In the press release dated June 3, 2004, a U.S. district court judge in May gave final approval to a settlement in a class action lawsuit between Medi-Hut and its shareholders. The company agreed to pay $400,000 and issue 861,990 shares of stock to shareholders who bought Medi-Hut stock between April 2000 and February 2002.
According to the docket posted, on October 15, 2002, the Court entered the Amended Order signed by U.S. District Judge Mary L. Cooper, granting the motions to appoint the lead plaintiff and for approval of lead counsel. On December 23, 2002, the lead plaintiff filed a Consolidated Amended Complaint, and the defendants soon after filed several motions to dismiss the complaint. On July 16, 2003, the Court entered the Stipulation and Order withdrawing the motions to dismiss and a Second Amended Consolidated Complaint was filed. On December 19, 2003, the lead plaintiff filed a motion for preliminary approval of the settlement.
As reported by the Company’s FORM 10-Q for the quarter ended July 31, 2002,
during March and April of 2002, a total of eleven (11) class action lawsuits were filed against Medi-Hut in the United States District Court, District of New Jersey. The complaints allege that Medi-Hut and its officers and directors failed to disclose in its periodic reports a related party transaction between Medi-Hut and an employee of Medi-Hut. On February 21, 2002, the Securities and Exchange Commission ("SEC") issued a formal order directing private investigation entitled In the Matter of Medi-Hut Co., Inc. According to the formal order, the SEC is investigating, among other things, the accuracy of the Company's SEC filings and financial disclosures, as well as the sufficiency of the Company's system of internal accounting controls.
The original complaint seeks damages for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiff has alleged that defendants knowingly and recklessly disseminated materially false and misleading statements and omissions that misrepresented the Company's business, operations and financial performance. As stated in plaintiff's complaint, Medi-Hut misled the investing public by failing to disclose that a Medi-Hut vice president had a controlling interest in Larval Corp. (``Larval''), the Company's largest customer. Specifically, Medi-Hut failed to disclose that Lawrence Marasco, Medi-Hut's Vice President for Sales and Marketing, had a controlling interest in Larval. During fiscal year 2001, sales to Larval accounted for 62% of Medi-Hut's revenues. Because Lawrence Marasco had a controlling interest in one of Medi-Hut's customers, generally accepted accounting principles dictated that Medi-Hut identify sales to that customer as related party transactions. The Company, however, failed to disclose the true nature of its sales to Larval. Indeed, each report Medi-Hut filed with the Securities and Exchange Commission during the Class Period, including quarterly and annual reports, was devoid of any reference to the fact that one of its largest customers was controlled by a Company employee. These reports were disseminated to shareholders and/or were publicly available to potential investors. Plaintiff alleges that the misrepresentations and omissions by defendants influenced the views of stock market analysts and the investing public and brought about an unrealistic assessment of the Company's performance and prospects; and that, as a result, Medi-Hut's stock traded at artificially inflated prices throughout the Class Period. On February 4, 2002, the nature of the relationship between Medi-Hut, Lawrence Marasco and Larval Corp. was revealed. The market, recognizing that a majority of the Company's revenues in fiscal year 2001 were generated via sales to a related party, reacted swiftly and severely. By the close of business on February 4, shares of Medi-Hut had lost 51% of their value, falling $3.41 to $3.29 in unusually heavy trading. Four days later, Grant Thorton LLP (``Grant Thorton'') resigned its position as Medi-Hut's independent auditor after only two weeks. Grant Thorton served as the Company's auditors from January 24, 2002 through February 8, 2002.