This page has been archived and commenting is disabled.
The Latest on PrePaid Legal Services - The Story of a Publicly Traded Ponzi Scheme?
Every now and then, you come across a company and wonder, "How the hell
are they still in business?" Well, in my opinion, Prepaid Legal Services
fit that bill to the "T". I announced what I believed to be a ponzi
scheme, (see Flim,
Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause your wealth to
Scram?, A
Demonstration of How PPD Management is Destroying the Company and Reggie
Middleton's Continued Public Service Announcement on the Flim Flam
Scam). Since then, the company has announced that it is being
investigated by the FTC and the SEC. Prepaid Legal released a press release
yesterday which I have excerpted below:
ADA, Okla., March 3 /PRNewswire-FirstCall/ -- Pre-Paid Legal Services,
Inc. announced today that effective April 2, 2010, its founder and
current Chief Executive Officer, President and Chairman of the Board,
Mr. Harland C. Stonecipher, 71, will relinquish the title and
responsibilities of Chief Executive Officer and President. At the
suggestion of Mr. Stonecipher, the Board of Directors unanimously
approved that the title and responsibilities of Chief Executive Officer
will be shared equally by two co-CEOs - Randy Harp, 54, Pre-Paid's
current Chief Operating Officer, and Mark Brown, 56, Pre-Paid's current
Chief Marketing Officer. The Board also named Mr. Harp as Pre-Paid's
President.Mr. Stonecipher will continue as Chairman of the Board and will remain
actively involved with the Company, focused entirely on Pre-Paid's sales
force and other strategic areas.
Hat tip to Fil from Minyanville, who adds:
Chariman, CEO and founder H. Stonecipher is relinquishing his CEO
position effective April 2. Meanwhile, Thomas Smith, the largest
shareholder in the company (25.7%), stepped down from the Board of
Director effective last Tuesday.Now, Stonecipher is in his 70's and Smith is past 80, so retirement
would not be out of the ordinary. However, I would point out the
following:. "an event of default occurs if Harland Stonecipher ceases to be
ourChairman and Chief Executive Officer for a period of 120 days unless
replaced with a person approved by Wells Fargo." (PPD 10-K).. Our success depends substantially on the continued active
participation of our principal executive officer, Harland C.
Stonecipher.Although our management of the services of Mr. Stonecipher could have a
material adverse effect on our financial condition and results of
operations. (PPD 10-K).I have no basis to believe that the replacement CEOs were not approved
by Wells Fargo (WFC), so I am operating under the assumption that
Stonecipher's departure will not constitute an event of default.
Nonetheless, I will take PPD 10-K's words at face value and assume that
his action could have a material adverse effect on PPD's financial
condition and results of operations.But what's far more interesting in this story, is a Paragraph from a
13D/A also filed last evening. Here are the noteworthy parts:"(a) 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 asfollows: 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%).[Writer's embellishment: this totals to about 7.255M shares out of the
10M outstanding][Reggie's comments: It is no wonder how this stock is
potentially manipulated. A very small group of insiders control 73% of
the public float, with the balance trading on very thin volume. My
analysis in the past has made it clear that the company allows
management to sell shares into company buyback programs, which
effectively "manages" the share price in conjunction with allowing
management to bail!]The Reporting Persons are re-evaluating their position in the Company
and expect to engage in open market sales, including sales made pursuant
to Rule 144, and to consider other strategic transactions, which could
involve a disposition of some or all of their shares. Any actions taken
by the Reporting Persons will be dependent upon market conditions, the
evaluation of alternative investments and such other factors as may be
considered relevant. Based on such factors, the Reporting Persons may
also purchase Common Stock from time to time on terms considered
desirable by the Reporting Persons. In addition, the Reporting Persons
may talk or hold discussions with various parties, including, but not
limited to, the Issuer's management, its board of directors, and other
shareholders and third parties, for the purpose of developing and
implementing strategies to maximize shareholder value, including
strategies that may, in the future, result in the occurrence of one or
more of the actions or events enumerated in clauses (a) through (j) of
Item 4 of Schedule 13D.Subject to the foregoing, none of the Reporting Persons has any present
plan or proposal which relates to or would result in any of the actions
or events enumerated in clauses (a) through (j) of Item 4 of Schedule
13D. (PPD's Form SC 13D/A filed on 3/32010 - Emphasis added)The language about "re-evaluating their position in the Company . . . "
did not appear in the prior 13D/A filing. And Smith and his partners in
Prescott have owned PPD stocks for years on end.So to recap: PPD is the subject of an SEC inquiry into some very
relevant portions of its business; its CEO retires; and on the same day
the largest sharehodling group lets it be known that they may unload
their shares.As Toddo would say - the quack count is high.
For those who have not been following my comments on this company, see:
- First
PPD Gets SEC'd, Then it Gets FTC'd. It Seems to be a Bad Year for Ponzi
Schemes. - The
Flim Flam Scam gets SEC'd - I'm not going to say I told you so, again!
