Donald J. MacPhee

SECURITIES EXCHANGE ACT OF l934
Release No. 45552 / March 12, 2002

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1519 / March 12, 2002

ADMINISTRATIVE PROCEEDING
File No.3-10721

I.

The Securities and Exchange Commission ("Commission") deems it appropriate to institute public administrative proceedings against Donald J. MacPhee ("MacPhee" or "Respondent"), pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").

II.

In anticipation of the institution of these public administrative proceedings, MacPhee has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over him and over the subject matter of these proceedings, which are admitted, MacPhee consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order").

III.

On the basis of this Order and the Respondent's Offer, the Commission makes the following findings:¹

A. RESPONDENT

Donald J. MacPhee, age 50, from 1988 through June 1997, was the Chief Financial Officer of IGI, Inc. ("IGI"), a diversified company engaged in producing and marketing animal health products such as poultry vaccines, veterinary pharmaceuticals, cosmetics and skin care products. At the direction of the former President of IGI, MacPhee engaged in improper sales cut-off practices, failed to adequately record sales credits in a timely manner and engaged in improper accounting practices regarding IGI's inventory. 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.

B. OTHER RELEVANT PERSONS AND ENTITIES

1. IGI, Inc. is located in Buena, New Jersey. IGI's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act, and is listed for trading on the American Stock Exchange.

2. The President, who was also IGI's Chief Operating Officer, directed MacPhee and other former IGI officers and employees to engage in fraudulent accounting practices from 1995 through 1997, that caused IGI to overstate its assets, revenues, and net income. IGI terminated the President in November 1997.

C. SUMMARY

This matter involves fraudulent accounting practices and reporting, internal controls, and books and records violations at IGI. Throughout 1995, 1996, and during the first two quarters of 1997, IGI's former President manipulated the company's annual and quarterly earnings by directing MacPhee, among others, to engage in improper accounting practices that caused IGI to overstate its assets, revenues, and net income. Former senior management manipulated IGI's earnings by failing to: (1) write off inventory that was defective or that had been destroyed; (2) record sales revenue in the proper accounting periods; and (3) process and record sales credits in a timely manner. These accounting improprieties primarily concerned IGI's production and storage of mareks, a poultry vaccine that is used to inoculate chickens against cancer.

During the relevant time period, IGI derived most of its revenues from the sale of poultry vaccines, of which mareks was the most important, and other animal health products. Rather than writing off the cost of large quantities of destroyed or defective vaccines, the former President directed MacPhee to establish reserves, which the former President then used to achieve his desired financial results. The former President also directed MacPhee, among others, to hold open IGI's books at the end of the quarters so he could inflate IGI's quarterly revenues. At the direction of the President, MacPhee also did not record sales credits in the appropriate time periods. MacPhee's actions, in part, caused IGI to overstate its assets, revenues, and net income.²

D. FACTS

1. Overstatement of Inventory and Understatement of
Related expenses_______________________

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 were defective and could not be sold. In connection with this practice, the former President instructed MacPhee not to write off the cost of large quantities of mareks inventory that either was destroyed or that was defective. Instead, the former President instructed MacPhee to establish 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.

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.

2. Improper Recognition of Revenue - Sales Cut-off

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 two quarters of fiscal year 1997, IGI routinely recorded sales of its products prior to shipment in order to increase improperly its quarterly and annual revenues and to manipulate its earnings.

At or around the end of each quarter, 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 invoices. The 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.

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,³ and for the first two quarters of fiscal year 1997.

3. Failure to Process and Record Sales Credits on a
Timely Basis_________________________________

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 for the first two quarters of fiscal year 1997. By delaying the processing and recording of such credits, IGI misstated its accounts receivable, sales, and net income from 1995 through 1996, and during the first two quarters of fiscal year 1997.

IGI typically 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 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. The former President routinely instructed a former officer and a former manager to delay approval of large sales credits until revenue levels were high enough to allow write-offs of the credits without affecting expected or targeted earnings. The former officer and manager followed the former President's instructions and delayed approval of large sales credits. MacPhee knew, or was reckless in not knowing, that the approval of large sales credits was being delayed in fiscal year 1995.

During 1996, the former President also 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.

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,⁴ and for the first two quarters of fiscal year 1997.

E. LEGAL DISCUSSION

Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit material misstatements or omissions, made with scienter, in connection with the purchase or sale of securities. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-62 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). Scienter is the "mental state embracing the intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). A fact is material if there is a substantial likelihood that a reasonable investor would consider the information to be important. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Misrepresentation of a company's earnings, SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969), and the improper recognition of revenue in departure from GAAP, see Fin v. American Solar King Corp., 919 F.2d 290, 297, 300-01 (5^th Cir. 1990), may be material.

Issuers must file accurate annual and quarterly reports with the Commission pursuant to Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. See SEC v. Savoy Industries Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Exchange Act Rule 12b-20 requires that statements and reports contain all information necessary to ensure that statements made in them are not materially misleading.

Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books, records, and accounts that accurately and fairly reflect the transactions and dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain the accountability of assets. Section 13(b)(5) provides that no person shall knowingly falsify any such book, record, or account or circumvent an issuer's system of internal accounting controls. Exchange Act Rule 13b2-1 also prohibits, directly or indirectly, the falsification of any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act.

F. VIOLATIONS BY MACPHEE

As a consequence of the fraudulent practices described above, while MacPhee was IGI's Chief Financial Officer, IGI's Forms 10-K for the fiscal years ended December 31, 1995 and 1996, and its Forms 10-Q for the periods ended March 31 and June 30, 1997, contained materially false and misleading financial statements that were not prepared in conformity with Generally Accepted Accounting Principles ("GAAP"). IGI also 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. Accordingly, IGI violated 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 thereunder.

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, 1997.⁵ MacPhee, at the direction of the former President, failed to write off the cost of large quantities of destroyed or defective inventory. Instead, MacPhee, at the President's direction, established inventory reserves, which MacPhee then used, at the President's direction, to systematically reduce the inventory. Also, MacPhee, at the former President's direction, held open IGI's books at the end of the quarters to recognize out-of-period sales which caused IGI to inflate its quarterly revenues. At the direction of the former President, MacPhee also did not record sales credits in the appropriate time periods.

MacPhee knew, or was reckless in not knowing, that by engaging in the foregoing practices, 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.

Accordingly, the Commission finds that MacPhee violated Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1 thereunder, and that he was a cause of IGI's violations of 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 thereunder.

IV.

MacPhee has submitted an Offer in which, without admitting or denying the findings herein, he consents to the Commission's entry of this Order, which: (1) makes findings as set forth above; and (2) orders MacPhee to cease and desist from committing or causing any violation, or any future violation, of certain provisions of the federal securities laws. As set forth in his Offer, MacPhee undertakes to cooperate with the Commission staff in connection with this action and any related judicial or administrative proceeding or investigation commenced by the Commission or to which the Commission is a party.

V.

Based on the foregoing, the Commission deems it appropriate to accept the Offer submitted by MacPhee and imposes the relief specified herein.

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that MacPhee cease and desist from committing or causing any violation, and any future violation, of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1 thereunder, and that he cease and desist from causing any violation, and any future violation, of 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 thereunder.

IT IS HEREBY FURTHER ORDERED that MacPhee shall comply with his undertaking described in Section IV. above.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes