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U.S. Securities and Exchange Commission

Counsel of Record:
Mark Kreitman
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 9-11
Washington, D.C. 20549-0911
(202) 942-4677
(202) 942-9581 (fax) MK 8935

LOCAL COUNSEL:
Louis J. Bizzarri
Assistant United States Attorney
United States Attorney's Office
401 Market Street
Fourth Floor
Camden, N.J. 08101
(856) 757-5139 LB 3903

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY


UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549,

Plaintiff,

v.

DONALD J. MACPHEE,

Defendant.


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Civil Action No.

COMPLAINT

Plaintiff, United States Securities and Exchange Commission ("Commission"), for its Complaint alleges as follows:

SUMMARY

1. This action concerns the activities of the defendant, Donald J. MacPhee ("MacPhee"), the former Chief Financial Officer of IGI, Inc. ("IGI"). IGI is a diversified company located in Buena, New Jersey, that produces and markets animal health and consumer products, including Mareks, a poultry vaccine that is used to inoculate chickens against cancer. At various times between 1995 and June 1997, MacPhee, at the direction of IGI's former President, engaged in improper accounting practices related to revenue recognition, the recording of sales credits, and IGI's inventory. As a result of his misconduct, MacPhee knew, or was reckless in not knowing, that he caused IGI to materially overstate its assets, revenues, and net income and caused IGI to file materially false and misleading reports and financial statements with the Commission for IGI's fiscal years ended December 31, 1995 and December 31, 1996, and for the quarters ended March 31, and June 30, 1997.

2. By engaging in such conduct, MacPhee violated 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 and 13b2-1 [17 C.F.R. §§ 240.10b-5 and 240.13b2-1], and was a cause of IGI's 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].

JURISDICTION AND VENUE

3. The Commission brings this action pursuant to the authority conferred upon it by Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] to obtain a civil money penalty from defendant MacPhee.

4. This Court has jurisdiction over this action pursuant to Sections 21 and 27 of the Exchange Act [15 U.S.C. §§ 78u and 78aa]. Venue lies in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa].

5. The defendant, directly and indirectly, has made use of the mails or the means or instrumentalities of interstate commerce in connection with the acts, practices and transactions alleged herein, certain of which occurred within the District of New Jersey.

THE DEFENDANT

6. Donald J. MacPhee, age 50, resides in Holland, Pennsylvania. From 1988 through June 1997, MacPhee was the Chief Financial Officer of IGI. In late June 1997, MacPhee alerted IGI's outside counsel about financial irregularities at IGI and in July 1997, he departed IGI for health reasons. MacPhee is not now, and was not at the time of his misconduct, a certified public accountant.

FIRST CLAIM

MacPhee Violated Sections 10(b) and 13(b)(5) of the
Exchange Act and Exchange Act Rules 10b-5 and 13b2-1

7. Paragraphs 1 through 6 above are re-alleged and incorporated herein by reference.

A. Overstatement of Inventory and Understatement of Related Expenses

8. From 1995 through the second quarter of 1997, IGI, while MacPhee was Chief Financial Officer, overstated its assets and net income by not recording properly the costs associated with reductions in its inventory for large quantities of Mareks that were either destroyed or defective and could not be sold.

9. In connection with this practice, MacPhee, at the direction of the former President of IGI, did not record the costs of large quantities of Mareks inventory that were either destroyed or were defective. Instead, MacPhee, upon instruction from the former President, established inventory reserves. The former President decided when and how much Mareks would be destroyed and directed MacPhee, who complied with the directive, to reduce or increase the inventory reserve balances to achieve the former President's desired financial results. MacPhee knew, or was reckless in not knowing, that the reserves did not properly reflect the costs of destroyed or defective inventory.

10. As a result of MacPhee's misconduct, and that of others, involving IGI's inventory, IGI, while MacPhee was the company's Chief Financial Officer, overstated its assets and net income for fiscal years 1995 and 1996, and for the first two quarters of fiscal year 1997.

B. Improper Recognition of Revenue - Sales Cut-Off

11. IGI's revenue recognition policy required that sales revenue be recognized when products were shipped. Contrary to this policy, during fiscal years 1995 and 1996, and the first three quarters of fiscal year 1997, IGI routinely recorded sales of its products prior to shipment in order to fraudulently increase its quarterly and annual revenues and to manipulate its earnings.

