Bally Faces Class Action Lawsuit


At least nine law firms from across the country have filed a class action lawsuit against Bally Total Fitness on behalf of all purchasers of common stock between August 3, 1999 and April 28, 2004.

The filing said that Bally 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 Bally’s improving financial performance.

According to a release from a statement issued by the law firm of Schiffrin & Barroway, LLP, one of the firms working on the suit, "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."

On April 28, the Securities and Exchange Commission began an investigation in connection with the company’s restatement regarding the timing of recognition of certain prepaid dues. Bally also stated that it had modified its existing internal controls structure. On that same date, Bally’s chief financial officer and director, John W. Dwyer, resigned. Shares of the company’s common stock fell approximately 17 percent to close at $4.50 per share on heavy trading volume after these announcements.

On May 18, Bally announced that it had hired KPMG LLP as the company's new independent auditor to replace Ernst & Young LLP.

Bally Total Fitness has said that it is cooperating with the SEC on the investigation. The company issued a release denouncing the suit.

"Bally's directors and executive management believe this suit to be totally without merit," said the company’s official statement. "We deny all of the plaintiffs' substantive allegations and we will vigorously defend this litigation."

Bally will hold its annual meeting of stockholders on July 29, 2004.

In related news, Liberation Investments L.P. and Liberation Investments Ltd. announced that they have notified Bally Total Fitness Holding Corporation of their intention to submit certain governance proposals for approval at that July stockholders meeting.

The Liberation Funds, which owns just less than 6 percent of Bally's outstanding shares, said they are recommending separating the offices of the offices of chief executive officer and chairman of the board, both currently filled by Paul Toback.

Other initiatives proposed include removal of the company's stockholder rights plan, declassification of the company's board of directors and the adoption of a mandatory retirement age for directors at 75 years old.

The Liberation Funds said they intend to file a proxy statement and other relevant documents with the SEC in support of the proposals.

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