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Reggie Middleton is the personification of the freethinking maverick — the ultimate nonconformist as it applies to macro strategies, investment, and analysis. He uses his background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate,... More
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  • Pre-Paid Legal Services Ponzi - Sorry,,, I Mean News Update 17 comments
    Apr 15, 2010 12:00 PM | about stocks: PPD

    Prepaid Legal Services, the company that I believe is a publicly traded Ponzi scheme (this is my opinion, although I believe my research backs this opinion up), released  preview of earnings as well as an update to its SEC inquiry.ppd_4-15-10.png 

    From PRNewsire: ADA, Okla., April 1, 2010 /PRNewswire via COMTEX/ -- Pre-Paid Legal Services, Inc. (PPD 37.71, -2.94, -7.23%)reported new sales associates enrolled and new memberships produced for the 2010 first quarter. During the 1st quarter of 2010, new sales associates enrolled increased 58% to 37,640 from the 23,871 enrolled in the 1st quarter of 2009 and new memberships produced increased 9% to 134,181 during the 2010 quarter compared to 122,595 for the 2009 quarter.

    On a sequential quarterly basis, new associates enrolled decreased 39%, new memberships produced decreased 9%, new membership fees written decreased 6% and our active membership base decreased by 22,666 memberships.

    ppd_q1.png 

    Our total active membership fees in force increased less than 1% during the last twelve months. Membership persistency rate (defined as the number of memberships in force at the end of a 12 month period as a percentage of the total of memberships in force at the beginning of such period, plus new memberships sold during such period) was 72.4% for the 12 month period ended March 31, 2010, a decrease from the 72.7% for the 12 month period ended March 31, 2009.

    During the 2010 1st quarter, we returned $1.6 million to shareholders through the repurchase of 39,510 shares of common stock, at an average per share price of $39.70. Since April 1999, we have returned $459.4 million to shareholders through the purchase of 15.1 million shares, average price of $30.35 per share, and $17.1 million in dividends for a combined total of $476.5 million representing more than 100% of our net earnings during the same timeframe.

    Hmmm!!! Ponzilicious... And a quick recap from last quarter, courtesy of "Is Breaking the Spirit of the Law as Bad as Breaking the Law Itself? Enter Prepaid Legal Services ":

    Falling membership revenues and share buyback remains a key concern for the company 

    Total membership revenues in 2009 declined for the first time in the last 17 years, despite an increase in average annual membership fees

    Membership revenues declined to $426.4 million from $436.8 million in 2009 primarily off a decline in total memberships, partially offset by an increase in average annual membership fees to $303 from $301 in 2008. This has been done several times in an apparent effort to boost revenues in what appears to be a failing business model.

    Click to enlarge...

    ppd_member_revenues.png

    Total memberships continue to fall despite an increase in new memberships

    Though the company was able to increase total new members that joined in 2009, higher membership cancellations lead to an overall decline in total number of memberships outstanding at the end of 2009.

    •·         Total memberships at the end of 2009 declined 0.7% to 1,547,585 from 1,559,154 at the end of 2008 primarily off a 1.9% increase in membership cancellations to 579,664 from 568,975 in 2008. However, the decline in total memberships was partially offset by a 2.9% increase in new memberships to 568,095 from 552,327 in 2008.

    Consequently, total revenues and net income declined for 2009

    Total revenues for the company declined 1.3% Y-o-Y to $458.5 million from $464.5 million in 2008 primarily off a 2.4% decline in membership revenues partially offset by a 20.5% increase in revenues from associate services.  

    •·         Associate services revenues increased 20.5% to $28.4million from $23.5 million in 2008, primarily owing to an increase in associates recruited and higher average associate fee paid (charged).

    ppd_membership.png

    Source: Company filings

    Total cost and expenses increased a meager 0.2% to $367.8 million from $367.1 million in 2008 as an increase in associate services and direct marketing expenses and commissions was offset by a decline in membership benefits, general administrative and other expenses.

