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2 shareholder suits filed vs. Medifast

At least 17 law firms have started investigations, filed lawsuits or begun trawling for potential plaintiffs against weight-loss food maker Medifast Inc. since the company announced on March 11 it needed more time to file its annual report.

The Owings Mills-based company is the subject of two class-action lawsuits filed over the last two weeks in the U.S. District Court for the District of Maryland in Baltimore. The lawsuits allege shareholders suffered losses because Medifast executives misled them about the company’s condition as a way to artificially inflate the stock price to raise capital — and their individual bottom lines when they later sold stock holdings.

“The Individual Defendants were involved in drafting, producing, reviewing, approving and/or disseminating the materially false and misleading statements and information alleged herein, were aware of or recklessly disregarded the fact that materially false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws,” reads one of the lawsuits, filed March 24 by Powers & Frost LLP, in Towson.

Named in the lawsuits are Medifast’s Chairman of the Board Bradley T. MacDonald, CEO Michael S. McDevitt, Chief Financial Officer Brendan N. Connors and President Margaret E. Macdonald-Sheetz.

Both lawsuits point, among other things, to four filings with the SEC that occurred on Jan. 5, highlighting stock sales by the four executives. According to filings, McDevitt sold 22 percent of his stock holdings on that day worth $2.64 million while MacDonald sold about 8 percent of his holdings for $1.4 million. Connors sold 20,000 shares for $582,600, nearly 18 percent of his holdings, while MacDonald-Sheetz sold 25,000 shares for $726,750.

A Medifast spokesman said the company declined to comment on pending litigation.

According to court and SEC filings, the company first said on March 31, 2010, that revenue was up in the fourth quarter and fiscal year revenue was up 57 percent compared to the corresponding period in 2008. In a filing with the Securities and Exchange Commission, Medifast said three weeks later that it had to restate earnings from 2006-2008 due to errors its accounting firm found regarding “timing differences resulting between depreciation expense for tax purposes versus financial statement purposes.”

Then, in September, the company again issued an SEC filing saying that its 2006-2008 earnings needed to be restated. Medifast said the corrections reduced net income by $583,000 in 2006, $411,000 in 2007 and $601,000 in 2008.

Medifast then issued an earnings report to the SEC on Nov. 4, 2010, that said its third quarter profit was $5.75 million, a 67 percent increase over the previous year. Revenue for the quarter was also up 46 percent, according to the company.

On March 11, the company made another filing with the SEC, saying its annual report would be delayed because it needed time to review prior periods. This caused stock prices to drop more than 20 percent that day. The first lawsuit seeking class action status was filed six days later. The second came a week after that.

Since then, other law firms specializing in shareholder lawsuits started hunting for shareholders of Medifast to represent if and when the case moves forward. The firms are jockeying to be named “lead plaintiff,” a situation specific to federal securities law that allows one plaintiff to be recognized as representative of the entire class. Having a client named lead plaintiff is important for lawyers to secure the business.

“The lead plaintiff is essentially the active client in the case and controls the litigation,” said David A.P. Brower, with Brower Piven PC in New York, which is not involved in the case. “The lead plaintiff chooses the lawyer who will litigate the case and that attorney will get paid, presuming there is a successful outcome.”

Shares of Medifast lost 38 cents Monday to close at $18.79. Its shares are down nearly 35 percent for the year.