+1 212 318 2000
Europe, Middle East, & Africa
+44 20 7330 7500
+65 6212 1000
The U.S. District Court for the District of Maryland March 28 dismissed an investor securities suit over accounting problems at diet concern Medifast Inc.(MED) during a period of rapid growth (Proter v. Medifast Inc., D. Md., Civil Action No. GLR-720, 3/28/13).
Judge George Russell III dismissed the litigation in its entirety, determining that, when viewed collectively, the lead plaintiffs’ allegations “fail, at their inception, to raise a strong inference of scienter.”
During this period of growth, the court wrote, Medifast allegedly discovered errors in its accounting practices. “In sum, Medifast proffers a benign, non-fraudulent explanation for the Company’s series of misstatements beginning on March 4, 2010: the Company’s rapid growth, coupled with the transition between outside accountants, resulted in insufficient outside financial guidance and necessitated restatements of the Company’s financials.”
However, the court said, the lead plaintiffs “posit a veritable decathlon of allegations, the sum total of which, they believe, give rise to a cogent and compelling inference that Medifast and the Individual Defendants misled the market intentionally or with severe recklessness.”
The court also rejected the lead plaintiffs' “attempt to characterize the duration of the accounting errors as indicative of scienter. It is established law in this Circuit that there can be no inference of scienter based solely on [generally accepted accounting principles] or other accounting errors, even when such errors occur routinely.”
Moreover, the court said, the lead plaintiffs’ assertion that two individual Medifast defendants’ Sarbanes-Oxley certifications support a strong inference of scienter “is misguided.” The Sarbanes-Oxley allegation fails, the court exlained, “because Lead Plaintiffs do not plead facts indicating that defendants intentionally misstated a material fact or acted recklessly. Without that, there is no inference, much less a strong inference, that Defendants acted with the required scienter.”
The court rejected other attempts by the lead plaintiffs to satisfy the scienter element--including a “final salvo” based on the alleged insider trading of the individual defendants. None of the individual defendants sold stock in amounts that “were unusual or suspicious in comparison to their prior trading histories or to case law,” the court said.
The court also remarked that it “strains credulity to allege” that the defendants “were engaging in a nefarious scheme to inflate the price of Company stock for their own benefit while simultaneously making a public disclosure of their intention to sell shares far in advance.”
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).