    Consequently, net income for the year declined 8.4% to $55.1 million from $60.2 million in 2008. However, diluted EPS per share remained constant at $5.04, as the company continued to buy back shares, thus the 8% decline in net income was netted off by 8% decline in shares outstanding (which, of course, served to deplete usable cash even more). It is here that I have a problem. Management should be investing cash into the company to either make the business model more sustainable or to alter the model, but instead are buying back shares,  a temporary stopgap at best. What happens when they get to the end of the road? Issue more shares - wash, rinse repeat?

     ppd_costs_and_expenses.png

    Source: Company filings

    Although continuous share buybacks have helped PPD push up its share price; actual equity returns haven't been so lucky, as reflected by a lesser gain in market capitalization reflecting the fact that the company has actually lost intrinsic value over the last few years

    Pre-Paid Legal Services Announces Update on Inquiry 

    ADA, Okla., April 15 /PRNewswire-FirstCall/ -- Pre-Paid Legal Services, Inc. (NYSE: PPD) announced that, as a part of an ongoing inquiry by the Division of Enforcement of the Securities and Exchange Commission ("SEC"), we received an additional subpoena from the SEC on April 13, 2010. The subpoena requests us to provide documents relating to certain membership information, member complaints about provider law firms, our efforts to achieve compliance with all payment card industry requirements, the resignation of Harland C. Stonecipher as Chief Executive Officer and President and the resignation of Tom Smith as a director.

    The subpoena is part of an ongoing inquiry by the SEC. The SEC has stated that the inquiry is non-public and should not be construed as an indication by the SEC or its staff that any violation of law has occurred, nor should it be considered a reflection upon any person, entity or security.

    For those who have not followed my opinio and analysis on this company over the last year or two, here 'ya go: 

    Is Breaking the Spirit of the Law as Bad as Breaking the Law Itself? Enter Prepaid Legal Services

    •1.     First PPD Gets SEC'd, Then it Gets FTC'd. It Seems to be a Bad Year for Ponzi Schemes.

    •2.     The Flim Flam Scam gets SEC'd - I'm not going to say I told you so, again!

    •3.     Flim, Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause your wealth to Scram?

    •4.     A Demonstration of How PPD Management is Destroying the Company

    •5.     Additional Commentary on PPD

    •6.     Reggie Middleton's Continued Public Service Announcement on the Flim Flam Scam

    •7.     PPD 2009 First Quarter Update and Comment

    •8.     A quick opinion on PPD's latest earnings release

    •9.     The Latest on PrePaid Legal Services - The Story of a Publicly Traded Ponzi Scheme?

    •10.   PPPPDPPW: Put Purchasing on the PPD Ponzi, Pyramid, or Whatever It's Called...



    Disclosure: Often short PPD
    Stocks: PPD
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Comments (17)
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  • mrwhsla
    , contributor
    Comment (1) | Send Message
     
    I completely disagree. These are the same ups and downs the regular insurance industry experienced, although back then, very few people paid attention to Allstate, State Farm, and other companies as their products became accepted. Until people as a whole accept the prepaid legal concept, we will go through ups and downs, except everyone will have the chance to watch them. For folks trashing PPD for Stonecipher stepping back, what would you do after you have given thirty-eight years of your life to a company? The normal thing to do is to retire. Stop putting us to standards that other companies that buy back shares, answer SEC/FTC inquiries, get sued, and so on are not put to. It is unfair. Regardless, the truth comes out, as time can only expose or promote someone or something. At least our membership works like we said it will.
    16 Apr 2010, 09:15 AM Reply Like
  • Reggie Middleton
    , contributor
    Comments (269) | Send Message
     
    Author’s reply » Why are you comparing yourself to insurance companies? Do you have statutory reserves? Are you regulated by the state insurance departments? Do you make use of stop loss and reinsurance policies? Do you disclose how you invest your premiums, and the returns on those investments openly and transparently? As an insurance company, this firm would rate poorly since its primary investment (potentially other than cash) is its own stock. Concentration risk, even if it is not a ponzi scheme.
    16 Apr 2010, 04:17 PM Reply Like
  • copp
    , contributor
    Comments (5) | Send Message
     
    Reggie,

     

    You are terribly off based. Yes, the state insurance boards regulate Pre-Paid Legal services. In fact, the Insurance commissioner of OK was present at the national conventional held earlier this month.

