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SEC Sues Bally on Fraud Charges, Reaches Settlement

CHICAGO -- On the same day the Securities and Exchange Commission (SEC) filed a civil lawsuit against Bally Total Fitness on financial fraud charges, the Chicago-based health club company reached a settlement with the SEC. However, the SEC’s investigation is continuing, according to a statement.

The SEC filed the suit Thursday in the United States District Court for the District of Columbia. The SEC alleges that from 1997 to 2003, Bally fraudulently accounted for three types of revenue it received from its members: initiation fees, pre-paid dues and reactivation fees, and Bally also fraudulently accounted for its membership acquisition costs. Bally’s financial statements were affected by more than two dozen accounting improprieties during those years, causing Bally to overstate its originally reported year-end 2001 stockholders’ equity by nearly $1.8 billion, or more than 340 percent, according to the lawsuit.

The SEC also alleges that Bally understated its originally reported 2002 net loss by $92.4 million and understated its originally reported 2003 net loss by $90.8 million.

The filing of the lawsuit, coupled with Bally’s simultaneous settlement with the SEC, is known as a consent decree. In a separate statement Thursday, Bally said the settlement does not require the company to pay a monetary penalty and that the company agreed to comply with federal securities laws in the future. Bally reached the settlement without admitting or denying the SEC’s findings.

“Without admitting or denying the Commission’s allegations, Bally has consented to the entry of a court order enjoining [prohibiting] it from violating these provisions [in the future],” the SEC said in its statement. “In determining to accept Bally’s settlement offer, the Commission considered Bally’s cooperation with the Commission staff in the investigation leading to this action and prompt commencement of remedial action.”

Bally also said in its statement that the Department of Justice has closed a separate criminal investigation of the company without taking action against it.

“I am pleased that the conclusion of the government investigations puts these matters behind us as we continue to execute our strategies for the long-term success of our business,” Bally Chairman Don Kornstein said in the company statement.

Bally filed for bankruptcy last July but emerged as a private company two months later with the financial backing of Harbinger Capital Partners, a New York-based private equity firm which had been one of Bally’s shareholders.

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