U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

LITIGATION RELEASE NO. 17410 / March 13, 2002

ACCOUNTING AUDITING ENFORCEMENT RELEASE NO. 1521 / March 13, 2002

SEC v. JOHN P. GALLO, Civil Action No. 02-1087 (SMO) (D.N.J. March 13, 2002)

SEC v. LAWRENCE N. ZITTO, Civil Action No. 02-1088 (SMO) (D.N.J. March 13, 2002)

SEC v. DONALD J. MACPHEE, Civil Action No. 02-1089 (SMO) (D.N.J. March 13, 2002)

SEC FILES FINANCIAL FRAUD ACTIONS AND SETTLED
ADMINISTRATIVE PROCEEDINGS AGAINST FORMER SENIOR
OFFICERS AND MANAGERS OF IGI, INC. AND AGAINST IGI, INC.

The Securities and Exchange Commission today filed suit in the United States District Court for the District of New Jersey against John P. Gallo ("Gallo"), the former President and Chief Operating Officer of IGI, Inc. ("IGI"), for violations of the antifraud, periodic reporting, record keeping, internal controls and lying to auditors provisions of the federal securities laws. The Complaint alleges that Gallo engaged in a fraudulent scheme to inflate IGI's assets, revenues and net income and to manage the company's reported earnings. IGI, a small animal health and cosmetics company with its principal offices located in Buena, New Jersey, manufactures, among other things, poultry vaccines and other animal health products, pet products, and cosmetics and skin care products.

In related actions, the Commission filed a settled antifraud injunctive action against Lawrence N. Zitto ("Zitto"), IGI's former Vice President of Operations, a settled civil penalty proceeding against Donald J. MacPhee ("MacPhee"), IGI's former Chief Financial Officer, and instituted and simultaneously settled administrative cease-and-desist proceedings against IGI, MacPhee, William A. Dickson ("Dickson"), IGI's former Production Manager for Poultry Vaccines, and Stephen P. Collins ("Collins"), IGI's former Manager of International Sales.

The Complaint against Gallo alleges that:

From fiscal year 1995 through the third quarter of fiscal year 1997, Gallo directed the former Vice President of Operations, the former Production Manager for Poultry Vaccines and, until the second quarter of fiscal year 1997, the former Chief Financial Officer, not to record properly the costs associated with reductions in IGI's inventory for large quantities of poultry vaccine that either were destroyed or were defective and could not be sold. Gallo further directed IGI's former Chief Financial Officer to improperly account for destroyed or defective poultry vaccines as inventory reserves, instead of writing them off as the losses were realized in conformity with Generally Accepted Accounting Principles. Gallo also directed the former Chief Financial Officer to adjust inventory reserve balances to achieve his desired financial results.

Gallo directed the former Vice President of Operations and the former Manager of International Sales to record revenue from the sale of IGI products prior to shipment in order to fraudulently increase IGI's revenues and to manipulate its earnings. Gallo directed these individuals and the former Chief Financial Officer to hold IGI's books open after the quarter had ended and directed the former Vice President of Operations and the former Manager of International Sales to backdate sales invoices and shipping documents.

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. Finally, in connection with the annual audits of IGI's financial statements for fiscal years 1995 and 1996, Gallo signed IGI's management representation letters, later given to IGI's independent auditors, that he knew, should have know, or was reckless in not knowing were materially false and misleading.

As a result of Gallo's fraudulent conduct, IGI materially overstated its assets, revenues and net income for fiscal years 1995 and 1996, the interim quarters thereof, and for the first three quarters of fiscal year 1997, and IGI filed 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.

In its Complaint, the Commission requests that the Court issue a final judgment of permanent injunction and other relief restraining and enjoining Gallo from violating and/or aiding and abetting violations of the antifraud, periodic reporting, record keeping, internal controls and lying to auditors provisions of the federal securities laws, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2. In addition to civil money penalties, the Commission is seeking an order that Gallo be permanently barred from acting as an officer or director of any public company. The Complaint also seeks an order that Gallo prepare an 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. Finally, the Commission's Complaint seeks an order that Gallo disgorge all such compensation, remuneration and trading profits, with prejudgment interest, and surrender to IGI all unexercised stock options.