     

    Investment strategy is transparent, as are earnings. Despite those things, what would you call a "just in case" investment other than insurance? The fact that PPD requires a license by the dept of insurance to be sold in about a dozen states suggests that the attorneys general and governors who support the company are likely more in the know than you are.
    23 Apr 2010, 04:11 PM Reply Like
  • Reggie Middleton
    , contributor
    Comments (269) | Send Message
     
    Author’s reply » You failed to answer the questions, none of which had to do with convention attendance:
    Do you make use of stop loss and reinsurance policies? Do you disclose how you invest your premiums, and the returns on those investments openly and transparently? As an insurance company, this firm would rate poorly since its primary investment (potentially other than cash) is its own stock. Concentration risk, even if it is not a ponzi scheme.
    23 Apr 2010, 05:38 PM Reply Like
  • kbermel
    , contributor
    Comment (1) | Send Message
     
    What is the your problem. Do you have nothing else to do as to investigate a solid company by hoping to be on the right side, or get some money out of it?

     

    If you so good in analyzing why you do not make a real job out off it and go to companies which do not help with their products.
    Ask a person who had no legal help and started with the membership and now have the same rights and financial power as you in court.

     

    Why you people cannot work together without bashing everything?

     

    It seems you are a very unhappy person. Well, I hope live will treat you well.
    17 Apr 2010, 05:44 PM Reply Like
  • nlhinct
    , contributor
    Comment (1) | Send Message
     
    I tried to link to the 10 previous posts you listed in today's blog. None of them are available to be read which made me very suspicious of your statements.

     

    This company is a common sense way to get life-event legal counsel. I have kicked the tires. I have seen the legal provider offices (very organized with a quality control system for call backs and resolution that is quite impressive), met with the attorney's ( well paid, sharp with a variety of legal expertise within the firm), used the service several times with success, all within the monthly fee).

     

    I am really not following your line of reasoning.
    18 Apr 2010, 10:41 AM Reply Like
  • Reggie Middleton
    , contributor
    Comments (269) | Send Message
     
    Author’s reply » Pardon the links to the blog. I just updated the software, and as is usual, am encountering technical difficulties. The analysis, I believe, stands on its on merits though. Revisit the links in 48 hours and all should be accessible.
    20 Apr 2010, 08:31 AM Reply Like
  • BigO312
    , contributor
    Comment (1) | Send Message
     
    Well Reggie, I happened to stumble upon your blog as I was looking for articles on PPL that would give me some nuggets I could use in my selling the membership.

     

    Now, I'm not very knowledgeable when it comes to the details of the "stock market thing," although I do have a good general sense of what I read. Therefore, I'll accept the details you state when it comes to stock values, the investigations, and such as factual. When there's opposition to the things I believe or accept, I'm always open to hear other's opinions with an open mind. All this being said, here's where you lose me Reggie. You yourself say, "You're a maverick - a nonconformist." And that's cool. We, the world, need people like you. The one thing about being a deeply investigative maverick is that you will always find something that is or could be looked upon as being wrong - with everything! On a couple of occasions you made a statement about a particular practice, but also said it was not illegal. The company is being investigated by the SEC & FTC, and to the best of my knowledge there's been no finding of any wrong doing. Publicly traded companies are investigated all the time to make sure they don't cross the line. So aren't your conclusions about the the company's activities merely what one might expect from a "maverick?" Furthermore, I don't think I read once where you attributed the performance of the membership and the stock prices, at least in part, to the downturn in the economy and it's psychological effect on the American public. Now let's discuss your love of referring to PPL as a "scam, scheme, ponzi, flim flam, and so on. With all the support, endorsement, and acknowlegement of the legal community - from current & former State Attorney Generals to the President of the National Chamber of Commerce - how is it that you see this business model as such? Sure, have there been big problems in the past with businesses that were set up using this model, but you'd have to agree that it has been cleaned up so people aren't taken advantage of, and have an opportunity to build and mentor an organization that pays for their efforts. Your use of the those desciptive terms reminds me of the toxic political fighting that goes on between the Dems & Reps simply because of their opposing agendas. Nothing factual, just bitterness. So along comes someone that's looking at this business as an opportunity for whatever they see it for. They do the "wrong" thing by Googling and stumble upon your blog. They see you using these inappropriate descriptions and get turned off, because they heard... They decide not to pursue the opportunity. Now you think you've done them a favor. Selfish Reggie! Very Selfish.
    30 Apr 2010, 04:28 PM Reply Like
  • JakeRothman
    , contributor
    Comments (13) | Send Message
     
