In re NutriSystem, Inc. Securities Litigation 07-CV-04215 ...securities.stanford.edu/.../200837_r01c_07CV04215.pdfCase 2:07-cv-04215-MAM Document 31 Filed 03/07/2008 Page 1 of 41 IN

Case 2:07-cv-04215-MAM Document 31 Filed 03/07/2008 Page 1 of 41

IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA

)Master File No. 2:07-cv-4215-MKIn re NUTRISYSTEM, INC. SECURITIES )LITIGATION ) CLASS ACTION )

)This Document Relates To: ) CONSOLIDATED AMENDED

) COMPLAINTALL ACTIONS. ) )

Lead Plaintiff, for its Consolidated Amended Complaint, alleges the following based

upon the investigation of counsel, which included, among other things, the review of

NutriSystem, Inc. (“NutriSystem” or the “Company”) filings with the United States Securities

and Exchange Commission (“SEC”), regulatory filings and reports, securities analysts’ reports

and advisories about the Company, press releases and other public statements issued by the

Company, media reports about the Company, investigative interviews with former employees,

and Lead Plaintiff believes that substantial additional evidentiary support will exist for the

allegations set forth herein after a reasonable opportunity for discovery.

NATURE AND BACKGROUND OF THE ACTION

1. This is a federal securities class action on behalf of purchasers of the common

stock of NutriSystem, between February 14, 2007 and February 19, 2008, inclusive (the “Class

Period”), seeking to pursue remedies under the Securities Exchange Act of 1934 (the “Exchange

Act”).


The Diet Industry and Nutrisystem

2. NutriSystem describes itself as a leading marketer and provider of a weight

management system based on a portion-controlled, prepared meal program to customers who

typically purchase monthly food packages containing a 28-day supply of breakfasts, lunches,

dinners and desserts, which they supplement with fresh milk, fruit and vegetables. According to

the Company, its program offers customers significant value because it is priced below its

competitors and does not charge a membership fee.

3. NutriSystem primarily markets its program through a combination of online and

traditional offline advertising and promotional strategies. In light of the high attrition of its

dieting customers, the Company’s business plan relies on substantial marketing and advertising

efforts to constantly attract new customers, who have been the driving force of the Company’s

past success. In 2007, the Company reported marketing expenses of over $178,000,000,

representing 23% of total annual revenue. Thus, the success of its business depends, in

significant part, on its ability to efficiently manage its marketing expenditures and advertising

dollars.

4. Indeed, because of its critical importance to the Company’s overall financial

picture, NutriSystem carefully tracked and measured the precise cost in dollars of acquiring each

new customer and publicly reported this figure, known as its “Customer Acquisition Costs” or

“CAC,” when presenting its financial results to investors and analysts. Simply put, each dollar

the Company spent on marketing and advertising was measured to determine the amount of

revenue generated by that dollar in the form of new customer acquisition. Correspondingly, the

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extent to which marketing and advertising dollars were effectively spent impacted directly on the

Company’s bottom line earnings and overall financial performance.

5. Accordingly, NutriSystem represented in its public filings and statements that it

closely monitored and frequently tested its marketing and advertising expenditures and the status

of competitive influences to assure an appropriate return on those critical dollars. In this regard,

Thomas Connerty, the Company’s Executive Vice President of Program Development and Chief

Marketing Officer, explained during the Class Period:

One of the nice aspects of our business model is the fact that we can adjustrelatively quickly on our media spend and when we are seeing competitiveinfluences kind of push our acquisition costs up a little bit we can adjustaccordingly and pull back on our spending, and then when we kind of see thetsunami effect of new introduction of competitive products start to lull a little bitwe can start turning the media spend back on.

* * *

We have got campaigns on -- in the works that we’re -- working to be a little bitmore aggressive about talking about our program and why it is superior to otherweight loss programs in the marketplace. It does take a little bit of time to initiateand launch those. And like everything we do we test, it is not likely we’d got outthere overly aggressively with a campaign that wouldn’t yield positive return onthe media investment. (Emphasis added.)

Glaxo and Alli

6. On or about February 7, 2007, a week before the commencement of the Class

Period herein, GlaxoSmithKline (“Glaxo”) announced that the U.S. Food and Drug

Administration (the “FDA”) had approved Glaxo’s new weight loss product, orlistat 60 mg

capsules, for over-the-counter use in the United States, to be marketed under the brand name

Alli. Approved for use by overweight adults in conjunction with a reduced-calorie low-fat diet,

Alli purportedly helps people lose 50 percent more weight than they would with diet alone.

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According to Glaxo, Alli is the only FDA-approved weight loss product available to consumers

without a prescription, and it is the first clinically-proven over-the-counter product to be

combined with a comprehensive support program.

7. Glaxo invested $150 million in publicity, education, advertising and marketing

prior to, and in conjunction with, the introduction of Alli for sale to the public on June 15, 2007.

This was a massive roll-out, the expenditure amounting to as much as the total NutriSystem

expenditure for advertising over the prior two years. Indeed, in and around May, 2007, Glaxo

ramped up its media blitz in preparation for Alli’s introduction. It was just at the time of Glaxo’s

media blitz that defendants sold large amounts of NutriSystem stock, as described herein.

8. Contrary to NutriSystem’s claim that it was well prepared to deal with

competition from Alli because its program was priced below its competitors and because it was

nimble in controlling costs and expenses, the cost difference to the consumer between

purchasing the NutriSystem program and Glaxo’s Alli was vast and NutriSystem’s costs and

expenses would have to increase dramatically for it to continue attracting a meaningful number

of new customers. Alli costs $50 to $60 per month, not including food; NutriSystem costs

approximately $300 per month, including basic food, but not including additional food and

supplements necessary and/or recommended for dieters. With the additional food and

supplements, which include fresh milk, fruit and vegetables, the monthly price of NutriSystem’s

program rises to approximately $450! Moreover, the defendants knew, based upon their

experience with dieters and their knowledge of the industry, that very few have the discipline to

stick with the NutriSystem program for an indefinite term and would naturally be tempted away

from NutriSystem by a pill which relieved the self-control demanded by a diet.

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9. On or about June 15, 2007, Glaxo began selling Alli over-the-counter.

NutriSystem and the Individual Defendants carefully monitored Alli sales and its influence on

sales of NutriSystem products. By July 25, 2007, approximately 1,500,000 customers had

purchased Alli. That number ultimately reached 2,000,000 by the end of the third quarter. The

introduction of Alli caused a sustained negative impact on NutriSystem’s sales, marketing and

advertising costs, and earnings.

10. The defendants, however, downplayed Alli’s effect upon NutriSystem as merely a

“slight softness” and a “hiccup” in the market for NutriSystem’s diet program. They failed to

disclose to investors that the Company was, in fact, being devastated by Alli and was

experiencing what defendants internally had anticipated would be the materially negative and

sustained impact from Alli. This undisclosed impact was of material importance to NutriSystem

because it had a direct bearing on the Company’s ability to attract new customers to sustain its

growth model and meet the “guidance” which it had given to securities analysts and investors.

11. Specifically, as more fully set forth herein, notwithstanding increasingly

expensive marketing and advertising, the Company was attracting fewer new customers than it

had guided the market to expect; the problem becoming so significant that on February 19, 2008,

the end of the Class Period, the Company announced it would no longer publicly measure its

success by the number of new customers it was attracting but by the “reactivation” of existing or

ex-customers and other factors. In other words, because of the inroads made by Alli, the

Company’s could no longer generate significant growth by attracting new customers and had to

rely on its old customers remaining on board or returning -- a new measure of “success.”

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12. Thus, well before the end of the Class Period, the defendants knew, but failed to

disclose, that NutriSystem’s publicly touted business model was all but obsolete. They knew

that the Company was not -- and could not -- effectively and efficiently manage its critical

marketing and advertising expenditures, materially driving up its CAC and that, as a result,

NutriSystem’s financial performance was being and would continue to be negatively impacted

for a sustained period of time.

JURISDICTION AND VENUE

13. The claims asserted herein arise under, and pursuant to, Sections 10(b) and 20(a)

of the Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by

the SEC [17 C.F.R. §240.10b-5].

14. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §1331 and Section 27 of the Exchange Act.

15. Venue is proper in this District pursuant to Section 27 of the Exchange Act and

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U.S.C. § 1391(b). Many of the acts charged herein, including the preparation and dissemination

of materially false and misleading information, occurred in substantial part in this District.

16. In connection with the acts alleged in this complaint, defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the national

securities markets.

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PARTIES

17. Lead Plaintiff purchased the common stock of NutriSystem at artificially inflated

prices during the Class Period and has been damaged thereby, as set forth in its Certification

previously filed with the Court. 1

18. Defendant NutriSystem is incorporated in Delaware and maintains its

headquarters at 300 Welsh Road Building 1, Suite 100, Horsham, PA 19044. The Company

provides weight management and fitness products and services in the United States.

19. (a) Defendant Michael J. Hagan (“Hagan”) is, and was at all relevant times,

Chairman and Chief Executive Officer (“CEO”) of NutriSystem.

(b) Defendant James D. Brown (“Brown”) is, and was at all relevant times,

Chief Financial Officer (“CFO”) of NutriSystem.

(c) Defendant Thomas F. Connerty (“Connerty”) is, and was at all relevant

times, Chief Marketing Officer and Executive VP, Product Development of NutriSystem.

(d) Defendant Bruce Blair (“Blair”) is and was at all relevant times Chief

Information Officer and Senior VP, Operations of NutriSystem.

(e) Defendants Hagan, Brown, Connerty and Blair are collectively referred to

herein as the “Individual Defendants.”

20. During the Class Period, the Individual Defendants, as senior executive officers

and/or directors of NutriSystem, were privy to confidential and proprietary information

concerning NutriSystem, including an internal weekly report which was prepared by

1 Lead Plaintiff reserves the right to name additional class members as plaintiffsand/or class representatives in connection with class certification proceedings.

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management and circulated among the officers and executives of NutriSystem. That report listed

new memberships, sales, cancellations, competitive factors, and other information concerning

the Company and its operations. Because of their positions with NutriSystem, the Individual

Defendants also had access to additional non-public information about its business, finances,

products, markets and business prospects via access to internal corporate documents,

conversations and connections with other corporate officers and employees, attendance at

management and/or board of directors meetings and committees thereof and via reports and other

information provided to them in connection therewith. Because of their possession of such

information, the Individual Defendants knew or recklessly disregarded that the adverse facts

specified herein had not been disclosed to, were being concealed from, and were not known by

the investing public.

21. The Individual Defendants are liable as direct participants in the wrongs

complained of herein. In addition, the Individual Defendants, by reason of their status as senior

executive officers and/or directors, were “controlling persons” within the meaning of Section

20(a) of the Exchange Act and had the power and influence to cause the Company to engage in

the unlawful conduct complained of herein. Because of their positions of control, the Individual

Defendants were able to and did, directly or indirectly, control the conduct of NutriSystem’s

business.

22. The Individual Defendants, because of their positions with the Company,

controlled and/or possessed the authority to control the contents of its public filings, reports,

press releases and presentations and guidance to securities analysts and through them, to the

investing public. The Individual Defendants were provided with copies of the Company’s public

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filings, reports, press releases, and presentations alleged herein to be misleading, prior to or

shortly after their issuance and had the ability and opportunity to prevent their issuance or cause

them to be corrected. Thus, the Individual Defendants had the opportunity to commit the

fraudulent acts alleged herein.

23. As senior executive officers and/or directors and as controlling persons of a

publicly traded company whose common stock was, and is, registered with the SEC pursuant to

the Exchange Act, and was, and is, traded on the NASDAQ National Market (“NASDAQ”) and

governed by the federal securities laws, the Individual Defendants had a duty to promptly

disseminate accurate and truthful information with respect to NutriSystem’s financial condition

and performance, growth, operations, financial statements, business, products, markets,

management, earnings and business prospects, and to correct or update any previously issued

statements that had become materially misleading or untrue, so that the market price of

NutriSystem’s common stock would be based upon truthful and accurate information. The

Individual Defendants’ misrepresentations and omissions during the Class Period violated these

specific requirements and obligations.

24. The Individual Defendants are liable as participants in a scheme and course of

conduct that operated as a fraud or deceit on purchasers of NutriSystem’s common stock by

disseminating materially false and misleading statements and/or concealing material adverse

facts. The scheme: (i) deceived the investing public regarding NutriSystem’s business,

operations and management and the intrinsic value of NutriSystem’s securities; (ii) enabled the

Individual Defendants and other Company insiders to sell 305,179 shares of their

personally-held NutriSystem common stock for gross proceeds in excess of $19.5 million just

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prior to the significant drop-off in NutriSystem’s stock price; and (iii) caused Lead Plaintiff and

members of the Class to purchase NutriSystem’s common stock at artificially inflated prices.

LEAD PLAINTIFF’S CLASS ACTION ALLEGATIONS

25. Lead Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased the

common stock of NutriSystem between February 14, 2007 and February 19, 2008, inclusive, and

who were damaged thereby (the “Class”). Excluded from the Class are defendants, the officers

and directors of the Company, at all relevant times, members of their immediate families and

their legal representatives, heirs, successors or assigns and any entity in which defendants have

or had a controlling interest.

26. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, NutriSystem common stock was actively traded on

the NASDAQ. While the exact number of Class members is unknown to Lead Plaintiff at this

time and can only be ascertained through appropriate discovery, Lead Plaintiff believes that there

are hundreds or thousands of members in the proposed Class. Record owners and other

members of the Class may be identified from records maintained by NutriSystem or its transfer

agent and may be notified of the pendency of this action by mail, using the form of notice similar

to that customarily used in securities class actions.

27. Lead Plaintiff’s claims are typical of the claims of the members of the Class, as

all members of the Class are similarly affected by defendants’ wrongful conduct in violation of

federal law complained of herein.

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28. Lead Plaintiff will fairly and adequately protect the interests of the members of

the Class and has retained counsel competent and experienced in class action and securities

litigation.

29. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants’ acts as

alleged herein;

(b) whether statements and omissions made by defendants to the investing

public during the Class Period misrepresented material facts about the business, operations and

prospects of NutriSystem;

(c) whether the price of NutriSystem common stock was artificially inflated

during the Class Period; and

(d) to what extent the members of the Class have sustained damages and the

proper measure of damages.

30. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

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SUBSTANTIVE ALLEGATIONS

31. The Class Period begins on February 14, 2007. On that date, a week after Glaxo

announced FDA approval of Alli, and after the defendants knew of its potential material impact

upon the Company, NutriSystem issued a press release announcing its financial results for the

fourth quarter and year end of 2006, the period ended December 31, 2006. For the quarter, the

Company reported revenue of $133,569,000 and net income of $19,607,000, or $0.53 per diluted

share. Defendant Hagan commented on the results, stating in pertinent part as follows:

2006 was an exceptional year for us. For the past several years the NutriSystemteam has had a singular focus on our customer, and that obsession has paid offwith extraordinary financial results.

