Valerie Terrigno, a gay activist who became the first mayor of West Hollywood, pleaded innocent to charges that she embezzled nearly $11,000 in federal funds when she operated a now-defunct counseling agency in 1983-84. Terrigno, 32, entered the plea before U.S. District Judge Laughlin E. Waters. When she was named in a 14-count indictment returned Oct. 23 by a federal grand jury, Terrigno and her attorney, Howard Weitzman, suggested that she was being prosecuted because she is a lesbian who has been a vocal advocate of equal rights for homosexuals. Assistant U.S. Atty. Richard M. Callahan, the prosecutor, said the former mayor is being prosecuted because of the facts gathered by federal investigators. Terrigno still sits on the West Hollywood City Council.