- Flim,
Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause your wealth to
Scram? - A
Demonstration of How PPD Management is Destroying the Company - Additional
Commentary on PPD - Reggie
Middleton's Continued Public Service Announcement on the Flim Flam
Scam - PPD
2009 First Quarter Update and Comment - A
quick opinion on PPD's latest earnings release
- advertisements -
And then silence.
Has anyone on this thread ever had to pay for the services of a lawyer? How much did it cost you? My guess is that it was more than the cost to sign up to be an associate ($300) and the monthly memberhip fee ($26/month) you pay for the service that the agents are selling. Everyone is talking about a ponzi scheme or a pyramid scheme, but no one actually is talking about the services that PPD provides.
If PPD is a either a ponzi (which isn't the correct term in this case) or a pyramid scheme, why would law firms risk their reputation to be associated with a scam? If I were an affiliated lawyer and concluded that PPD was a scam, I would disassociate myself with PPD and file suit. Grant Thornton also has a lot to lose by being associated with a scam. They are not one of the Big 4, but they are definitely in the tier right below and likely have pockets that are far deeper than the $400 million market cap of PPD. I'm sure that someone will say, where were the accountants on Enron, but PPD is a fairly easy business to understand.
Has anyone on this thread ever had to make an investment in their career (ie. education, new suit, business lunch, franchise, capital investment in a new business)? If you have no experience, you can become a truck driver for Swift Trucking, but you have to pay for them to teach you how to drive a truck. Is that unreasonable? The $300 collected from new associates represents only 5% of PPD's total revenue. It is also offset by associate related costs which almost net out. Actually, the costs of bringing on a new associate are slightly higher than the fees brought in.
Does anyone know how life insurance policies were sold in the US 50-60 years ago?
Has anyone heard of The Pampered Chef. The only difference between PPD and The Pampered Chef is that one sells a service and the other sells a product. The Pampered Chef is 100% owned by Berkshire Hathaway.
Finally, does anyone know what the FTC complaint is about? It is about claims made regarding the Identity Theft Shield service. How much of PPD's revenues come from that service? Not that much.
The DOJ has alleged Fair Finance of Ohio is a ponzi scheme... though criminal charges have not yet been filed.
Interesting accounting.
www.fairfinanceinvestors.com
p-onzi as in social security
Reggie,
Take a look at WRLD...where Thomas W. Smith is also an insider....looks very similar
negative WSJ article last week...huge short position saves the stock just like PPD
Keep spreading the short position message. A fall in share price presents an opportunity for those who know the value of the business.
"Be fearful when others are greedy and greedy when others are fearful" --Buffett
I wonder how many other companies are doing this. Some companies just keep going up no matter what, and when the public float is small its easy to manipulate. WGO is either selling a lot of winnebagos or I suspect they are doing this too as well as many others.
Can you clarify what you think Winnebago is doing? Are you referring to the share buybacks? That is what I'm assuming you're referring to because they are definitely not making/selling more Winnebagos in the current economic environment. The Company has been buying back shares in the Company. If you were a shareholder in Winnebago, would you want the managers of the Company to buy up competitors, add additional capacity or buy back shares if they looked cheap? If neither of those opportunities provided a decent return, I anticipate that you would want management to return earnings in the form of a dividend so that you could go out and allocate your capital.
Name another company that makes and sells RVs. I don't know anything about RVs. The only two companies that I can think of that make them are Winnebago and Airstream. Is there value in the Winnebago brand? It has been around for at least the last 30 years (I'm 37) and my guess is that people will still want RVs 30 years from now. My guess is that there isn't going to be lots of new competitors in the space as my initial hunch is that it isn't a market that is growing. Is that bad? No, it is great! Think about the market for cigarettes or lead fuel additives. No new competitors will entire those spaces because the market is shrinking. How does that effect the cigarette and lead fuel additive manufacturers? They have pricing power and are making a killing. I don't think that Winnebago will make a killing, but quickly thinking about it, share buybacks a WGO makes reasonable sense.
I watch the charts and volume activity on WGO and it looks like somebody is keeping it propped up. The float is small so it isn't difficult. They are definitely a good solid company and not a sham at all. They have done everything to mitigate their downside. Layoffs,closing facilities, slowing production basically. They also had cash reserves. They do have competitors(THO,NAV,SKY) but a lot of them have gone under. The ones I have listed are more diversified than WGO which is WGO main problem that I see. I don't see their business returning anytime soon. EPS is -2.43 and they have been losing money for almost 2yrs. then they reinvested in making hybrid motor homes which is a good thing but not when your business is doing so poorly and there is no demand.
I have watched them over this time and if you look at the charts somebody would buy shares at the very end of the day when the share price was falling. Also earnings are about to come out and they are pumping the price up again as has been done on the previous Quarters when earnings were bad.