We also proved that the men’s weight loss market, long neglected by commercialweight loss companies, can become a large opportunity for NutriSystem becauseof our successful product, anonymous delivery platform and convenient approachto weight loss. We feel the men’s weight loss market will be an important driverof our business in the years to come. Additionally, the first quarter of 2007 hasstarted off strong with growth across all of our market segments, with particularmomentum in the men’s segment and reactivations of ex-customers. Other keyfinancial metrics such as customer acquisition costs have improved over thecourse of the quarter, especially considering the ‘infancy stage’ of the men’s andsenior’s market segments. The women’s market, our core customer segment,continued to perform well in 2006 and is growing in 2007 due to enhanced mediamarketing efforts and a strong referral business.

Defendant Brown added, in pertinent part, as follows:

We continue to increase the profitability and scalability of our business model.Year over year, fourth quarter gross margin increased by 5.6 percentage pointsand operating margin jumped by 8.0 percentage points. We expect operatingmargin to continue to expand in the first quarter of 2007. Using the high end ofour guidance, we anticipate operating margin to reach 25% in the first quarter of2007.

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32. With regard to the Company’s outlook for the first quarter and full year of 2007,

the press release stated:

First Quarter and Full Year 2007 Outlook

For the first quarter of 2007, the Company estimates that revenues will bebetween $205 million and $215 million, an increase of at least 40%year-over-year. Diluted earnings per share is expected to be between $0.88 and$0.92, an increase of at least 47% year-over-year. Further, the Company expectsto add at least 300,000 new Direct channel customers in the first quarter of 2007.For the full year 2007, the Company estimates that revenues will be between $720million and $740 million, and diluted earnings per share will be between $3.00and $3.10 per share. This guidance does not reflect the effect of any stockrepurchases.

“We are very pleased with our start in 2007. Our advertising continues toperform, our new market segments provide us additional visibility for growth, andour revenue stream from ex-customers is starting strong,” commented MichaelHagan, Chairman, President and Chief Executive Officer.

33. NutriSystem held a conference call with securities analysts the same day in which

defendant Connerty discussed the importance of the Company’s media and advertising

expenditures to its business plan, stating as follows:

As we have more markets to work with, we expect our media expenditures toincrease substantially in 2007. Not only will this increase and spend allow us toacquire more customers profitably, it will continue to create greater awareness forNutriSystem brand. Each quarter our brand is getting stronger. We had spentmore than $150 million in the last two years in advertising and our growth ratehas proven that this highly effective spend has propelled NutriSystem frommoribund obscurity to top of mind within the weight loss category.

34. In response, on February 15, 2007, the price of NutriSystem common stock rose

$5.91 per share, or more than 13%, to close at $49.79 per share, on heavy trading volume.

35. On April 25, 2007, NutriSystem issued a press release announcing its financial

results for the first quarter of 2007, the period ended March 31, 2007. For the quarter, the

Company reported revenues of $238,360,000 and net income of $37,867,000 or $1.04 per diluted

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share. Moreover, the Company raised its guidance for the full year. Defendant Hagan

commented on the announcement, stating in pertinent part as follows:

The solid growth of our core women’s market and continued strength of themen’s market allowed us to achieve record earnings. In addition, an integral partof our first quarter has been the ongoing expansion of our pool of ex-customersand their desire to return to NutriSystem for weight management services. Theoperating margin expansion we saw in the first quarter was partially due to thegrowth in revenue from ex-customers.

Notwithstanding the looming impact of Alli, defendant Brown added:

Our customer economics are strong and getting stronger. Compared to the firstquarter of last year, revenue per customer in the initial diet cycle, gross marginand the value per customer net of food and customer acquisition costs allincreased. We also expect that reactivation revenue (revenue from customersmore than nine months removed from their first purchase) will be about $93million in the aggregate in 2007 compared to $38 million in 2006.

The business continues to generate substantial operating cash flow. We deployed$76 million in the first quarter to repurchase 1.7 million shares of common stock,and funded most of the buyback with net cash from operations of $66 million.

36. With regard to the Company’s outlook for the second quarter and full year of

2007, the press release stated:

Second Quarter and Revised Full Year 2007 Outlook

For the second quarter of 2007, the Company estimates that revenues will bebetween $190 and $200 million, an increase of at least 43% year over year.Diluted earnings per share are expected to be between $0.82 and $0.86, anincrease of at least 55%. Further, the Company expects to add at least 210,000new Direct channel customers in the second quarter of 2007. The Company nowexpects full year 2007 revenues will be between $790 million and $805 million.2007 diluted earnings per share are expected to be between $3.34 and $3.46 pershare. This guidance does not reflect the effect of any potential future stockrepurchases.

“2007 is shaping up to be a very good year for us. Our 2007 strategy is to focuson three areas: profitable new customer growth across all market segments -women, men, and seniors; continue to improve retention and reactivation efforts;and invest in product areas such as our new 2008 weight loss program that

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advance customer health while growing the lifelong value of each customer,”commented Mr. Hagan.

37. In a NutriSystem conference call with securities analysts that day, defendant

Connerty touted the Company’s ability to effectively manage its advertising expenditure to react

to competitive pressures. Specifically, in response to a question from Lehman Brothers analyst

Michael Lasser regarding a soft start to the quarter, Connerty explained that NutriSystem is able

to maintain its growth and outflank its competitors by adjusting the timing and amount of its

marketing and advertising expenditures:

<Q - Michael Lasser>: And as you look back over how the quarter transpired, itsounds like in the beginning of the quarter it was a little bit more difficult thanyou had anticipated and then things picked up towards the second half of thequarter. Does that mean that there could be incremental volatility as you becomea larger organization, or what do you attribute some of the volatility that youwitnessed over the last quarter?

<A - Thomas Connerty>: Well, I think if you take a look at what happened atthe very beginning of the quarter, we kind of ascribe a higher CAC duringespecially the first two weeks in January to increase competitive advertisingacross the board, not only from Jenny Craig but also Weight Watchers and othercompetitors. We feel that that might have created a little bit of softness inresponse. But I guess the beauty of our particular business model is that we canmaintain a persistent advertising presence throughout the quarter. We can adjustour media mix to lower those CACs and maintain that presence throughout thequarter where are competitors usually don’t spend that money. So what happenedafter the first two weeks of January is, we believe, a lot of other advertisersdropped out of the mix and we were able to kind of recoup from the halo effect oftheir advertising. (Emphasis added.)

38. In response, over the next two trading days, the price of NutriSystem common

stock rose $5.05 per share, or approximately 10%, to close at $63.29 per share, on heavy trading

volume.

39. On June 15, 2007, Glaxo began retail sales of Alli, closely monitored by the

defendants.

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40. On July 24, 2007, NutriSystem issued a press release announcing its financial

results for the second quarter of 2007, the period ended June 30, 2007. For the quarter, the

Company reported revenue of $213,556,000 and diluted earnings per share of $0.96. Defendant

Hagan commenting on the announcement, stated in pertinent part as follows:

The quarter was a very good one and we were pleased with the solid growth inour core women’s market and continued strength in revenue coming from our ex-customers. In addition, the growth in the men’s and senior’s market segments forthe second quarter exceeded our expectations.

