 |
Home | Previous Page | |
|
||
 |
|
|
|
||
 |
|
|
|
|
|||||||||||||||
|
|
|||||||||||||||
|
|
Counsel of Record:
LOCAL COUNSEL:
UNITED STATES DISTRICT COURT
COMPLAINT Plaintiff, United States Securities and Exchange Commission ("Commission"), for its Complaint alleges as follows: SUMMARY 1. Defendant Lawrence N. Zitto ("Zitto"), the former Vice President of Operations of IGI, Inc. ("IGI"), and others, at the direction of IGI's former President, engaged in fraudulent accounting practices to inflate IGI's assets, revenues, and net income in 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 was used to inoculate chickens against cancer. Mareks was the most important poultry vaccine that IGI produced, because sales of other poultry vaccines were dependent on the 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. 3. Throughout fiscal year 1995, 1996 and the first three quarters of fiscal year 1997, Zitto, and others, at the direction of IGI's former President, inflated IGI's assets, revenues, and net income by failing to: (1) write off inventory that was either defective or that was destroyed; (2) record sales revenue in the proper accounting periods; and (3) process and record sales credits in a timely manner. As a result of Zitto's unlawful conduct, IGI filed materially false and misleading financial statements on Forms 10-K for 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, and internal controls provisions of the federal securities laws. 4. 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 5. 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. 6. 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. 7. 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 fourth quarter by $878,000. 8. As a result of the fraud carried out by Zitto, and others, IGI's public investors and potential investors were deceived into believing that IGI's revenues and net income were materially better than they actually were. 9. The Commission seeks an Order of Permanent Injunction, restraining and enjoining Zitto from further violations of the statutes and rules alleged to have been violated, and an Order requiring Zitto to pay a civil money penalty, pursuant to Section 21(d)(3) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78u(d)(3)]. JURISDICTION 10. 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 restrain and enjoin permanently Zitto from engaging in the acts, practices, and transactions alleged herein. 11. 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]. 12. Zitto, 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 13. Lawrence N. Zitto, age 60, a resident of Richland, New Jersey, was at all relevant times, the Vice President of Operations for IGI. During all relevant times, Zitto was the IGI officer with overall responsibility for production and sales. In April 1998, IGI terminated Zitto's employment. RELEVANT ENTITY 14. 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 Zitto Violated Sections 10(b) and 13(b)(5) of the
15. Paragraphs 1 through 14 above are re-alleged and incorporated herein by reference. A. Overstatement of IGI's Inventory and Understatement of Related Expenses 16. From 1995 through the third quarter of 1997, IGI 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. 17. Zitto, at the direction of the former President, failed to process or approve documentation for the destruction of large quantities of Mareks in a timely manner. Consequently, IGI's books and records failed to reflect the extent to which inventory actually had been destroyed, which resulted in IGI overstating its assets and net income. Zitto, when he was directed to do so by the former President, failed to notify IGI's accounting staff that large quantities of Mareks were destroyed, and how much defective Mareks should be written-off, in order to manage the IGI's earnings. 18. Zitto and others, at the direction of the former President, kept 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 inventory in its books and records, which had the effect of artificially inflating its assets and net income. 19. In connection with their annual audit of IGI's 1995 and 1996 fiscal year results, the independent auditors observed IGI's inventory. IGI employees falsely represented to the auditors that they would ruin Mareks if they removed it from the liquid nitrogen in which it was stored. 20. Zitto knew that this representation was made to the auditors and that it was false and misleading. Zitto, however, did nothing to correct or otherwise inform the auditors that this representation was false. 21. As a result of Zitto's misconduct involving IGI's inventory, IGI overstated its assets and net income for fiscal years 1995 and 1996, and for the first three quarters of fiscal year 1997. B. Improper Recognition of Revenue - Sales Cut-off 22. IGI's revenue recognition policy required that sales revenue be recognized when products were shipped. Contrary to this policy, during fiscal years 1995, 1996, and the first three quarters of fiscal year 1997, IGI routinely recorded sales of its products prior to shipment in order to improperly increase its quarterly and annual revenues and to manipulate its earnings. 23. At or around the end of each quarter during 1995 to 1997, the former President instructed Zitto and others to hold IGI's books open beyond the end of the reporting period for which they reflected results and to backdate invoices and shipping documents in order to fraudulently manipulate to company's financial reporting data. Zitto, in turn, instructed IGI's sales clerks, whom he supervised, to backdate invoices and shipping documents in order to record these out-of-period sales. 24. As a result of Zitto's actions, IGI recorded revenues from the sales of its products prior to shipment and recorded revenues in the incorrect quarterly or annual periods. These practices were not in conformity with Generally Accepted Accounting Principles ("GAAP"). 25. As a result of Zitto's misconduct regarding sales cut-off practices, IGI misstated its assets, revenues, and net income for fiscal years 1995 and 1996, during each interim quarter thereof, and during the first three quarters of fiscal year 1997. C. Failure to Process and Record Sales Credits on a Timely Basis 26. 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 who prepared credit memoranda. 27. Before entering the credits into IGI's accounting system, the sales clerks sent the credit memoranda to Zitto and to their immediate manager, who reported to Zitto, for approval. 28. Zitto and the manager, at the direction of the former President, routinely delayed approval of large sales credits until revenue levels were high enough to allow write-offs of the credits without affecting expected or targeted earnings. 29. Zitto and the manager, in some instances at the direction of the former President, also instructed the sales clerks not to process or record large sales credits at all. 30. As a result of Zitto's misconduct regarding sales credits, IGI misstated its assets, revenues, and net income for fiscal years 1995 and 1996, during each interim quarter thereof, and for the first three quarters of fiscal year 1997. 31. Zitto knew that by engaging in the aforementioned improper accounting practices with respect to IGI's inventory, sales cut-off, and sales credits, 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 the fiscal years ended December 31, 1995 and 1996, and for the quarters ended March 31, June 30, and September 30, 1997. 32. Section 10(b) of the Exchange Act, and Rule 10b-5, prohibit, inter alia, any device, scheme or artifice to defraud in connection with the purchase or sale of securities, 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 Rules 13b2-1 [17 C.F.R. §§ 240.13b2-1], prohibit, inter alia, circumvention of internal accounting controls and the falsification of corporate books and records. 33. By virtue of the conduct described above, Zitto 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 Zitto Aided and Abetted
34. Paragraphs 1 through 33 above are re-alleged and incorporated herein by reference. 35. IGI 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, June 30, and September 30, 1997. The financial statements contained in IGI's filings were materially false and misleading by virtue of IGI's fraudulently inflated assets, revenues, and net income. 36. 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 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 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. 37. As a result of Zitto's misconduct during fiscal years 1995 and 1996, and the first three quarters of fiscal year 1997, IGI maintained false and misleading books and records which, among other things, materially overstated its assets, revenues, and net income during those financial reporting periods. Among other things, IGI failed 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. 38. 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]. 39. Zitto knowingly 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. Indeed, Zitto, directly or indirectly, caused these violations to occur. 40. By reason of the foregoing, and pursuant to Section 20(f) of the Exchange Act [15 U.S.C. § 78t(f)], Zitto 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 Zitto from, directly or indirectly, violating Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 and 13b2-1; II. Issue a Final Judgment of Permanent Injunction and Other Relief restraining and enjoining Zitto from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13; III. Order Zitto to pay a civil money penalty pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78t(u)(3)]; and IV. 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. V. Grant such other and further relief as this Court may deem necessary and appropriate under the circumstances. Respectfully submitted, Dated: _________________ ___________________________
___________________________
http://www.sec.gov/litigation/complaints/complr17410b.htm
|