received as a result of IGI fraudulently misrepresenting that it had attained or exceeded any revenue, net income or other performance targets for fiscal years 1995, 1996, and 1997 including all bonuses or stock options he received; and (b) profits from all sales by him of IGI securities between January 1, 1995 and November 17, 1997, and from the sale of IGI securities resulting from his exercise of stock options after November 17, 1997; and (2) to disgorge all such compensation, remuneration and trading profits, with prejudgment interest, and surrender to IGI all unexercised stock options. 13. The Commission also seeks an Order requiring Gallo to pay a civil money penalty, pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. 14. The Commission also seeks an Order, pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)], permanently barring Gallo from acting as an officer or director of any issuer that has a class of securities registered 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]. JURISDICTION 15. The Commission brings this action pursuant to Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)] to permanently restrain and enjoin Gallo from engaging in the acts, practices, and transactions alleged herein. 16. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. Venue lies in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa]. 17. Gallo, directly or indirectly, has 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, practices, and transactions alleged herein, certain of which occurred within the State of New Jersey. THE DEFENDANT 18. John P. Gallo, age 58, a resident of Buena, New Jersey, was at all relevant times, the President and Chief Operating Officer of IGI. In November 1997, IGI terminated Gallo's employment. RELEVANT ENTITY 19. IGI, located in Buena, New Jersey, is a small, diversified company engaged in producing and marketing animal health products such as poultry vaccines, veterinary pharmaceuticals, cosmetics, and skin care products. During the relevant time period, the production facilities for IGI's poultry vaccines were located in Vineland, New Jersey. IGI's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act [15 U.S.C. § 78l(g)], and traded on the American Stock Exchange. FIRST CLAIM Gallo Violated Sections 10(b) and 13(b)(5) of the
20. Paragraphs 1 through 19 above are re-alleged and incorporated herein by reference. A. Overstatement of IGI's Inventory and Understatement of Related Expenses 21. From 1995 through the third quarter of 1997, Gallo directed the former Vice President of Operations, the former Manager for Production of Poultry Vaccines, and until the second quarter of 1997 the former Chief Financial Officer (the "CFO") not to record properly the costs associated with reductions in IGI's inventory for large quantities of Mareks that either were destroyed or defective and could not be sold. This fraudulent conduct resulted in IGI's overstatement of assets and net income in required periodic filings with the Commission and disclosures to the investing public. 22. Gallo instructed the former Vice President of Operations and the former Manager for Production of Poultry Vaccines not to timely process or approve United States Department of Agriculture required documentation for the destruction of large quantities of Mareks. Gallo also directed the former Vice President of Operations and the former Manager for Production of Poultry Vaccines not to inform IGI's accounting staff that IGI had destroyed large quantities of Mareks until he gave the former Vice President of Operations and the former Manager for Production of Poultry Vaccines approval to do so. In instances when Gallo gave such approval, he directed the former Vice President of Operations and the former Manager for Production of Poultry Vaccines to omit disclosing to the company's accounting staff material information regarding the amounts of destroyed and/or defective Mareks that should be written-off. Gallo engaged in these practices in order to control the amount of write-offs reflected in the company's periodic financial results and, thereby, manage reported earnings. 23. Gallo also directed the former Vice President of Operations and the former Manager for Production of Poultry Vaccines to keep vials of defective Mareks stored in liquid nitrogen to make it appear that the vaccines were saleable. As a result, IGI improperly recorded defective Mareks as saleable inventory in its books and records, which had the effect of artificially inflating its assets and net income. 24. In connection with these fraudulent inventory practices, Gallo directed IGI's former CFO to improperly account for destroyed or defective Mareks vaccines as inventory reserves, instead of writing them off as the losses were realized in conformity with Generally Accepted Accounting Principles ("GAAP"). Gallo decided when and how much defective Mareks would be destroyed and directed the CFO to adjust the inventory reserve balances to achieve his desired financial results. B. Improper Recognition of Revenue - Sales Cut-off 25. IGI's revenue recognition policy required that sales revenue be recognized when products were shipped. 26. Contrary to this policy, during fiscal years 1995 and 1996, and the first three quarters of fiscal year 1997, Gallo directed the former Vice President of Operations and the former Manager for International Sales to record revenue from sales of IGI products prior to shipment in order to fraudulently increase IGI's quarterly and annual revenues and manipulate its earnings. 27. At or around the end of each quarter during 1995 to 1997, Gallo directed the former Vice President of Operations, the former CFO, and the former Manager for International Sales to hold IGI's books open for several days after the quarter had ended, for the purpose of fraudulently manipulating the company's financial reporting data. 28. In connection with this practice, Gallo directed the former Vice President of Operations and the former Manager for International Sales to backdate sales invoices and shipping documents, and to record out-of-period sales. 29. As a result of Gallo's actions, IGI recorded revenues from the sales of its products prior to shipment and recorded revenues in the incorrect quarterly and annual periods. These practices were not in conformity with GAAP. C. Failure to Process and Record Sales Credits on a Timely Basis 30. During fiscal years 1995, 1996, and 1997, IGI issued sales credits to its customers for returned products, for the return of liquid nitrogen containers used to ship Mareks, and for promotional allowances. Customers generally sent requests for such credits to the sales clerks at IGI who prepared credit memoranda. 31. Before entering the credits into IGI's accounting system, the sales clerks sent the credit memoranda to their supervisors, the former Vice President of Operations and the former Manager for International Sales, for approval. 32. Gallo directed the former Vice President of Operations and the former Manager for International Sales to delay approval of large sales credits until revenue levels were high enough to allow write-offs of the credits without affecting the company's ability to announce realization of its quarterly earnings targets. 