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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, February 28, 2008

Bally Total Fitness Settles Financial Fraud Charges

The SEC settled financial fraud charges against Bally Total Fitness Holding Corporation, a nationwide commercial operator of fitness centers that recently emerged from bankruptcy proceedings under new, private ownership. The Commission alleges that from at least 1997 through 2003, Bally's financial statements were affected by more than two dozen accounting improprieties, which caused Bally to overstate its originally reported year-end 2001 stockholders' equity by nearly $1.8 billion, or more than 340%. The Commission's complaint further alleges that Bally understated its originally reported 2002 net loss by $92.4 million, or 9341%, and understated its originally reported 2003 net loss by $90.8 million, or 845%.

According to the Commission's complaint, Bally fraudulently accounted for three types of revenue it received from its members: initiation fees, prepaid dues, and reactivation fees; additionally, Bally fraudulently accounted for its membership acquisition costs. These frauds account for $1.2 billion of the $1.8 billion overstatement of Bally's originally reported year-end 2001 stockholders' equity. In addition, Bally's accounting for more than 20 other revenue or expense items failed to conform to Generally Accepted Accounting Principles. These failures account for the remaining $600 million of the $1.8 billion overstatement of Bally's originally reported year-end 2001 stockholders' equity.

Without admitting or denying the Commission's allegations, Bally has consented to the entry of a court order enjoining it from violating these provisions. 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.

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