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Bally's Totally Rotten Report

In December, I wrote an article about Bally Total Fitness (NYSE: BFT  ) that focused on the enormous number of Internet complaints concerning its sales tactics. Since then, Bally hasn't cleaned up its act -- at least not if you Google (Nasdaq: GOOG  ) anything related to the words "Bally's Fraud". The Securities and Exchange Commission has been looking into other aspects of the company's financial reporting for some time, as has an internal audit committee. The result? Well, think of that famous line from Casablanca: "I'm shocked -- shocked! -- to find that gambling is going on in this establishment!"

On Feb. 8, Bally found something much worse than gambling going on in its establishment. From its press release:

  • "Report finds two former and two current finance executives engaged in improper conduct."
  • "Company terminates its Controller and its Treasurer for improper conduct."
  • "Bally ceases severance payments to Lee Hillman, former CEO and current President of Liberation Investment Advisory Group, LLC, and former CFO John Dwyer. Investigation finds both responsible for multiple accounting errors and for creating a culture of aggressive accounting."
  • "Company discloses material weaknesses in internal controls over financial reporting."
  • "Currently, the Company is focused on completing the restatement of its financial statements for the years ended December 31, 2002 and 2003, (and on) completing its 2004 financial statements."

As if that weren't enough, the U.S. Attorney has also jumped on the investigation bandwagon. All of this was reported a few days after the company announced it had retained The Blackstone Group to assist with a turnaround plan. My first piece of advice to whoever will be spearheading this turnaround: Try doing business honestly.

The best news is that since the fish stinks from the head down and the head has been removed, Bally has taken the first step to recovery. One can only hope that the aggressive tactics and alleged wrongdoing by sales staff at individual locations will begin to change with a new sheriff in town. Then we can hope that the bad guys go to trial like Ken Lay, Bernie Ebbers, the Rigases, and former Cendant (NYSE: CD  ) CEO Walter Forbes (convict him, you nutty jurors!).

In the meantime, speculative investors -- with the emphasis on "speculative" -- may enjoy throwing their money at a company with $731 million in debt, only $13 million in cash, and negative margins -- and with earnings restatements still to come. The rest of us, myself included, will stand behind the treadmill and wait for Bally to tumble off it into bankruptcy.

Looking for more on Bally? We've got it:

Fool contributor Lawrence Meyers owns no stocks mentioned in this article, nor is he short any. But don't listen to him; he's just another stranger with an opinion and a forum to voice it in.

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