    Read Reggie's bio carefully. I got a good laugh out of it. Don't assume that just because you don't understand what a writer is saying that the writer does. But be very careful of PPD as well. They have hurt a lot of people by selling false dreams.
    13 May 2010, 01:05 PM Reply Like
  • Reggie Middleton
    , contributor
    Comments (269) | Send Message
     
    Author’s reply » I don't have time to read through and reply to your lengthy comment, but I did notice that you said you were selling memberships. I'm open to admitting that I am wrong, if I am wrong.
    Would you be willing to tell us (remember, your anonymous) how much you and the people who you know personally at your level have made over the last couple of years selling this product? How much in terms of per hour compensation (divide all of your efforts into your net income)?
    3 May 2010, 09:00 AM Reply Like
  • Truth B
    , contributor
    Comments (8) | Send Message
     
    Word of Mouth Advertising
    The Most Effective Advertising Of All
    Word-of-mouth advertising is important for every business, as each happy customer can steer dozens of new ones your way. And it's one of the most credible forms of advertising because a person puts their reputation on the line every time they make a recommendation and that person has nothing to gain but the appreciation of those who are listening.

     

    Pre-Paid legal capitalizes upon this by paying the people who would refer the service anyway.

     

    Word of mouth advertising is more influential than any other form of advertising. People believe what their friends and neighbors say about your company, and they remember it for a long, long time.
    Your company generates word of mouth advertising, whether you know it or not. People are talking about you. The question is, what are they saying? “Oh yeah, I have to call them. And I need to tell Fred at work about them too.” Superior products and services, combined with ongoing marketing and advertising, are the keys to success.

     

    The basis of all positive word of mouth advertising is providing superior products and services. This is, in fact, the basis for success with all marketing and advertising.
    But no company is perfect
    13 May 2010, 12:54 AM Reply Like
  • Truth B
    , contributor
    Comments (8) | Send Message
     
    I was chatting with a PPD associate yesterday. I asked why so many quit. They responded they don't quit. They never get started. They went on to explain the power of Pre-Paid Legal's differential pay plan.

     

    If you are the only source of your income you go to work and you get paid. If you don't work you don't get paid. For the associates who do actually get started WORKING Pre-Paid Legal at least 10 hours a week [which consists of sharing company approved materials twice a day, two 2 hour trainings a week for 52 weeks (1 a product training the other a marketing training), 1 Saturday 4 hour training a month and 3 conventions a year]. We will call these active associates as opposed to those who are inactive and do none of the above but still manage to market a 1 or 2 memberships a month.

     

    If active associates recruit 5 new team members the first year and teach those 5 to duplicate their success the second year and that repeats for five years they will have recruited over 3,000 associates on their team. If nine out of ten quit (give up before the fifth year) they still have 300 active associates. If each active associate sells 10 memberships a month the team leader earns over $10,000 per month. That's why after 38 years every 12 days a new family earns over six figures and every 30 days a new family has earned over 7 figures as documented in their annual report.

     

    That's also why the best growth in this company will occur in the next 7 to 14 years and those who invest just $1,000 in this stock at today's price will undoubtedly become millionaires as well.
    13 May 2010, 12:59 AM Reply Like
  • JakeRothman
    , contributor
    Comments (13) | Send Message
     