SEC SETTLES FRAUD CHARGES WITH LAWRENCE N. ZITTO

In a related action, the Commission filed a settled injunctive action against Lawrence N. Zitto that alleges, among other things, that from fiscal year 1995 through the third quarter of fiscal year 1997, Zitto, at the direction of Gallo, failed to process or approve documentation for the destruction of large quantities of poultry vaccines that were included in IGI's inventory. The Complaint also alleges that Zitto, at the direction of Gallo, instructed his subordinates to hold IGI's books open and record out-of-period sales and that Zitto instructed IGI employees to backdate invoices and shipping documents. Finally, the Complaint alleges that at the direction of Gallo, Zitto delayed approval of large sales credits, and in some instances instructed his subordinates not to process or record large sales credits at all.

Zitto, without admitting or denying the allegations of the Complaint, consented the entry of a Final Judgment permanently restraining and enjoining him from violating and/or aiding and abetting violations of the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws, 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-1, 13a-13 and 13b2-1 thereunder. Zitto also agreed to pay a $20,000 civil penalty pursuant to Section 21(d)(3) of the Exchange Act.

SEC SETTLES CEASE-AND-DESIST PROCEDING WITH IGI

In a related action, the Commission instituted and simultaneously settled an administrative cease-and-desist proceeding against IGI pursuant to which IGI, without admitting or denying the Commission's findings, consented to an order requiring it to cease and desist from committing or causing any violation, and any future violation, of the periodic reporting, record keeping and internal controls provisions of the federal securities laws, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13. The Commission found that in fiscal year 1995 and 1996, and for the first three quarters of fiscal year 1997, IGI overstated its assets, revenues and net income in annual and periodic filings with the Commission. [In the Matter of IGI, INC., Administrative Proceeding File No. 3-10722; SECURITIES EXCHANGE ACT OF 1934 Release No. 45553; ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1520] March 12, 2002.

SEC SETTLES CEASE-AND-DESIST PROCEEDING WITH DONALD J. MACPHEE

In a related action, the Commission instituted and simultaneously settled an administrative cease-and-desist proceeding against Donald J. MacPhee, pursuant to which MacPhee, without admitting or denying the Commission's findings, consented to an order requiring him to cease and desist from committing or causing any violation, and any future violation, of the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws, 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-1, 13a-13 and 13b2-1 thereunder. Also, without admitting or denying the allegations of the Commission's Complaint, MacPhee consented to the entry of Final Judgment requiring him to pay a civil penalty of $20,000 pursuant to Section 21(d)(3) of the Exchange Act.

The Commission found that during fiscal years 1995 and 1996, and the first two quarters of fiscal year 1997, MacPhee, at the direction of Gallo, did not write-off the cost of large quantities of poultry vaccines in IGI's inventory that either had been destroyed or that were defective. Instead, at the direction of Gallo, MacPhee establish inventory reserves that were then adjusted to obtain Gallo's desired financial results. The Commission also found that MacPhee, at the direction of Gallo, held IGI's books open and recorded out-of-period sales and that MacPhee, at the direction of Gallo, did not to record valid sales credits in the proper accounting periods. [In the Matter of DONALD J. MACPHEE, Administrative Proceeding File No. 3-10721; SECURITIES EXCHANGE ACT OF 1934 Release No. 45552; ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1519] March 12, 2002.

SEC SETTLES CEASE-AND-DESIST PROCEEDINGS WITH WILLIAM A. DICKSON AND STEPHEN P. COLLINS

In a related action, the Commission instituted and simultaneously settled administrative cease-and-desist proceedings against William A. Dickson and Stephen P. Collins each of whom, without admitting or denying the Commission's findings, consented to an order requiring them to cease and desist from committing or causing any violation, and any future violation, of the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1.

The Commission found that from fiscal year 1995 through the third quarter of fiscal year 1997, Dickson, at the direction of Gallo, falsified inventory records and failed to disclose accurate records and information concerning IGI's inventory of vaccines to IGI's assistant controller and to IGI's former independent auditors during the audits for fiscal years 1995 and 1996. The Commission found that Collins, at the direction of Gallo and Zitto, instructed IGI's sales clerks to backdate sales invoices and to record out-of-period sales. The Commission also found that Gallo and Zitto instructed Collins to delay approval of large sales credits, or to not process or record at them at all. [In the Matter of WILIAM A. DICKSON and STEPHEN P. COLLINS, Administrative Proceeding File No. 3-10720; SECURITIES EXCHANGE ACT OF 1934 Release No. 45551; ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1518] March 12, 2002.


*  SEC Complaint: SEC v. John P. Gallo in this matter.
*  SEC Complaint: Sec v. Lawrence N. Zitto in this matter.
*  SEC Complaint: SEC v. Donald J. MacPhee in this matter.


http://www.sec.gov/litigation/litreleases/lr17410.htm

Modified: 10/15/2003