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A court hearing has been set for the pending shareholder class-action lawsuit against Bally Total Fitness Holding Corp., but no other action has been taken since shareholders began filing federal class action complaints in late May. The complaints were in response to Bally (NYSE: BFT) restating its revenue in the spring.
Ten law firms representing Bally shareholders have filed 10 separate federal class-action complaints in the U.S. District Court for the Northern District of Illinois, all of which basically charge damages because of artificially inflated stock prices. The value, under which they based their stock-buying decisions, was based on the company’s financial performance numbers, which were called false and misleading. (See SNEWSÂ® story, June 4, 2004: “Bally faces shareholder class-action suit after revenue reinstatement.”)
Further, the federal class-action complaints allege that Bally; Paul Toback, chairman, CEO and president; Lee Hillman, former chairman, CEO and president; and John Dwyer, former executive vice president and CFO, violated the Securities Exchange Act of 1934 by violating accounting principles (known as “GAAP”), prematurely recognizing revenue on prepaid membership dues, not having enough internal controls, and overstating revenue numbers.
U.S. District Court Judge John F. Grady on Sept. 8 consolidated the plaintiff’s complaints and will hear opposition to that action from plaintiffs’ law firms in a hearing set for Oct. 13. After that, the judge will appoint a lead plaintiff and lead counsel, which means that only one or two law firms will manage the comprehensive class-action suit. Once the plaintiff and counsel are chosen, they will consolidate their information and file a new complaint covering all shareholders involved.
According to legal sources, defendants usually file for dismissal at this point, and then the court will determine whether the complaint should proceed. If the suit is officially deemed a class action, registered shareholders will be notified via direct mail or announcements in major newspapers about their opportunity to participate in the case. Shareholders who do not wish to participate can opt-out and will not be affected by the suit’s outcome. Additional dates for these actions have not yet been set.
“We are in a very preliminary investigation at this point,” Jon Harris, vice president of communications at Bally, told SNEWSÂ®, in a concise statement. “We believe that the suits have no merit, and we will contest them vigorously.”
But it’ll likely be a long time until the case reaches a conclusion. Class-action suits usually run from two to five years; however, some cases can go longer.
“With allegations of securities fraud and a large corporation involved, it becomes a complex case,” Conor Crowley, an associate at Chicago-based Much Shelist PC and a firm representing shareholders, told SNEWSÂ®. “That means it can take longer.”
As a part of these actions, the company has also recently endured some sharp public remarks from major shareholder Emanuel Pearlman of the Liberation Investment Group. Pearlman, who owns 7.56 percent of the company, criticized Bally for last month granting CEO Paul Toback a $100,000 a year raise (to $575,000 annually) while this was going on. Pearlman also has told the company to focus on the delayed release of its 10Q results. The company said in mid-August that the filing now would be delayed until at least Sept. 30. Â
Last week, Pearlman also threatened to nominate new board members or propose transactions involving governance or communication if Bally doesn’t find a way to improve shareholder value. Most recently, Pearlman urged Bally to sell some assets and refinance debt. Pearlman also sent a letter to the company’s board after Bally spokesman Jon Harris said that the company had fired Pearlman from his role as a consultant. Pearlman denied that statement and urged Bally to be more “transparent” in its financial communications with stockholders.
The road has become more and more slippery for Bally.
In an April 30, 2004, report, Donald Trott of Jeffries & Co., a New York-based equity research company that analyzes the Bally company and its stock, said that he expected Bally to be fully exonerated of any wrongdoing. However, in an Aug. 10, 2004, report, Trott added that “the lack of visibility combined with the difficult industry environment make BFT shares highly speculative.” In a June report, Trott called Bally’s valuation “highly uncertain.”
Trott also wrote in the August report, “Management also announced the restatement of prior periods and the continued review of the company’s financials. We are suspending our earnings estimates until the company’s second quarter financial results are released and there is more clarity from management.”
The report by Jeffries & Co. said Pearlman and Liberation “believe fundamental changes in Bally’s corporate governance, such as anti-takeover devices, are necessary. These proposed sound governance practices are believed to impose a level of management and BOD accountability, thereby increasing shareholder value. A representative for Liberation or Pearlman has on several occasions met with Bally CEO, Paul Toback, and one of the company’s independent Board members expressing Liberation’s willingness to work with management to develop a strategy to maximize shareholder value as well as Liberation’s views on the matter.”
Pearlman or other Liberation representatives did not return calls requesting an interview.
Aside from Liberation and Pearlman, the company’s stock prices have also not been good news in the last year. Shares closed Sept. 20 at 3.28, a decrease over the previous week’s closing of 0.12 or 3.53 percent. That’s significantly lower than its 52-week high on Oct. 14, 2003, of 9.31 and nearly its lowest of 3.26 hit on Sept. 20. Its financial restatement was released March 11, 2004, along with the company’s 2003 results.
In June, David Rosenfeld, an associate at New York-based Geller Rudman PLLC, one of the first law firms to file a complaint, said defendants always say a case is without merit.
“They always say this, but we believe that there is a strong allegation here,” Rosenfeld told SNEWSÂ® in June. “Any time a company issues a restatement, it’s an admission that their numbers were wrong, and there usually are consequences for that.”
A copy of the complaint filed in this action is available from the Illinois court, or can be viewed at the Geller Rudman website by clicking here. SEC filings by Bally can be accessed by clicking here. Other than short corporate statements to the media, Bally has not acknowledged the pending lawsuit on its website or among press releases at www.ballyfitness.com. The international health club company based in Chicago, Ill., has approximately 4 million members and 420 facilities located in 29 states, Mexico, Canada, Asia and the Caribbean under several brand names.