BALA CYNWYD, PA — There has been a class action suit filed against Bally Total Fitness on behalf of all purchasers of common stock between Aug. 3, 1999 and April 28, 2004.
The complaint, filed in the United States District Court for the Northern District of Illinois, charges Bally, Paul A. Toback, Lee S. Hillman and John W. Dwyer violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by issuing a series of materially false and misleading statements to the public that described the company's increasing financial performance.
According to a statement from a release issued by the law firm of Schiffrin & Barroway, LLP, one of the no less than five firms filing suit so far, “As alleged in the complaint, these statements were materially false and misleading because they failed to disclose and/or misrepresented the following adverse facts, among others: (i) that the Company had violated Generally Accepted Accounting Principles (“GAAP”) and its own internal policies by prematurely recognizing revenue on certain non-obligatory prepaid membership dues; (ii) that the Company lacked adequate internal controls and was, therefore, unable to ascertain the true financial condition of the Company; and (iii) that, as a result, the value of the company's reported revenues during the Class Period was materially overstated.”
This quick run to the courts is not unusual when there is any kind of SEC investigation, according to Jeffrey Russell, a partner at Bryan Cave LLC, who specializes in class action and securities litigation.
“Anyone can file a lawsuit in these situations and you often see firms file class action suits after an SEC investigation is announced,” he said. “Many firms spend a good part of their time scouring the newswires and SEC filings for unfavorable news that may open the chance to file a lawsuit.”
The SEC investigation resulted from a Bally restatement to correct errors in a portion of its revenues relating to non-obligatory prepaid membership dues. The errors accelerated dues recognition for certain prepaying members. According to a Bally release, the restated amounts aggregated approximately $43 million during the seven-year restatement period.
The company's amended annual report on Form 10-K for the year ended Dec. 31, 2003, which was filed on April 2, 2004, contains restated financial statements audited by Ernst & Young LLP and describes the impact of correcting the errors for each annual and quarterly period from Jan. 1, 1997 through Sept. 30, 2003. The amended annual report also discloses that the company made changes to its systems and processes related to the deferral of prepayments of non-obligatory dues and believes its current controls over such systems and processes are effective.
Although not willing to comment directly on the pending legal action, Bally management issued a release denouncing the suit.
“Bally's directors and executive management believe this suit to be totally without merit,” said the company in an official statement. “We deny all of the plaintiffs' substantive allegations and we will vigorously defend this litigation.”
That vigorous defense may take a while, according to Russell.
“These things normally progress, so you can expect a motion to dismiss from the defendant's lawyer before you can even go forward with discovery,” said Russell. “Then, depending on the decision, the case will be able to move into discovery.”