Defendant Brown added:

In the second quarter, we increased operating margin by 130 basis points yearover year. At the same time we made substantial investments in the business toimprove future profitability including a new e-commerce platform, the new foodprogram, a new call center and international expansion.

To date we’ve used our strong cash flow to fund stock buy-backs. In the first halfof 2007, we generated net cash from operations of $98 million and repurchased2.0 million shares for $98 million.

41. Notwithstanding defendants’ knowledge that in less than one and a half months

since Alli appeared on store shelves it had almost as many customers as NutriSystem, many of

whom surely had been or otherwise would have been NutriSystem customers, and

notwithstanding their knowledge that Alli had already impacted and was continuing to impact

NutriSystem’s sales, revenues and earnings, the press release stated with regard to the

Company’s outlook for the third quarter and full year:

Third Quarter and Revised Full Year 2007 Outlook

For the third quarter of 2007, the Company estimates that revenue will bebetween $200 and $208 million, and expects diluted earnings per share to bebetween $0.77 and $0.82. Further, the Company expects to add approximately245,000 new Direct channel customers in the third quarter of 2007. TheCompany is raising its full year 2007 guidance and now expects revenue to bebetween $810 million and $820 million and 2007 diluted earnings per share to be

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between $3.46 and $3.52 per share. This guidance does not reflect the effect ofany potential future stock repurchases. (Emphasis added.)

“The business performed extremely well for the first half of 2007. We continueto be excited about the new market segments we’ve launched in the past year andeven more excited about how often our ex-customers are returning to us,”commented Mr. Hagan. “We’ve come a long way in the last few years with overtwo million Americans relying on NutriSystem to help them reach and maintaintheir weight loss goals. The future remains bright with an all-new programplanned for 2008, our first international market, and new product extensions thatwe believe will expand our customer’s life long value.”

42. In a NutriSystem conference call with securities analysts that day, it assured

analysts and investors that its business was “solid,” that it would have “a very solid year” and

that the impact of Alli was “fully reflected” in the Company’s third quarter and full year

guidance. Specifically, as demonstrated by the following comments and Q&A exchange with

Citigroup analyst Greg Badishkanian, the Company explained that the raised guidance -- which

it deemed “conservative” -- reflected “slight softness in demand” it had been experiencing since

the end of June and continuing into the first half of July.

Now turning to the rest of 2007, we are raising our revenue guidance to bebetween 810 and 820 million and also an EPS of $3.46 to $3.52 per share on aGAAP basis. Some additional color on the start of our third quarter, we did seesome slight softness in demand starting in late June and carrying into early July.We believe the launch of a new over-the-counter weight loss pill with significantPR and media behind it has had an effect, and based on information we have thisis fully reflected in our guidance for the remainder of the year.

* * *

<Q - Gregory Badishkanian>: Great, thanks. Hey guys. Just a few questions,you had a phenomenal second quarter and I missed the early part of the call but Ibelieve you mentioned there was some weakness due to a new -- the new dietdrug on the market. Can you just provide some color on that? And also howmuch of your guidance is being impacted by just normal conservatism and howmuch of it is due to just sort of that other impact I believe you mentioned?

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<A - Michael Hagan>: Sure, Greg. This is Mike. We are obviously classicallyconservative but for the first time we did see some slight softening of demand aswe entered the second half of June and not so coincidentally we believe that itmight be related to the launch of a new over-the-counter drug from GSK and thebig PR and media blitz surrounding it.

So -- but we also believe that while demand has been picking up over the lastweek or so we provide guidance in what we believe to be a conservative fashionto reflect what we have been seeing over the last month and that includes the lastcouple weeks of June. So we believe that -- what you often see in cases such asthis, you get a lot of pent-up demand because of the huge amount of hype aroundthis product. But if consumers either don’t lose the weight or not fast enough ordon’t like the side effects then we believe it is just a temporary type of thing andthat is what we believe.

<Q - Gregory Badishkanian>: I mean but you have seen sort of normalvolatility month-to-month even in January so a little bit of a -- sort of an impactthere on CAC and sure things rebound. I’m assuming things are not, given youare in hyper growth mode they are pretty volatile week-to-week almost.

<A - Michael Hagan>: We do and the trend over the last couple of weeks hasbeen improving. So could this be another near-term hiccup like what we say inJanuary? Absolutely. I mean we have got a solid business. As you see in ourcore women’s segment, which is the most mature, we grew at 31 % in Q2. Webelieve we just got stronger as the quarter went on. I mean April and May werejust really solid. First half of June was really solid, and then we had a bit ofhiccup but recognizing that we had the hiccup we reined a little bit Q3 guidance.But still when you look at growth year-over-year we’re going to have a very solidyear. (Emphasis added.)

43. In fact, the Company’s business was experiencing “acute pressure” from the

introduction of Alli. As of July 24, 2007, Defendants knew that NutriSystem’s marketing was

not yielding the return they expected in terms of garnering new customers, and that NutriSystem

would now rely in large part on its customer “reactivation” business.

44. The impact that the introduction of Alli was having on NutriSystem’s marketing

efforts, advertising expenses, and the Company’s ability to address the challenge to its financial

performance through nimble marketing and advertising, was described as follows:

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<Q - Colin Sebastian>: Thanks for taking my call. Just want to drill down alittle bit more on the trends you’re seeing this quarter to-date. And I guess first,Tom I am curious if you’ve been making any adjustments to the marketing plan atall in response to the competition from -- on the pharmaceutical side and if thathas given you some direct benefits.

<A - Thomas Connerty>: Yes, I think in areas where we have seeing marginalbuys not perform as well as they have in previous quarters we’ve cut them backbased on softness in demand. So we’ve just been a little bit more conservativeabout how we have gone about buying during the course of the past couple ofweeks. One of the nice aspects of our business model is the fact that we can adjust relatively quickly on our media spend and when we are seeing competitive influences kind of push our acquisition costs up a little bit we can adjustaccordingly and pull back on our spending, and then when we kind of see the tsunami effect of new introduction of competitive products start to lull a little bitwe can start turning the media spend back on. (Emphasis added.)

<Q - Colin Sebastian>: Okay. So it’s fair to say that you have been seeing alittle bit higher -- the trend in the media rates has been a little bit higher thus far inQ3 as a result of that competition?

<A - Thomas Connerty>: Well, the implied statement of the fact that we areseeing softening in demand naturally equates to an increase in CAC.

45. Likewise, as demonstrated by the following exchange with Kaufman Bros.

analyst Sameet Sinha on the July 24 call, defendants continued to provide assurance that

NutriSystem’s marketing dollars would continue to yield positive financial returns.

<Q - Sameet Sinha>: Yes, thank you. In terms of the diet that has beenlaunched, Tom you spoke about pulling back on marketing spend. Are there anyways you can be proactive and actually be aggressive maybe grabbing more mindshare or do you think that will be wasteful expenditure?

<A - Thomas Connerty>: We have got campaigns on -- in the works that we’re -- working to be a little bit more aggressive about talking about our program andwhy it is superior to other weight loss programs in the marketplace. It does take alittle bit of time to initiate and launch those. And like everything we do we test so it is not likely we’d got out the overly aggressively with a campaign that wouldn’t yield positive return on the media investment. (Emphasis added.)

19


46. In an exchange with analyst Joseph Garner of Emerald Advisors, defendants also

represented that the “soft start” to the quarter had subsided and the comeback was broad based:

<Q - Joseph Garner>: Mike, when -- the period of softness that you hadmentioned, can you talk a little bit what you have seen by segment and did yousee it more in men, women, seniors, any difference across those lines?