12. At or around the end of each quarter during the period from 1995 through the second quarter of 1997, the former President instructed MacPhee, among others, to hold IGI's books open and to record out-of-period sales. MacPhee knew, or was reckless in not knowing, that as part of this practice, employees backdated sales invoices. IGI's accounting department, which MacPhee supervised, routinely informed the sales staff when the "extended quarter" had ended and when out-of-period sales should no longer be entered into IGI's computerized accounting system.

13. As a result of MacPhee's misconduct, and that of others, involving IGI's sales cut-off practices, IGI, while MacPhee was the company's Chief Financial Officer, misstated its assets, revenue, and net income for fiscal years 1995 and 1996, during each interim quarter thereof, and for the first two quarters of fiscal year 1997.

C. Failure to Process and Record Sales Credits on a Timely Basis

14. IGI, while MacPhee was Chief Financial Officer, failed to process and record sales credits on a timely basis in fiscal years 1995 and 1996, and during the first two quarters of fiscal year 1997. By delaying the processing and recording of such credits, IGI misstated accounts receivable, sales, and net income from 1995 through 1996, and during the first two quarters of fiscal year 1997.

15. 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 who prepared credit memoranda. Before entering the credits into IGI's accounting system, the sales clerks sent the credit memoranda to their managers for approval.

16. In fiscal year 1995, the former President routinely instructed two former managers to delay approval of large sales credits until the revenue levels were high enough to allow write-offs of the credits without affecting expected or targeted earnings. MacPhee knew, or was reckless in not knowing, that the approval of large sales credits was being delayed in fiscal year 1995.

17. During 1996, the former President instructed MacPhee not to record valid sales credits. MacPhee's knowing or reckless failure to record sales credits caused IGI to overstate materially its assets, revenues, and net income in fiscal year 1996.

18. As a result of MacPhee's misconduct, and that of others, involving sales credits, IGI, while MacPhee was the company's Chief Financial Officer, misstated its assets, revenues, and net income for fiscal years 1995 and 1996, during each interim quarter thereof, and for the first two quarters of fiscal year 1997.

19. 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 [15 U.S.C. § 78m(b)(5)], and Exchange Act Rule 13b2-1 [17 C.F.R. §§ 240.13b2-1], prohibit, inter alia, circumvention of internal accounting controls and falsification of corporate books and records.

20. By virtue of the conduct described in paragraphs 7 through 19 above, MacPhee violated 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 and 13b2-1 [17 C.F.R. §§ 240.10b-5 and 240.13b2-1].

SECOND CLAIM

MacPhee Was a Cause 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

21. Paragraphs 1 through 20 above are re-alleged and incorporated herein by reference.

22. IGI, while MacPhee was IGI's Chief Financial Officer, filed with the Commission annual reports on Form 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, and June 30, 1997. The financial statements in all the aforementioned filings were materially false and misleading by virtue of IGI's fraudulently inflated assets, revenue, and net income. MacPhee signed IGI's Forms 10-K for fiscal year 1995 and 1996, the interim Forms 10-Q for those years, and the Form 10-Q for the quarter ended March 30, 1997. MacPhee left IGI in late June 1997 and did not prepare or sign IGI's Form 10-Q for the quarter ended June 30, 1997.

23. During 1995 through 1997, IGI had securities registered with the Commission pursuant to Section 12(g) of the Exchange Act [15 U.S.C. § 78l(g)]. As a result, IGI was required to file quarterly, annual, and other reports and statements with the Commission which did not contain untrue statements of material facts or omissions of material facts, 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 also was required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances 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.

24. As a result of MacPhee's misconduct, IGI maintained with respect to fiscal years 1995 and 1996, and for the first two quarters of fiscal year 1997, false and misleading books and records which, among other things, materially overstated its assets, revenues, and net income during those financial reporting periods.

25. By reason of the foregoing, IGI violated 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].

26. By reason of the foregoing, MacPhee was a cause 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.

Enter an Order requiring defendant MacPhee to pay a civil money penalty pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)];

II.

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

III.

Grant such other relief as the Court deems just and appropriate.

Respectfully submitted,

Dated: ____________________

___________________________
Mark Kreitman, MK 8935
Linda Chatman Thomsen
Christopher R. Conte
Noel A. Gittens
Attorneys for Plaintiff
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 9-11
Washington, D.C. 20549-0911
(202) 942-4677 (Kreitman)
(202) 942-9581 (fax)

___________________________
Local Counsel:
Louis J. Bizzarri, LB 3903
Assistant United States Attorney
United States Attorney's Office
401 Market Street
Fourth Floor
Camden, N.J. 08101
(856) 757-5139


http://www.sec.gov/litigation/complaints/complr17410c.htm

Modified: 03/13/2002