Aug 1, 2006 12:00 PM

CHICAGO — Bally Total Fitness CEO Paul Toback may be breathing a bit easier — for now. He, along with John Dwyer, former Bally CFO, executive vice president and board member; Lee Hillman, former Bally CEO, president and chairman of the board; and the company's former auditor, Ernst & Young, had been accused of violating federal securities laws in a class action lawsuit, but the suit was dismissed last month by a federal judge.

Plaintiffs alleged that the executives publicly disseminated false and misleading corporate reports, financial statements and press releases; improperly recognized revenue; and improperly delayed the recording of expenses. They also alleged that Ernst & Young played a role in the fraud.

Ten separate actions had been consolidated into “Bally Total Fitness Securities Litigation” before being dismissed by the U.S. District Court of the Northern District of Illinois. In this securities fraud case, plaintiffs must have pleaded scienter (that the defendants had a negative state of mind and intention to deceive, manipulate or defraud) and loss causation (that the defendants' actions caused a drop in value of the stock, which ultimately led to shareholders' financial losses). The plaintiffs pleaded loss causation, but they were unable to show evidence of scienter, which led to the dismissal of the complaint, says Adam Savett, a Washington, DC, securities litigation lawyer who covered the case for his legal blog.

U.S. District Judge John Grady gave plaintiffs until Aug. 14 to file an amended complaint and scheduled a status hearing for Sept. 13. Matt Messinger, Bally spokesperson, declined to comment on the lawsuit.

For a copy of the court report, visit http://www.fileden.com/files/2006/7/11/124373/bally%20mtd%20order.pdf.

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