<A - Michael Hagan>: It’s all more across-the-board, Joe, meaning it wasn’tisolated in any one segment.

<Q - Joseph Garner>: Okay. And as you have seen things getting a little bitmore -- picking up a little bit, are you also seeing that come back across-the-boardas well?

<A - Michael Hagan>: We are.

47. On July 25, 2007, the price of NutriSystem common stock fell $6.88 per share, or

approximately 11 %, to close at $56.90 per share, on heavy trading volume. Had defendants been

truthful, and not omitted material information, NutriSystem’s price would have declined even

more.

48. According to a former NutriSystem Human Resources employee during the Class

Period, in early August, 2007 NutriSystem’s business had so weakened that a hiring freeze was

imposed on the Customer Service Division of the Company’s Call Center. The number of

employees in the Call Center is largely a function of revenues and the volume of orders.

49. On August 10, 2007, the Company announced that defendant Brown would resign

as CFO. In commenting on Brown’s resignation, defendant Hagan noted that “He leaves the

company in excellent financial condition.” Defendant Brown commented that, “Combined with

a fundamentally strong business model, healthy balance sheet and growth catalysts in the

horizon, I believe NutriSystem is well positioned to continue its success.” (Emphasis added.)

This was not true because Brown already knew that NutriSystem’s ability to attract new

20


customers was seriously impaired, and the Company was not effective in attracting new

customers which was the pillar of NutriSystem’s business model.

50. On September 10, 2007, notwithstanding his positive comments about the

Company and its growth catalysts, defendant Brown sold 12,000 shares of his personally-held

NutriSystem stock, thereby reaping approximately $687,120 in gross proceeds.

51. According to a former weight loss counselor at NutriSystem, during the Class

Period, by October, 2007, business had so weakened that NutriSystem began to lay off

employees from its Call Center.

52. On October 3, 2007, after the markets closed, the Company issued a press

release announcing its preliminary third quarter 2007 results and revised earnings guidance for

the full year of 2007. For the quarter, the Company expected revenues of $188 million and

earnings per diluted share of between $0.62 and $0.66. Defendant Hagan, commenting on the

poor results, stated, in pertinent part, as follows:

After a very strong first half of the year, our results for the third quarter didn’tmeet our expectations. We continue to be satisfied with our success inreactivating former customers, but our performance with new customers webelieve was affected by shorter-term competitive pressures which caused ourmarketing dollars to become less efficient, resulting in fewer new Direct Businesscustomers than anticipated and customer acquisition costs to be higher thananticipated. (Emphasis added.)

53. In response to this announcement, and notwithstanding NutriSystem’s contention

that its performance was impacted by merely “shorter-term competitive pressures,” the price of

NutriSystem common stock fell $15.98 per share, or approximately 34%, to close at $31.59 per

share, on extremely heavy trading volume. Yet, the complete truth regarding the business of

NutriSystem and its already failing business model was still concealed by defendants.

21


54. On October 24, 2007, NutriSystem issued a press release announcing its financial

results for the third quarter of 2007, the period ended September 30, 2007. For the quarter, the

Company reported revenue of $188,283,000 and diluted earnings per share of $0.64. Defendant

Hagan commented on the announcement, stating in pertinent part:

“Although we continue to feel positive about our business and its long-termstrength, the third quarter results didn’t meet our growth expectations,” saidMichael J. Hagan, Chairman and Chief Executive Officer. “We believecompetitive pressures from new entrants in the weight loss market had a largereffect on our marketing efficiency than anticipated. We continue to be satisfiedwith our reactivation business but our growth in new customers in the quarter wasoff about 11 % versus the guidance we provided in July 2007. We did, however,continue to demonstrate that the business generates cash as we added roughly $35million to our cash balance during the quarter.”

Direct channel revenue reached $175,149,000 in the third quarter of 2007, a 22%increase over the same period in 2006. The Company added approximately218,000 Direct channel new customers, as compared to an approximately 235,000new customers in the third quarter of 2006. Customer acquisition costs for the third quarter 2007 were $214 as compared to $143 in the third quarter of 2006. (Emphasis added.)

55. With regard to the Company’s outlook for the fourth quarter and full year, the

press release stated:

Fourth Quarter and Revised Full Year 2007 Outlook

The Company estimates fourth quarter 2007 revenues will be approximately flaton a year-over-year basis. Full year revenues are now expected to be between$770 million and $776 million. Given the uncertainty around competitivepressures, the seasonally slower fourth quarter, and the timing of the launch of thenew food program, the Company expects the number of new customers in thefourth of 2007 to be down about 20% on a year-over-year basis.

Due to the recently announced investment in ZeroWater, the Company will nowprovide guidance for operating income going forward, rather than earnings pershare. For the fourth quarter 2007, the Company estimates operating income tobe between $16 million and $19 million. This guidance includes approximately$3.5 million of non-cash compensation, depreciation and amortization. This

22


guidance does not include approximately $2 million of NutriSystem’s estimatedproportionate share in ZeroWater’s loss.

For the full year 2007, the Company expects operating income to be between$163 million and $166 million. This guidance includes about $10.5 million ofnon-cash compensation, depreciation and amortization. This guidance does notinclude approximately $2 million of NutriSystem’s estimated proportioned sharein ZeroWater’s loss.

“In the second half of 2007, we’ve taken significant steps to bolster ourmanagement team with a new President and Chief Operating Officer, a new VP ofSupply Chain, and our recently announced new Chief Financial Officer,” saidMichael Hagan. “We’ve also made other significant investments in 2007 whichwe believe will benefit 2008 and beyond, including our first new weight lossprogram in four years, a new e-commerce platform, and preparations to launchinternational businesses.”

“Although we may pursue acquisitions in adjacent health and wellness categoriesin the future, with a strong cash position and through the recently announced $200million credit facility, we believe the best way to return value to our shareholdersin through repurchasing our shares at this time,” concluded Mr. Hagan.

56. In a NutriSystem conference call with securities analysts that day, defendants

acknowledged that the Company’s marketing efforts had in fact failed to meet even the July 24,

2007 guidance. As defendant Hagan explained:

As we stated in our October 3rd press release there were competitive pressures inQ3 greater than what we anticipated. We attribute most of the it to a new entrantinto the diet category. Specifically, an new over-the-counter pill was launched inUS in late June. The parent company just announced yesterday, that they had 2million diet starts in the US since it launch. Put simply that a lots of starts goingto an alternative weight loss approach in a short period of time.

We were only down 7% new customer starts from Q3 of 2006. In some ways, weare satisfied by the way our business responded during a quarter with such acutepressure from a new entrant. In the end, our business still generated 38 million inquarterly operating cash flow, and has generated 136 million for the first ninemonths of the year in the operating cash flow. (Emphasis added.)

We provided guidance on July 24th expecting 245,000 new customers for thequarter, and we acquired 218,000, we are about 11% shy of our projections. Thedisparity in customer counts, which is directly related to marketing efficiency,

23


explains a lot about why we relate in revenue and EPS. In essence, our marketingto drive new customers wasn’t yielding the return that we originally expected.However, we do continue to be satisfied with our reactivation business, as ourbase of ex-customers has largely now been impacted by the new over-the-countypill.

