Pre-Paid Legal: The Flim Flam Scam Gets SEC'd

| About: Pre-Paid Legal (PPD)

From Reuters:

Oct 6 (Reuters) - Pre-Paid Legal Services Inc (NYSE:PPD) said it received a subpoena from the Division of Enforcement of the U.S. Securities and Exchange Commission (SEC) as part of a fact-finding inquiry, sending its shares down as much as 21 percent.

The company said the subpoena required it to produce documents pertaining to its Treasury stock repurchase program, American Depository Receipt Shares program and membership statistical information, among others.

"We are also responding to comments received by the Division of Corporation Finance of the SEC pertaining to our Form 10-K for fiscal year ended Dec. 31, 2008 and our definitive proxy statement incorporated by reference therein," it said.

The company, which provides legal service benefits plans through a network of independent law firms across the United States and Canada, said it would not able to predict when the inquiries would be resolved.

Shares of the Ada, Oklahoma-based company touched a low of $41.00 before recouping some losses to trade down $8.21 at $43.52 Tuesday on the New York Stock Exchange. They had hit a 52-week high of $52.79 before the news. (Reporting by Renju Jose; Editing by Anne Pallivathuckal)

This is PPD over the last couple of days.

click to enlarge

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I can't help but speculate that that intraday pop was not a reversal but the PPD management raiding the coporate treasury in an attempt to rasie the price enough to dump the rest of their shares. For those who don't know what I am referring to, this is another "I told you so!". I would like to note that I gave this analysis away for free as a public service. Many pundits confused a bubblicious bear market rally with an error in my finding this company to be what I consider a Ponzi scheme. I cannot control stock prices, but over time they do tend to converge with reality.

PPD's latest earnings release is a bit misleading in my opinion as well. Instead of rehashing it myself, reference Robert Fitzpatrick's analysis.

Pre-Paid Legal Services Inc.'s (PPD) third-quarter numbers reveal 85 percent of PPD's sales force quits or fails to make even one sale annually; 2 percent of the sales force makes 10 or more sales annually, reports Fraud Discovery Institute Inc. (FDI). According to FDI co-founder Barry Minkow, "The 2009 third-quarter data released today by Pre-Paid Legal Services further confirm the analyses our expert Robert Fitzpatrick has presented over a two-year period - that of a pyramid selling scheme in ultimate decline."

Fitzpatrick observes the two key indicators, declining retail sales and a growing proportion of revenue sourced directly and only from salespeople (investors) - not retail customers - are prominent in third-quarter 2009 figures, as they have been in previous quarters.

For the last two years, these analyses of Pre-Paid Legal Services revealed and examined the driver of PPD's revenue, which has been affirmed as a deceptive "endless chain" business opportunity - not market-based product sales. Fitzpatrick affirmed PPD data as manifesting classic signs of pyramid collapse.

Hard numbers showed declines in recruitment of sales associates, rates of recruitment and membership sales.

Another red flag - the proportion of the total company revenue coming directly from the sales people - indicates that revenue depends on promises of income. At PPD, these promises are tragically false and misleading:

- Of the PPD sales force, 85 percent quit or fail to make even one sale each year.

- Only 2 percent of the sales force makes 10 or more sales per year.

- The mean average income of all salespeople in 2008 was $5.74 per week, before all expenses.

- PPD's 3Q09 data reflect the general spike in recruitment that most direct selling companies have realized as a result of millions of newly unemployed people.

In a USA Today article, president of the Direct Selling Association Neil Offen stated, "... Unfortunately as the unemployment rate rises to 10 percent or higher, we'll be picking up more people who need an income-earning opportunity."

Retail Sales Decline; Revenue Sourced from Sales Reps Grows

Yet, behind the industry-wide spike based on income promises, PPD's retail customer base declined this quarter over the same period last year, and the proportion of new memberships that are actually recruited salespeople grew dramatically.

- Total new memberships - that are not sales associates - declined 7 percent in 3Q09 from 3Q08.

- The proportion of new memberships that are actually new sales associates rose to 43 percent in 3Q09 from 26 percent in 3Q08.

- PPD does not reveal a total Associate count per quarter. However, totaling all Associates recruited in the last 420 quarters shows that newly recruited Associates as a proportion of total Members at the end for the third quarter of 2009 grew from 8 percent in 3Q08 to 10 percent.

At the end of the quarter, the total number of Active Memberships declined by more than 30,000 from the same period last year, and the company reports that membership fees in force decreased approximately 1.5 percent during the last twelve months.

Cancellations Exceed Recruitment

Previous analyses have noted that PPD is unique in the legal services industry for its extraordinary cancellation rates, traditionally viewed as a result of misleading or over-hyped sales.

PPD tracks cancellation with an arcane and obscure "membership persistency rate" which blends both attrition and recruitment. This measure declined in 3Q09 from 73.5 percent to 72.6 percent for the 12-month period.

The hard numbers are these:

- At the end of 3Q08 - one year ago - PPD reported that it had a total of 1,575,893 Memberships.

- Over the next four quarters, ending with this quarter, 3Q09, it reported signing up 552,488 new Members. This would bring a total to 2,128,381. However, the company reports that actual current members at the end of 3Q09 are only 1,505,871.

- Members who canceled their memberships during the last 12 months totaled 582,826 - 30,000 more than the number recruited in the same time frame.

Insider Sell-offs

As reported in the previous quarter and in earlier analyses provided to the public by FDI, PPD manifests another classic sign of a pyramid in decline - the use of company revenue to enhance the private fortunes of the insiders at the expense of the longer term fortune of the enterprise. PPD's total net value is now about half of what it was 10 years ago - yet its stock has been manipulated to its highest point in its history.

Minkow affirms, "In the midst of decline, the company used available funds to buy up stock, driving up the share price artificially, and then insiders have sold off many of their own personal shares at the high prices."

In its latest disclosures, PPD announced that the company used $761,758 to purchase 15,666 shares of common stock at an average per share price of $48.62. In this same quarter, the company CEO, Harlan Stonecipher sold 2,500 personal shares. There has been no insider purchase of PPD stock within the last year.

Note: May 15, 2009, "Direct Sales ..." by Charisse Jones

PPD Sales Associates are also Members. To get the actual number of new retail customers (Members that are not Sales Associates) the newly recruited Sales Associates must be subtracted from the total new Members.

Disclaimer: Always consider me to be short what I am bearish on and long what I am bullish on.