33. Gallo also directed the former Vice President of Operations and the former Manager for International Sales to instruct the sales clerks in some instances not to process or record large sales credits at all. 34. Gallo knew, should have known, or was reckless in not knowing, that by engaging in these fraudulent practices regarding IGI's inventory, sales cut-off, and sales credits, detailed in paragraphs 30 to 33 above, he caused IGI to materially overstate its assets, revenues, and net income, and to file materially false and misleading reports and financial statements with the Commission, for fiscal years 1995 and 1996, and for the first three quarters of fiscal year 1997. D. False and Misleading Representations to IGI's Independent Auditors 35. In connection with the annual audits of IGI's financial statements for fiscal years 1995 and 1996, Gallo signed management representation letters that he knew, should have known, or was reckless in not knowing, were materially false and misleading. The letters, which were provided to IGI's independent auditors, falsely represented, among other things, that: (1) "[t]he financial statements and related notes include all disclosures necessary for a fair presentation of the financial position . . . of the company in conformity with generally accepted accounting principles"; (2) "[t]here are no material transactions that have not been properly recorded in the accounting records underlying the financial statements"; (3) "[t]here have been no irregularities involving management . . . who have significant roles in the internal structure"; and (4) "[t]here have been no irregularities involving other employees that could have a material effect on the financial statements." 36. Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit, inter alia, any device, scheme or artifice to defraud in connection with the purchase or sale of securities, or the making of any untrue statement of a material fact or omitting to state a material fact, in connection with the purchase or sale of any security. Section 13(b)(5) of the Exchange Act, and Exchange Act Rules 13b2-1 and 13b2-2, prohibit, inter alia, circumvention of internal accounting controls, falsification of corporate books and records, and material misstatements or omissions by corporate officers or directors to an accountant in connection with an audit or a filing with the Commission. 37. By reason of the conduct described above in paragraphs 20 to 36 inclusive, defendant Gallo violated Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2. SECOND CLAIM Gallo Aided and Abetted
38. Paragraphs 1 through 37 above are re-alleged and incorporated herein by reference. 39. IGI filed with the Commission annual reports on Forms 10-K for its fiscal years ended December 31, 1995 and 1996, and quarterly reports on Forms 10-Q for the quarters ended March 31, June 30, and September 30, 1997. The financial statements in all the aforementioned filings were materially false and misleading by reason of IGI's fraudulently inflated assets, revenue, and net income. 40. From 1995 through 1997, IGI had securities registered with the Commission pursuant to Section 12(g) of the Exchange Act. As a result, IGI was required under Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, and 13a-13, to file annual, quarterly, and other reports and statements with the Commission which did not contain untrue statements of material fact or omissions of material fact and was required to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of its assets. IGI was also required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements. 41. As a result of Gallo's fraudulent conduct, IGI maintained false and misleading books and records in fiscal years 1995 and 1996, and the first three quarters of fiscal year 1997, which, among other things, materially overstated its assets, revenue, and net income during those financial reporting periods. Among other things, IGI failed properly to accurately account for its inventory, sales, and sales credits. Moreover, IGI's books, records, and accounts failed to document a number of transactions that took place and documented a number of transactions in improper time periods. 42. By reason of the foregoing, IGI violated Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. 43. Gallo knowingly or recklessly provided substantial assistance to IGI in connection with its violations of the aforementioned provisions with respect to fiscal years 1995 and 1996, and the first three quarters of fiscal year 1997, and Gallo, directly or indirectly, caused these violations to occur. 44. By reason of the conduct described in paragraphs 18 through 42 above, and pursuant to Section 20(f) of the Exchange Act, Gallo is liable as an aider and abettor of IGI's violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that this Court: I. Issue a Final Judgment of Permanent Injunction and Other Relief restraining and enjoining defendant Gallo from, directly or indirectly, violating Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.13b-1, and 240.13b2-2]; II. Issue a Final Judgment of Permanent Injunction and Other Relief restraining and enjoining defendant Gallo from aiding and abetting violations of Sections 13(a) and 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 Exchange Act Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13]; III. Order, pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)], that defendant Gallo be barred from acting as an officer or director of any issuer that has a class of securities registered 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)], as a result of his violations Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; IV. Order defendant Gallo to pay a civil money penalty for his unlawful acts pursuant to Section 20(d)(3) of the Exchange Act [15 U.S.C. § 78t(d)(3)]; V. Order defendant Gallo (1) to prepare an accurate accounting of (a) all compensation and other remuneration he received as a result of IGI fraudulently misrepresenting that it had attained or exceeded any revenue, net income or other performance targets for fiscal years 1995, 1996, and 1997, including all bonuses or stock options he received, and (b) profits from all sales by him of IGI securities between January 1, 1995 and November 17, 1997, and from the sale of IGI securities resulting from his exercise of stock options after November 17, 1997, and (2) to disgorge all such compensation, remuneration and trading profits, with prejudgment interest, and surrender to IGI all unexercised stock options; VI. 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; and VII. Grant such other and further relief as this Court may deem necessary and appropriate under the circumstances. DEMAND FOR JURY TRIAL Plaintiff United States Securities and Exchange Commission demands a jury trial pursuant to Rule 38(b) of the Federal Rules of Civil Procedure for all issues so triable. Respectfully submitted, Dated: ____________________ ___________________________
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http://www.sec.gov/litigation/complaints/complr17410a.htm
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