Heading into the seasonally slower fourth quarter, we still see some lingeringeffects from competition, and thus we believe it’s prudent to be cautious with ournew customer guidance. We also don’t have the same tailwinds heading into Q4that we had in 2006. We are now looking at revenues for Q4 to be relatively flaton a year-over-year basis and operating income in the range of 16 to $19 million.

57. With respect to the impact of Alli on NutriSystem’s Customer Acquisition Costs

and thus, ultimately, on its bottom line earnings, defendant Brown acknowledged:

The direct channel customer acquisition cost or CAC incorporating thisadjustment was $214 in the third quarter of 2007, as compared to Q3 2006 CACof $143, an increase of 50%. This is a larger increase than we expected, which isdisappointing. We believe the year-over-year increase in CAC [was] largelycaused by the introduction of a new over-the-counter diet drug. We also morethan doubled our non-media spending which does not immediately and directlydrive new customer growth.

58. According to the aforementioned weight loss counselor, by November, 2007 calls

to NutriSystem had decreased even further, and employees were being laid off on a regular basis.

59. It was not until February 19, 2008, the end of the Class Period, that the Company

finally disclosed the true extent of the weakness in NutriSystem’s business and the failure of

what had been its business model. On that day, in a conference call with analysts to discuss

weaker than expected results at the end of 2007, including an 18% decline in new customers

compared with the same period in 2007, David Clark finally admitted:

Accordingly we will measure our success on adjusted EBITDA generation andthe consequent margin as compared to our revenue. And so consistent withsubscriber-based businesses and we also consistent with our peers, commencingin the first quarter we will move our focus towards gross margins, marketing as apercentage of sales, and adjusted EBITDA margins. And you will see us move away from CAC, revenue per customer and other new customer focused metrics.

24


While continuing to use these tactical metrics to make day-to-day operatingdecisions, we will have our strategic focus on long-term profitability. (Emphasisadded.)

60. As a result of the Company’s announced results and revelations at the conference

call, the price of NutriSystem stock declined yet another time, from $23.89 per share on

February 19, 2008 to $16.58 on February 20, 2008, a decline of 30.5%. Volume on February 20

increased to over 11 million shares from an average volume of 1.9 million shares.

61. The market for NutriSystem common stock was open, well-developed and

efficient at all relevant times. As a result of these materially false and misleading statements and

failures to disclose, NutriSystem’s common stock traded at artificially inflated prices during the

Class Period. Lead Plaintiff and other members of the Class purchased or otherwise acquired

NutriSystem’s common stock relying upon the integrity of the market price of NutriSystem’s

common stock and market information relating to NutriSystem, and have been damaged thereby.

62. During the Class Period, defendants materially misled the investing public,

thereby inflating the price of NutriSystem’s common stock, by publicly issuing false and

misleading statements and omitting to disclose material facts necessary to make defendants’

statements, as set forth herein, not false and misleading. Said statements and omissions were

materially false and misleading in that they failed to disclose material adverse information and

misrepresented the truth about the Company, its business and operations, as alleged herein.

63. The statements referenced above were materially false and misleading when made

because they misrepresented and failed to disclose the following adverse facts which were

known to defendants or recklessly disregarded by them:

25


(a) that the Company was signing up fewer new customers and was not

performing according to guidance furnished to securities analysts;

(b) that the Company’s costs of acquiring new customers were significantly

increasing;

(c) that the Company’s performance was being and would continue to be

negatively impacted by competition from Alli;

(d) that Hagan falsely and misleadingly represented on July 24, 2007 that Alli

presented a “slight softness,” a “temporary” problem, and a “near-term hiccup,” when, in fact

defendants knew there would be sustained negative impact for the rest of 2007 and, possibly,

beyond;

(e) that Connerty falsely and misleadingly depicted NutriSystem’s ability to

successfully and quickly meet the major challenge created by Alli because this was but a

“temporary” “hiccup”;

(f) that the representation that NutriSystem still had a strong business model

was false because defendants knew that, as a result of Alli’s sales, NutriSystem’s CAC was

continuously rising and its ability to attract new customers was seriously impaired, rendering the

Company’s business model all but obsolete; and

(g) that as a result of the foregoing, defendants lacked a reasonable basis for

their positive statements about the Company and its prospects.

64. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Lead Plaintiff and other members of the Class. As described herein,

26


during the Class Period, defendants made or caused to be made a series of materially false or

misleading statements about NutriSystem’s business, prospects and operations. These material

misstatements and omissions caused the market to overvalue NutriSystem and its business,

prospects and operations, thus causing the Company’s common stock to be artificially inflated at

all relevant times. Defendants’ materially false and misleading statements during the Class

Period resulted in Lead Plaintiff and other members of the Class purchasing the Company’s

common stock at artificially inflated prices, thus causing the damages complained of herein.

Additional Scienter Allegations

65. As alleged herein, defendants acted with scienter in that defendants knew or

recklessly disregarded that the public documents and statements issued or disseminated in the

name of the Company were materially false and misleading; knew that such statements or

documents would be issued or disseminated to the investing public; and knowingly and

substantially participated or acquiesced in the issuance or dissemination of such statements or

documents as primary violations of the federal securities laws. As set forth elsewhere herein in

detail, defendants, by virtue of their receipt of information reflecting the true facts regarding

NutriSystem, their control over, and/or receipt and/or modification of NutriSystem’s materially

misleading misstatements and/or their associations with the Company which made them privy to

confidential proprietary information concerning NutriSystem, participated in the fraudulent

scheme alleged herein.

66. Defendants were further motivated to engage in this course of conduct in order to

allow the Individual Defendants and other Company insiders to sell 305,179 shares of their

27


personally-held NutriSystem common stock for gross proceeds in excess of $19.5 million. The

following chart sets forth the insider trading during the Class Period:

