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Is Breaking the Spirit of the Law as Bad as Breaking the Law Itself? Enter Prepaid Legal Services
For those who haven't been reading me, I am of the belief that Prepaid
Legal, a publicly traded company, is actually running a pyramid scheme
and a ponzi scheme (potentially illegal, but arguably legal due to the
current share buyback laws of the land). They are also employing a
self-destructive business (pyramid) model and instead of revamping that
model and reinvesting heavily in marketing, they spend money on share
buybacks (ponzi) to enrich management who are compensated in stock that
is sold directly into the share buyback scheme.
Wikipedia defines
"ponzi " as "any scam that pays early investors returns from the
investments of later investors." The share buyback plan]. It defines a pyramid
scheme as a non-sustainable business model that involves the exchange of money primarily
for enrolling other people into the scheme, without any product or service being delivered (in my opinion,
this hits PPD business model right on the head). Pyramid schemes are a
form of fraudPyramid schemes
are illegal in many countries including Albania, Australia,[1] Brazil, Bulgaria, Canada, China,[2] Colombia,[3] France,Germany, Hungary, Iran[4], Italy,[5] Japan,[6] Malaysia, Mexico, Nepal[citation needed], The
Netherlands,[7] New
Zealand,[8] Norway[9],
the Philippines,[10] Poland, Portugal, Romania,[11] South
Africa,[12] Sri
Lanka,[13] Switzerland, Thailand,[14] theUnited Kingdom, and the United
States.[15]
according to the Wikipedia definition.
These types of schemes have existed for at least a century some with
variations to hide their true nature and there are people who hold that
multilevel marketing, even if it is legal, is nothing more than a
pyramid scheme.[16][17][18][19]
A successful pyramid scheme combines a fake yet seemingly credible
business with a simple-to-understand yet sophisticated-sounding
money-making formula which is used for profit. The essential idea is
that the mark, Mr. X, makes only one payment. To start earning, Mr. X
has to recruit others like him who will also make one payment each. Mr. X
gets paid out of receipts from those new recruits. They then go on to
recruit others. As each new recruit makes a payment, Mr. X gets a cut.
He is thus promised exponential benefits as the "business" expands.
| |
|
| The "eight-ball" model contains a total of fifteen members. Note that unlike in the picture, the triangular setup in the cue game of eight-ball corresponds to anarithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme in the picture in contrast is a geometric progression 1 + 2 + 4 + 8 = 15. |
No matter how large the model becomes before collapse, approximately 88% of all people will lose. |
Such "businesses" seldom involve sales of real products or services to
which a monetary value might be easily attached. However, sometimes the
"payment" itself may be a non-cash valuable. To enhance credibility,
most such scams are well equipped with fake referrals, testimonials, and
information. The flaw is that there is no end benefit. The money simply
travels up the chain. Only the originator (sometimes called the
"pharaoh") and a very few at the top levels of the pyramid make
significant amounts of money. The amounts dwindle steeply down the
pyramid slopes. Individuals at the bottom of the pyramid (those who
subscribed to the plan, but were not able to recruit any followers
themselves) end up with a deficit. Professor Benjamin Fine, PhD and director of the MS
program in mathematics at Fairfield University explains the concept
of market saturation as it relates to PPD, which elaborates on the
pyramid diagrams above.
They are currently being investigated by the FTC and the SEC, but they
are a slippery company. I would hope that the SEC takes notice of the
third to the last chart of this review that shows the company, if whose
shares are indexed to a fixed point in time, has made absolutely no
material gain in value despite using company resources to enrich
corporate insiders. As Senator Kaufman said in his recent speech and as
excerpted from When
the Patina Fades... The Rise and Fall of Goldman Sachs???:
"...fraud and potential criminal conduct were at the heart of the
financial crisis"."transactions as “window dressing,” a nice way of saying they were
designed to mislead the public."... Mr. President, it is high time that we return the rule of law to
Wall Street, which has been seriously eroded by the deregulatory
mindset that captured our regulatory agencies over the past 30 years...we must help regulators and other gatekeepers not only by demanding
transparency but also by providing clear, enforceable “rules of the
road” wherever possible. That includes studying conduct that may not be
illegal now, but that we should nonetheless consider banning or
curtailing because it provides too ready a cover for financial
wrongdoing. [BINGO!!!]
I addressed this issue when I first wrote about this company last year,
see The
Flim
Flam Scam gets SEC'd - I'm not going to say I told you so, again!
and A
Demonstration of How PPD Management is Destroying the Company.
