Litigation team wins dismissal of class action for Medifast Inc.

Litigation team wins dismissal of class action for Medifast Inc.
March 28, 2013

Saul Ewing Commercial Litigation attorneys Charles Monk, Christopher Gunderson, and Joshua Richards, along with Business and Finance Department Attorney Marshall Paul, achieved a victory for firm client Medifast Inc. by winning dismissal of a securities class action lawsuit in a Maryland federal court.  Medifast manufactures and distributes weight-loss foods and dietary supplements under brand names such as Medifast, Take Shape for Life, Hi-Energy Weight Control Centers and Woman’s Wellbeing, and it also runs weight-loss centers in several states.  The suit, brought on behalf of all persons who purchased Medifast stock between March 4, 2010 and March 31, 2011, alleged that the company lacked adequate financial controls and executives intentionally embellished reported sales of its weight-loss programs over that period of time.

From 2006 and throughout the Class Period, Medifast experienced remarkable success. Although its net income for 2007 and 2008 remained relatively stable, in 2009, the company’s profits more than doubled.  In March 2010, Medifast determined that it had to restate its financial results from 2006, 2007 and 2008 after errors were discovered in its tax calculations.  Plaintiffs argued that these misstatements were intentional so that company executives could inflate the price of company stock for their personal benefit.  

U.S. District Judge George L. Russell III, disagreed, holding that the plaintiffs’ allegations, even taken together, failed to raise the culpable inference that the Individual Defendants actually knew about, or at least recklessly disregarded, the accounting problems before the public statements were made.  Instead, Judge Russell determined the errors were the result of  the company’s rapid growth, coupled with the transition between outside accountants, and that neither Medifast nor its executives had engaged in any wrongdoing.  He granted the defendants’ motion to dismiss in its entirety and put an end to the case On the strength of Judge Russell’s opinion, the Plaintiff’s elected not to appeal the decision, and the plaintiffs in a related derivative class action lawsuit agreed to a stipulated dismissal of their claims as well.”