Insider Date Shares Price Proceeds

IAN BERG 7/2/2007 10,112 $70.00 $707,840

7/2/2007 6,000 $70.00 $420,000

Total 16,112 $1,127,840

BRUCE BLAIR 5/2/2007 7,696 $61.70 $474,843

5/2/2007 5,403 $62.25 $336,337

5/2/2007 3,667 $61.74 $226,401

5/2/2007 2,601 $61.90 $161,002

5/2/2007 2,200 $62.14 $136,708

5/2/2007 2,197 $61.76 $135,687

5/2/2007 2,107 $61.71 $130,023

5/2/2007 2,001 $62.15 $124,362

5/2/2007 1,428 $62.00 $88,536

5/2/2007 1,336 $62.13 $83,006

5/2/2007 1,000 $62.17 $62,170

5/2/2007 749 $61.95 $46,401

5/2/2007 700 $62.28 $43,596

5/2/2007 600 $62.27 $37,362

5/2/2007 600 $61.78 $37,068

5/2/2007 504 $61.72 $31,107

5/2/2007 500 $61.87 $30,935

5/2/2007 405 $61.93 $25,082

5/2/2007 400 $62.30 $24,920

28


5/2/2007 400 $62.05 $24,820

5/2/2007 400 $62.06 $24,824

5/2/2007 400 $61.88 $24,752

5/2/2007 351 $61.77 $21,681

5/2/2007 300 $62.29 $18,687

5/2/2007 300 $62.43 $18,729

5/2/2007 300 $62.26 $18,678

5/2/2007 300 $62.04 $18,612

5/2/2007 300 $62.08 $18,624

5/2/2007 200 $62.46 $12,492

5/2/2007 200 $62.07 $12,414

5/2/2007 200 $62.03 $12,406

5/2/2007 200 $62.01 $12,402

5/2/2007 200 $61.85 $12,370

5/2/2007 200 $61.75 $12,350

5/2/2007 192 $62.02 $11,908

5/2/2007 137 $61.89 $8,479

5/2/2007 100 $62.31 $6,231

5/2/2007 100 $62.32 $6,232

5/2/2007 100 $62.11 $6,211

5/2/2007 100 $62.10 $6,210

5/2/2007 100 $61.92 $6,192

5/2/2007 100 $61.86 $6,186

5/2/2007 100 $61.83 $6,183

5/2/2007 100 $61.73 $6,173

5/2/2007 100 $61.82 $6,182

5/2/2007 93 $61.79 $5,746

29


Total 41,667 $2,581,319

JAMES BROWN 5/10/2007 21,000 $61.48 $1,291,080

6/11/2007 7,000 $66.37 $464,590

7/10/2007 7,000 $71.37 $499,590

9/10/2007 12,000 $57.26 $687,120

Total 47,000 $2,942,380

THOMAS 4/4/2007 6,300 $55.00 $346,500CONNERTY

4/4/2007 1,100 $55.01 $60,511

4/4/2007 700 $55.02 $38,514

4/4/2007 600 $55.03 $33,018

4/5/2007 6,200 $55.00 $341,000

4/5/2007 5,100 $55.05 $280,755

4/5/2007 2,800 $55.01 $154,028

4/5/2007 2,600 $55.04 $143,104

4/5/2007 2,200 $55.02 $121,044

4/5/2007 1,200 $55.06 $66,072

4/5/2007 900 $55.03 $49,527

4/5/2007 300 $55.07 $16,521

4/26/2007 11,800 $65.00 $767,000

4/26/2007 1,000 $66.10 $66,100

4/26/2007 1,000 $66.49 $66,490

4/26/2007 400 $66.12 $26,448

4/26/2007 800 $65.29 $52,232

4/26/2007 800 $66.13 $52,904

30


4/26/2007 800 $66.14 $52,912

4/26/2007 600 $65.28 $39,168

4/26/2007 600 $66.48 $39,888

4/26/2007 400 $66.11 $26,444

4/26/2007 200 $65.30 $13,060

4/26/2007 200 $66.50 $13,300

4/26/2007 200 $65.97 $13,194

5/1/2007 1,400 $60.76 $85,064

5/1/2007 900 $60.77 $54,693

5/1/2007 700 $61.16 $42,812

5/1/2007 400 $60.63 $24,252

5/1/2007 400 $60.65 $24,260

5/1/2007 400 $60.74 $24,296

5/1/2007 400 $60.78 $24,312

5/1/2007 400 $60.89 $24,356

5/1/2007 400 $60.95 $24,380

5/1/2007 400 $60.96 $24,384

5/1/2007 400 $61.17 $24,468

5/1/2007 400 $61.18 $24,472

5/1/2007 400 $61.53 $24,612

5/1/2007 300 $61.11 $18,333

5/1/2007 300 $61.37 $18,411

5/1/2007 200 $60.75 $12,150

5/1/2007 200 $61.05 $12,210

5/1/2007 200 $61.23 $12,246

5/1/2007 200 $61.32 $12,264

5/1/2007 200 $61.33 $12,266

31


5/1/2007 200 $61.54 $12,308

5/1/2007 150 $60.70 $9,105

5/1/2007 150 $61.01 $9,152

5/1/2007 120 $61.83 $7,420

5/1/2007 100 $61.03 $6,103

5/1/2007 100 $61.10 $6,110

5/1/2007 100 $61.22 $6,122

5/1/2007 100 $61.36 $6,136

5/1/2007 100 $61.40 $6,140

5/1/2007 100 $61.65 $6,165

5/1/2007 100 $61.66 $6,166

5/1/2007 80 $61.88 $4,950

5/25/2007 27,973 $65.00 $1,818,245

5/25/2007 4,561 $65.01 $296,511

5/25/2007 2,400 $65.03 $156,072

5/25/2007 1,432 $65.02 $93,109

5/25/2007 1,150 $65.04 $74,796

5/25/2007 700 $65.06 $45,542

5/25/2007 600 $65.10 $39,060

5/25/2007 600 $65.13 $39,078

5/25/2007 543 $65.08 $35,338

5/25/2007 350 $65.05 $22,768

5/25/2007 300 $65.11 $19,533

5/25/2007 200 $65.12 $13,024

5/25/2007 200 $65.14 $13,028

5/25/2007 191 $65.19 $12,451

6/1/2007 1,900 $66.48 $126,312

32


6/1/2007 1,662 $66.47 $110,473

6/1/2007 1,500 $65.15 $97,725

6/1/2007 1,200 $65.42 $78,504

6/1/2007 1,200 $65.90 $79,080

6/1/2007 1,100 $66.90 $73,590

6/1/2007 1,000 $66.18 $66,180

6/1/2007 1,000 $66.88 $66,880

6/1/2007 897 $66.50 $59,651

6/1/2007 800 $66.66 $53,328

6/1/2007 706 $66.19 $46,730

6/1/2007 700 $65.38 $45,766

6/1/2007 700 $65.44 $45,808

6/1/2007 606 $65.40 $39,632

6/1/2007 600 $65.17 $39,102

6/1/2007 600 $65.29 $39,174

6/1/2007 600 $65.36 $39,216

6/1/2007 600 $66.43 $39,858

6/1/2007 600 $66.72 $40,032

6/1/2007 598 $66.55 $39,797

6/1/2007 594 $65.39 $38,842

6/1/2007 500 $65.20 $32,600

6/1/2007 400 $66.12 $26,448

6/1/2007 399 $66.54 $26,549

6/1/2007 300 $65.16 $19,548

6/1/2007 300 $65.51 $19,653

6/1/2007 300 $65.93 $19,779

6/1/2007 300 $66.93 $20,079

33


6/1/2007 299 $65.52 $19,590

6/1/2007 200 $65.18 $13,036

6/1/2007 200 $65.44 $13,088

6/1/2007 200 $65.94 $13,188

6/1/2007 200 $66.01 $13,202

6/1/2007 200 $66.07 $13,214

6/1/2007 200 $66.20 $13,240

6/1/2007 200 $66.57 $13,314

6/1/2007 200 $66.65 $13,330

6/1/2007 199 $66.56 $13,245

6/1/2007 140 $66.03 $9,244

6/1/2007 100 $65.19 $6,519

6/1/2007 100 $65.21 $6,521

6/1/2007 100 $65.27 $6,527

6/1/2007 100 $65.28 $6,528

6/1/2007 100 $65.31 $6,531

6/1/2007 100 $65.32 $6,532

6/1/2007 100 $65.45 $6,545

6/1/2007 100 $66.11 $6,611

6/1/2007 100 $66.23 $6,623

6/1/2007 100 $66.35 $6,635

6/1/2007 100 $66.51 $6,651

Total 125,000 $7,818,657

MICHAEL DIPIANO 5/3/2007 500 $62.52 $31,260

Total 500 $31,260

34


MICHAEL HAGAN 6/1/2007 25,667 $67.00 $1,719,689

6/1/2007 548 $67.24 $36,848

6/1/2007 350 $67.01 $23,454

6/1/2007 200 $67.31 $13,462

6/1/2007 130 $67.16 $8,731

6/1/2007 100 $67.02 $6,702

6/1/2007 100 $67.13 $6,713

6/1/2007 100 $67.18 $6,718

6/1/2007 100 $67.29 $6,729

6/1/2007 100 $67.32 $6,732

6/1/2007 99 $67.04 $6,637

6/1/2007 99 $67.28 $6,661

6/4/2007 32,307 $67.00 $2,164,569

Total 59,900 $4,013,644

BRIAN TIERNEY 6/8/2007 14,000 $65.84 $921,760

6/8/2007 1,000 $65.68 $65,680

Total 15,000 $987,440

Grand Total 305,179 $19,502,539

Loss Causation/Economic Loss

67. During the Class Period, as detailed herein, defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated the prices of NutriSystem’s

common stock and operated as a fraud or deceit on Class Period purchasers of NutriSystem’s

common stock by making positive, misleading statements about the Company, its business,

operations, and prospects, but failing to disclose to investors that: (i) the Company was signing