A Review of
Prepaid Legal's Last Fiscal Quarter
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...
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).
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?
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
In essence, PPD is eating itself to to enrich those in the share buyback
program. I don't know if this is illegal, but it is definitely not in
the best interests of the company. I would think this would be
obvious, but maybe I'm just different. Is there anyone at the SEC who
is different like me?
Over the years the company has been successful in keeping its share
price within a certain trading range - not allowing it to fall much
despite what we consider to be a dismal outlook. The Company's share
price has increased sharply, considerably more than its total market
capitalization. Currently, the price of the shares is trading at 99.74%
of their value as of January 3, 2007, while the company's market
capitalization is at 69.02% of the market capitalization as of the same
date. When adding total returns to shareholders (including any share
buy-backs and dividends) there is no notable difference in this
observation (see chart below). This reflects a loss in the Company's
intrinsic value as illustrated by its total market capitalization (this
is my being very, very nice and politically correct, may I add - there
definitely is a more direct way of saying it).
Moreover, management and insiders had a vested
interest in manipulating price through share buy-backs since the
majority share holdings of the company is held by key management
members.
According to company's latest 13 D filed, "Based
on the 10,045,068 shares of Common Stock reported as outstanding as of
February 12, 2010, the aggregate number and percentage of shares of
Common Stock beneficially owned by each of the Reporting Persons is as
follows: Mr. Smith - 2,579,115 shares (25.7%); Mr. Vassalluzzo -
1,629,515 shares (16.2%); Mr. Fischer - 1,544,415 shares (15.4%); Idoya
Partners - 488,434 shares (4.9%); and Prescott Associates
- 1,014,675 shares (10.1%)".
Since the company has such thin public float, its share price is easily
manipluated through the share buyback program which apparently has
served to boost and manage the share price through times of turmoil. So,
is the company in the business of selling prepaid legal services or
trading stock?
Moreover, the company's management has been
liquidating their shareholdings by opting for sale in the share-buyback
program. The same can be seen in the related party transactions that
the company has disclosed in their 2009 10K. The numbers and amounts are
not insignificant! If only the sales associates could be thusly
compensated.
Very recently there appears to have been at least one (possibly more)
big block sales of shares as well. One must wonder if the insiders
doing these trades know something that we outsiders do not. After all,
if they do, that would be tantamount to securities fraud. I'm not
saying that they do, but if they did.... As stated earlier the company
is being investigated by the SEC and the FTC. The ball is in your court,
Mr. and Mrs. Regulator.
For those who have not been following my comments on this company, see:
•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...
- advertisements -


keep up the good work.
I have been accosted on two different occasions by cloudy-headed college students hawking PPD's services. Both were high on E and marketing bitchery.
Don't expect good legal advice for $26 a month.
Great research, Reggie.
What you are saying isn't all that remarkable. Share buybacks announcements are usually just boilerplate. That their business is a subscription business doesn't alter the nature of their activity. Small companies want to grow, and in order to grow they must expand the float ( I didn't notice, have they done any splits?). The fact that share price is up, but market cap is down is warning sign (or a beacon to the shorts) I see the shorts are 25% of the float, 1.8M shares with avg daily volume is less than 100K, that's a lot of days to cover. Block sales are one indication that shares are moving from insiders to institutions, you remember during the go-go 90's that when a company issued new stock the street ignored the warnings about dilution, and actually bought more.
Looking at the chart there is none of the usual signs that some fund manager is juggling this stock for their own purposes, such as buying the moving average lines, and the bullish support lines, to paint the tape. If you see a chart that's too good to be true, it probably is.
The institutional owners are spread out, which makes sense. The plan is to raise cash, probably, and maybe they can buy another company, which really has a business plan that works. Also this stock is part of several index mutual funds. Institutions and mutual funds own 84% of the float, which in my thinking says it is late in the game. The real question is not whether they are a ponzi scheme, but will the scheme implode, and can we make some money on the short side.
To that end who is their competition, what's their business model, and how far will the stock fall? What's the catalyst that would make the shorts cover? The float is small, and the institutions would probably like to see the float increase. Meanwhile the company has to buy back shares to keep the price levitating, so they're in a difficult spot. If this was a retail business of some kind, and they announced plans to expand, despite falling revenue or same store sales, the street would have their back.
As a potential short, the nature of the institutional support bothers me, the CEO resigned, the stock will go up when they make a announce a new hire. Someone with some street credibility probably. The market will punish this stock, eventually.