    The problem with Prepaid Legal is that it sells an unnecessary product - insurance against needing a lawyer. It tells low-income people that they have no access to a lawyer unless they sign up for this service. When they sign up, 1/3 of their money actually goes to the lawyers for a capitated payment (reinsurance, Reggie), 1/3 goes as commissions and 1/3 is kept by PPD to pay for Harland's jet, the nice HQ's and profits to the shareholders. The company thrives on scaring low-income people about being sued, when in reality no one would waste their time suing someone who has no money. A couple interesting stats on this company: about 1/3 of the people who buy the product sign up to sell it (i.e. get rich quick, not insure themselves against lawyers' fees), >80% of the people who have signed up are no longer clients and nearly 40% of the customers quit each year, with new customers realizing they don't need this product at a much higher rate than that.
    13 May 2010, 01:02 PM Reply Like
  • Truth B
    , contributor
    Comments (8) | Send Message
     
    "The problem with Prepaid Legal is that it sells an unnecessary product - insurance against needing a lawyer."

     

    Pre-Paid Legal sells a Life Events Legal Plan. The plan gives access to middle income North Americans who would not be able to otherwise afford a lawyer for life events.

     

    Things like being overcharged for repairs, reviewing contracts before signing them, cell phone disputes, traffic tickets, will preparation (no cost if done within 1st 30 days of membership) mortgage review, child support questions, neighbor disputes, unfair child discipline in school, etc. Things the average person won't pick up a phone and discuss with an attorney because of the cost of the call.

     

    They also cover vehicular manslaughter, negligent homicide, involuntary homicide, and job related criminal charges. Things that would cost the average person tens of thousands of dollars when it happens to them. Will it happen to everybody? No. But if it happens to YOU then your glad your covered. You have the peace of mind that you don't have to use the house for collateral and loose it even if you win!

     

    "It tells low-income people that they have no access to a lawyer unless they sign up for this service." Low-income people are not the target market for Pre-Paid Legal's Life Events Legal Plan. These people have access to attorneys through government subsidized public services or pro bono services of law firms.
    14 May 2010, 12:33 AM Reply Like
  • JakeRothman
    , contributor
    Comments (13) | Send Message
     
    You may say that you are not targeting low income people, but I dont' think the statistics bear that out. A disproportionate percentage of your customers are low income, though maybe not very low income.

     

    "The plan gives access to middle income North Americans who would not be able to otherwise afford a lawyer for life events."

     

    Since only 1/3 of the money your customers spend on the Plan actually goes to paying for lawyers (i.e. 200% markup of lawyers' fees) it would seem your customers could afford access to lawyers if they weren't spending their money on insurance against needing lawyers.

     

    I doubt most people have $300/year in overcharged repair bills and bogus speeding tickets that can be solved by a letter from an attorney. What the Plan does, however, is encourage people to find something to sue over, since they are spending all this money on legal protection they don't need.
    14 May 2010, 11:59 AM Reply Like
  • Dirk McCoy
    , contributor
    Comments (665) | Send Message
     
    Consider that folks spend $35 a month on dental insurance, or $35 a month on renter insurance, or $35 a month on life insurance, or $35 a month on limited disability insurance.

     

    1 in 2 families will have a legal issue each year- foreclosure, immigration, termination agreement, home purchase, home refinancing, traffic (maybe even serious like dropping a cell phone and killing someone while picking it up)- so the odds of using this coverage seems much higher than the others (except dental, where you know you'll probably spend a few hundred bucks each year- and where coverage is capped so you often end up paying $1000+ for anything serious).

     

    This is like any other insurance- if you have significant means and can self insure, or retain an attorney (albeit at a much higher cost than this), then go for it. And if you're broke, you may not need this like you don't need dental if you have no teeth.

     

    But for a lot of people in between, legal insurance is a way to responsibly meet your potential obligations to your family (if you think you have responsibility for addressing legal issues, as opposed to telling Jr. to have a nice time in jail or signing any document someone puts in front of you).

     

    The big question is this- for those that actually use the service, is the retention rate higher or lower? My understanding is that it is higher. If the service wasn't effective, that wouldn't be the case.
    14 Aug 2010, 01:36 AM Reply Like
  • bigbassfisherman
    , contributor
    Comments (2) | Send Message
     
    Reggie, have you ever been arrested for growing marijuana and selling crack? Are you sure? The reason I ask is because you're not a journalist, rather a dealer in hyped jargon.
    14 Jun 2010, 07:50 PM Reply Like
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