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Pre-Paid Legal Service, Inc. (PPD) or a Ponzi scheme?

|Includes:Pre-Paid Legal Services Inc. (PPD)
Pre-Paid Legal Services Inc (NYSE:PPD) 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 21.0% on October 6th, 2009. Reggie Middleton had publicly proclaimed the downfall of the company six months ago, not hesitating to call it a Ponzi scheme (

PPD’s market value has continuously depreciated despite healthy financial results over the previous years. Adding back the total buybacks and dividend payments – which the company’s management carried out over the past 10 years – to the current market capitalization will show a decline in the market value of almost 8.9%. This decline would be worse if considered on a real, inflation adjusted basis.

A large portion of PPD’s shares were held by the board of directors and the management of the company which apparently gave incentives to the management to continue to buy back shares at higher rates. This should raise eyebrows: PPD used revenues collected from membership fees for the purpose of share buyback, instead of pooling back the funds in growth of the stagnating membership base and sales. Between 2004 and 2008, PPD has utilized $238.0 million for shares repurchase at an average price of $38.1, of which a staggering 28.9% (that’s almost 1/3rd) has gone to the insiders. In fact, the management has been the net seller in the insider trading activity, with net sales between July 2003 and September 2009, amounting to $69.5 million.

Again, the aggressive shares repurchase over the years has helped the management to artificially escalate the company’s EPS. For more discussions please follow the link:
Stocks: PPD