35


up fewer new customers and was not performing according to guidance furnished to securities

analysts; (ii) the Company’s costs of acquiring new customers were significantly increasing;

(iii) the Company’s business model was all but obsolete; and (iv) the Company’s performance

was being negatively impacted on an ongoing and continuous basis by competition from other

weight loss products on the market. When defendants’ prior misrepresentations, omissions and

fraudulent conduct were disclosed and became apparent to the market, the price of

NutriSystem’s common stock fell precipitously as the prior artificial inflation came out. As a

result of their purchases of NutriSystem’s common stock during the Class Period, Lead Plaintiff

and the other Class members suffered economic loss, i.e., damages, under the federal securities

laws.

68. By failing to disclose to investors the true facts about the Company, its business,

operations, and prospects, defendants presented a materially misleading picture of NutriSystem.

Defendants’ false and misleading statements had the intended effect and caused NutriSystem’s

common stock to trade at artificially inflated levels throughout the Class Period, reaching as high

as $72.93 per share on July 16, 2007.

69. As a direct result of disclosures on July 24, 2007, October 3, 2007, and

February 19, 2008, the price of NutriSystem common stock fell precipitously. These drops

removed the inflation from the price of NutriSystem common stock, causing real economic loss

to investors who had purchased NutriSystem common stock during the Class Period. The market

price of NutriSystem common stock at the close of trading on March 6, 2008 was $13.78 per

share.

36


70. The decline in the price of NutriSystem common stock after these disclosures was

a direct result of the nature and extent of defendants’ fraud finally being revealed to investors

and the market. The timing and magnitude of the price declines in NutriSystem common stock

negates any inference that the loss suffered by Lead Plaintiff and the other Class members was

caused by changed market conditions, macroeconomic or industry factors or Company-specific

facts unrelated to the defendants’ fraudulent conduct. The economic loss, i.e., damages, suffered

by Lead Plaintiff and the other Class members was a direct result of defendants’ fraudulent

scheme to artificially inflate the prices of NutriSystem common stock and the subsequent

significant decline in the value of NutriSystem common stock when defendants’ prior

misrepresentations and other fraudulent conduct were revealed.

Applicability of Presumption of Reliance:Fraud on the Market Doctrine

71. At all relevant times, the market for NutriSystem’s common stock was an

efficient market for the following reasons, among others:

(a) NutriSystem common stock met the requirements for listing, and was

listed and actively traded on the NASDAQ, a highly efficient and automated market;

(b) as a regulated issuer, NutriSystem filed periodic public reports with the

SEC and the NASDAQ;

(c) NutriSystem regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases

on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as conference calls with securities analysts; and

(d) NutriSystem was followed by several securities analysts employed by

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major brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace.

72. As a result of the foregoing, the market for NutriSystem common stock promptly

digested current information regarding NutriSystem from publicly available sources and

reflected such information in the prices of the stock. Under these circumstances, all purchasers

of NutriSystem common stock during the Class Period suffered similar injury through their

purchase of NutriSystem common stock at artificially inflated prices and a presumption of

reliance applies.

No Safe Harbor

73. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking

statements” when made or were statements of past or present fact. Lead Plaintiff has also

alleged omissions. To the extent there were any forward-looking statements, those statements

were not accompanied by particular meaningful cautionary statements identifying important

factors that could cause actual results to differ materially from those in the purportedly

forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply

to any forward-looking statements pleaded herein, defendants are liable for those false

forward-looking statements because at the time each of those forward-looking statements were

made, the particular speaker knew that the particular forward-looking statement was false, and/or

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the forward-looking statement was authorized and/or approved by an executive officer of

NutriSystem who knew that those statements were false when made.

COUNT I

Violation of Section 10(b) ofthe Exchange Act and Rule 10b-5

Promulgated Thereunder Against All Defendants

74. Lead Plaintiff repeats and realleges each and every allegation contained above as

if fully set forth herein.

75. During the Class Period, defendants disseminated or approved the materially false

and misleading statements specified above, which they knew or deliberately disregarded were

misleading in that they contained misrepresentations and failed to disclose material facts

necessary in order to make the statements made, in light of the circumstances under which they

were made, not misleading.

76. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s common stock during the

Class Period.

77. Lead Plaintiff and the Class have suffered damages in that, in reliance on the

integrity of the market, they paid artificially inflated prices for NutriSystem common stock.

Lead Plaintiff and the Class would not have purchased NutriSystem common stock at the prices

they paid, or at all, if they had been aware that the market prices had been artificially and falsely

inflated by defendants’ misleading statements.

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78. As a direct and proximate result of defendants’ wrongful conduct, Lead Plaintiff

and the other members of the Class suffered damages in connection with their purchases of

NutriSystem common stock during the Class Period.

COUNT II

Violation of Section 20(a) ofthe Exchange Act Against the Individual Defendants

79. Lead Plaintiff repeats and realleges each and every allegation contained above as

if fully set forth herein.

80. The Individual Defendants acted as controlling persons of NutriSystem within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By reason of their positions as

officers and/or directors of NutriSystem, and their ownership of NutriSystem stock, the Individual

Defendants had the power and authority to cause NutriSystem to engage in the wrongful conduct

complained of herein. By reason of such conduct, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act.

WHEREFORE, Lead Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, and certifying Plaintiff as a class

representative under Rule 23 of the Federal Rules of Civil Procedure;

B. Awarding compensatory damages in favor of Lead Plaintiff and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding Lead Plaintiff and the Class their reasonable costs and expenses incurred

in this action, including counsel fees and expert fees; and

D. Granting such other and further relief as the Court may deem just and proper.

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JURY TRIAL DEMANDED

Lead Plaintiff hereby demands a trial by jury.

Dated: March 7, 2008 WEISS & LURIEBy: s/ Joseph H. Weiss, EsquireJoseph H. Weiss, EsquireMoshe Balsam, EsquireDavid C. Katz, EsquireJack I. Zwick, Esquire551 Fifth AvenueNew York, New York 10176(212) 682-3025(212) 682-3010 (Fax)

Counsel for Lead Plaintiffs

BRODSKY & SMITH, LLCBy:s/ Marc L. Ackerman, EsquireMarc L. Ackerman, EsquireEvan J. Smith, EsquireBRODSKY & SMITH, LLCTwo Bala Plaza, Suite 602Bala Cynwyd, PA 19004610-667-6200610-667-9029 (fax)

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Documents

In re NutriSystem, Inc. Securities Litigation 07-CV-04215 ...securities.stanford.edu/.../200837_r01c_07CV04215.pdfCase 2:07-cv-04215-MAM Document 31 Filed 03/07/2008 Page 1 of 41 IN