Nutrisystem 2010 Annual Report Download - page 24

ITEM 3. LEGAL PROCEEDINGS
Commencing on October 9, 2007, several putative class action suits were filed in the United States District
Court for the Eastern District of Pennsylvania naming Nutrisystem, Inc. and certain of its officers and directors
as defendants and alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The
complaints purported to bring claims on behalf of a class of persons who purchased the Company’s common
stock between February 14, 2007 and October 3, 2007 or October 4, 2007. The complaints alleged that the
defendants issued various materially false and misleading statements relating to the Company’s projected
performance that had the effect of artificially inflating the market price of its securities. These actions were
consolidated in December 2007 under docket number 07-4215, and a consolidated amended complaint was filed
on March 7, 2008 that raised the same claims but alleged a class period of February 14, 2007 through
February 19, 2008. The consolidated amended complaint asked the court to (1) certify a class, (2) award
compensatory damages, reasonable costs and expenses and (3) grant such other and further relief as the court
deemed just and proper. The defendants filed a motion to dismiss on May 6, 2008 that was granted by the Court
on August 31, 2009. On September 29, 2009, plaintiff filed a notice of appeal, and on May 19, 2010, upon
motion by the plaintiff/appellant, the appeal was dismissed with prejudice without costs to either party. The
dismissal is final.
Commencing on October 30, 2007, two shareholder derivative suits were filed in the same Court, which
were nominally brought on behalf of Nutrisystem, Inc., and named certain of its officers and directors (including
four current directors) as defendants. The complaints alleged violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and asserted claims for breach of fiduciary duty, waste, and unjust enrichment
against all defendants and insider selling against certain defendants. The complaints were based on many of the
same allegations as the putative class action suits described above but added contentions regarding the
Company’s stock buyback program. The two federal action suits were consolidated under docket number
07-4565, and an amended complaint was filed on March 14, 2008 naming four members of the current Board of
Directors and certain current and former officers as defendants. The complaint sought (1) judgment for damages
against the individual defendants, (2) declarations that certain defendants were liable for violations of the
Exchange Act, (3) an order directing the Company and current director defendants to reform and improve
corporate governance, (4) extraordinary equitable and/or injunctive relief, (5) an award of restitution to
Nutrisystem from defendants ordering disgorgement of all profits, benefits and other compensation received,
(6) an award to the plaintiff for the costs and disbursements of the action and (7) such other relief as the court
deemed just and proper. Defendants filed a motion to dismiss, which the Court granted on October 26, 2009. The
dismissal is final.
A shareholder derivative action was also filed in the Common Pleas Court of Montgomery County,
Pennsylvania, in November 2007. Like the federal derivative action described above, the state court action was
nominally brought on behalf of the Company and named four members of the current Board of Directors as
defendants. The complaint sought (1) a determination that the case was a proper derivative action and plaintiff
was an appropriate representative, (2) a declaration that each of defendants breached his or her fiduciary duties to
Nutrisystem, (3) an award to Nutrisystem of damages sustained by reason of the violations and exemplary
damages, (4) an award to the plaintiffs for costs and disbursements and (5) such other relief as the court deemed
just and proper. On April 30, 2010, the Court sent the plaintiff a notice to terminate pursuant to Pennsylvania’s
Rules of Civil Procedure for inactive cases. The plaintiff took no action and, on October 1, 2010, the Court
closed this case.
On April 27, 2010, counsel for the same shareholder who commenced the Montgomery County,
Pennsylvania litigation described above sent a letter relating to the same events that form the bases of the federal
putative class action and derivative suits described above. Specifically, the shareholder has demanded, pursuant
to Delaware Chancery Court Rule 23.1, that the Board of Directors (1) undertake (or cause to be undertaken) an
independent internal investigation into violations of Delaware law committed by Company management during
the time periods described above and (2) commence a civil action against each member of management to
recover for the benefit of the Company the amount of damages sustained by the Company as a result of their
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