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Bally Total Fitness Holding Corp. is facing an investigation by the U.S. Securities and Exchange Commission and a shareholder class-action lawsuit after issuing a restatement of its revenues since 1997 when it released its 2003 results on March 11, 2004.
As of June 3, 10 law firms representing Bally (NYSE: BFT) shareholders have filed federal class action complaints against the company in the U.S. District Court for the Northern District of Illinois. Plaintiffs charge that they have suffered damages by paying an artificially inflated price for their stock because its value was based on the company’s false and misleading financial performance numbers. More separate suits may still be filed.
In an April 28 press release, the company announced that executive vice president and chief financial officer John W. Dwyer had resigned, and that it had issued a restatement to correct errors in revenues reported for each annual and quarterly period from Jan. 1, 1997, through Sept. 30, 2003. These errors in accelerated dues recognition for non-obligatory prepaying members amounted to approximately $43 million. After this announcement, Bally stock fell 17 percent, to close at $4.50 per share on extremely heavy trading volume April 28.
On June 3, stock closed at 4.49 (0 percent change) on a volume of 256,800, up from a 52-week low of 3.60 on May 20.
Officially, the complaint specifies that Bally; Paul Toback, chairman, CEO and president; Lee Hillman, former chairman, CEO and president; and Dwyer did three things: one, violated Generally Accepted Accounting Principles (GAAP) and the company’s own internal policies by prematurely recognizing revenue on certain non-obligatory prepaid membership dues; two, lacked adequate internal controls and was therefore unable to ascertain the true financial condition of the company; and three, materially overstated the value of the company’s reported revenues.
In response to the suits, Bally Vice President Jon Harris issued the following statement: “Bally’s directors and executive management believe this suit to be totally without merit. We deny all of the plaintiff’s substantive allegations, and we will vigorously defend this litigation.”
David Rosenfeld, an associate at New York-based Geller Rudman PLLC, one of the first firms that filed suit, said that this is a typical response from any company facing shareholder class-action litigation.
“They always say this, but we believe that there is a strong allegation here,” Rosenfeld told SNEWSÂ®. “Any time a company issues a restatement, it’s an admission that their numbers were wrong, and there usually are consequences for that.”
Although Bally’s restatement covers seven years, law limits the suit to a five-year period, so any Bally shareholder from August 3, 1999, to April 28, 2004, is eligible to file to be the lead plaintiff on the case or apply for a recovery. Lead plaintiffs (usually one to five) represent the entire class and generally are large institutional investors who potentially have the most at risk.
Lead plaintiff applications are due by law by July 26, at which time each firm files its individual lead plaintiff motions with the court. According to legal sources, after briefings, the court determines lead plaintiffs, and all law firms consolidate information. In the end, one or two firms end up managing one comprehensive class-action suit. If the court determines that the complaint should proceed (defendants generally file for dismissal), the class action is certified and registered shareholders are notified about their ability to participate via direct mail or announcements in major newspapers.
Although Geller Rudman’s complaint indicates that there could be “hundreds or thousands” of plaintiffs, Rosenfeld declined to estimate how many might participate. If awarded, ultimate damages are based on a complicated series of considerations, including the price of the stock at the end of the class period ($4.50), the 90-day average stock price (which cannot be assessed until the lead plaintiffs are appointed and the case is consolidated), and to what degree the misrepresentation of the numbers contributed to the loss versus normal market fluctuations and outside influences.
SNEWSÂ® legal sources said that shareholders in class-action suits typically receive additional stock — which may not amount to much since it is diluted immediately upon issuance — and the attorneys who represent these cases on a contingent basis apply for a percentage of the recovery. According to Rosenfeld, cases usually run between three to five years.
A copy of the complaint filed in this action is available from the Illinois court, or can be viewed on the Geller Rudman website by clicking here.Â SEC filings by Bally can be accessed by clicking here. Other than the corporate statement to the media, Bally has not acknowledged the pending lawsuit on its website or among press releases at www.ballyfitness.com. The company’s annual meeting of stockholders will be July 29.