SEC Seeks to Take Exec’s Stock Options

The Securities and Exchange Commission sued a New Jersey businessman Wednesday, aiming to strip him of bonuses and stock options that the agency alleges were granted as the result of fraudulently inflated financial statements.

It was the first time in a securities fraud case that the SEC has tried to take away an executive’s stock options, although the agency has previously gone after executive bonuses and profits from stock sales, said Christopher Conte, the SEC’s assistant director of enforcement.

The move comes only days after President Bush demanded more accountability of corporate executives in a speech that outlined a 10-point plan to deal with executives who mislead investors. Bush’s plan would strip these executives of bonus payments and bar them from running a public company, but it stops short of making them liable for investor losses.

“If officers of a public company participate in financial fraud and are rewarded through compensation, we will seek to have that profit returned to the company,” said Conte, who added that the SEC is receiving considerably more complaints about financial fraud in the wake of the Enron Corp. scandal than ever before.

“I can’t say what the cause is, but relative to the number of matters we were aware of, the numbers this year are bigger,” he said. “We are hearing about more and more possible problems at companies.”

Conte declined to comment on whether the agency is planning to take similar action in cases in which executive compensation has been an issue, including Enron and Global Crossing Ltd.

In its suit, the SEC alleges John P. Gallo, the former president and chief operating officer of IGI Inc., a Buena, N.J., maker of poultry vaccines, inflated the company’s earnings over three years.

The SEC alleged Gallo, in an effort to exceed earnings and revenue targets, instructed the company’s chief financial officer not to write off destroyed or defective inventory, as would be required under generally accepted accounting standards.

He also instructed the company’s former vice president of operations to backdate sales documents to manipulate earnings, according to the suit.

Gallo’s attorney, Edwin Jacobs, said he hadn’t seen the suit and couldn’t comment.

The SEC seeks to permanently bar Gallo from acting as an officer or director of any public firm. The agency also wants Gallo to prepare an accounting of all compensation and “other remuneration” he received as a result of “fraudulently misrepresenting that IGI had exceeded any revenue, net income or other performance targets for fiscal years 1995, 1996 and 1997.”

The SEC wants Gallo to return his salary, bonus and stock sale profits and any unexercised stock options to the firm.

The agency said it had settled related actions against the company’s chief financial officer and former vice president of operations, as well as two other IGI executives.

Without admitting or denying guilt, these executives settled with the SEC by agreeing not to violate securities laws in the future.

Shares of IGI rose 2 cents to 72 cents Wednesday on the American Stock Exchange.