I agree with you that their position is positive if and when the demand returns. If they can last that long.
Thanks for the debate over the "definition" of Prepaid Legal. It is important to understand the differences.
Harland C. Stonecipher should be crucified and it should be televised worldwide.
I don't really care if he is in his 70's. That will add to the ratings and he will die pretty quick so it won't take up valuable time allotted to "Dancing With the Stars", "America's Got Talent", "The Bachelor" or any of the other important educational programming that keeps people from actually figuring out what the fuck is really going on.
But an old fucker nailed to the cross on TV! Then people might say: "what did he do wrong?"
Why do you allow this clown with his BS $$$$ grubbing website to post here?? Big cut??
Arrrrr! Bounteee for Reggieeee
Hmm...do you have a position yet in this?
Yes, Nice catch and the drama unfolds
I think technically this is a pyramid scheme and not a ponzi scheme.
Not all pyramid schemes are scams for the shareholders, although valuing them using standard metrics is not recommended.
check out WRLD...Thomas W. Smith also an insider there...huge short squeeze, questionable business model, acctg?
Negative WSJ article last week
Actually, they are a pyramid scheme and a ponzi scheme. The ponzi comes in the form of taking the revenues from the "sales agents" and using it to buy back very thinly traded stock from management which of course drives the price of the stock up, instead of reinvesting said capital back into the company. The company then says it has returned capital to shareholders when in reality they are simply enriching management at the shareholder's expense.
"Actually, they are a pyramid scheme and a ponzi scheme. "
I disagree, on the following grounds:
First, the company produces a consistently positive operating cash flow of about $50m or so per year.
Second, the cash flow from financing activities is consistently negative, meaning that the company is not issuing securities but rather redeeming or repurchasing them.
Third, the insider stock sales have been small over the last couple of years: http://finance.yahoo.com/q/it?s=PPD. The insider sales are comfortably smaller than the negative financing cash flow.
Wikipedia defines a Ponzi scheme as follows "A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned." Since the company produces a positive operating cash flow and a negative financing cash flow, it's clearly not a Ponzi scheme.
Even if one uses an expansive definition of the company that consolidates both the company and insiders as a single entity, it's still not a Ponzi scheme abusing the outside shareholders because, in net, the cash flow to the outside shareholders is positive.
In general, it's never a Ponzi scheme unless new investors are required to keep it afloat.
The gross market value of the company has actually shrunk over the last 10 years on a nominal and particularly on a real basis. They are not truly growing, it's a sham.
In the last ten years, the company's market capitalization has eroded even after considering the share buybacks and the dividends paid during the same time. PPD distributed US$423 million through share buybacks and dividend payments. Adding back the total buybacks and dividends payment (on a nominal basis, the negative effect would be greater on a real, inflation adjusted basis) along with the current market capitalization shows that the company's market value still fell 8.9% in the last ten years. [This was the 2nd quarter of 2009, though.]
Plug in the agents (the salespersons who have to pay $300 or so to get a job selling the product) for the term "investors" in the Wikipedia definition and Shazam!, you have your scam, ponzi, pyramid scheme.
The agents (I think that's the term used) have to pay $300 or so for the privilege of employment although most of them never make more than a few sales. These members recruit or sell to friends, family etc., getting either a membership fee, subscription or both from them. It is these monies that are used to fund the share buybacks. The company has been sued, fined or sanctioned in at least a couple of states for misleading sales material and employment promises, if I am not mistaken. They are currently being investigated by the Federal Trade Commission.
Right, so take away the charge that the company demands to become an employee (remember, you have to pay them to work for them) and you remove the money necessary to keep the Ponzi afloat. Whenever the cash flow gets tight, the management raises the fees required to become a sales agent (employee). This smacks of ponzi no matter how you objectively look at it.
Then there is the possibility of continuing the Ponzi. As excerpted from the math professor Dr. of Fairfield university:
Since there have been practically NO insider stock purchases, at least in relation to the insider stock sales, I'd say there is something fishy here.
I am not disagreeing with you about "it" possibly being a scam. I am disagreeing about who's being scammed. It think the customers and employees are probably being scammed. However, to this date I haven't seen convincing evidence of shareholders being scammed.
"The gross market value of the company has actually shrunk over the last 10 years on a nominal and particularly on a real basis. They are not truly growing, it's a sham."
Given that the company has a large negative cash flow from financing activities (i.e., cash flowing out to investors), the shareholders and debtholders may get a satisfactory return even if the market value shrinks.
It's also the case that if the valuation is right, a shrinking company can be a good investment. Not every company that doesn't grow is a sham or a bad investment.
On a related note, have you read Bill Ackman's analysis from 2002 (or was it 2003) on PPD? He was bullish on the stock then when everyone else was predicting a collapse. I think his firm was called Gotham something then. His investment thesis was that the short sellers were wrong about the collapse. A long investor (not retail) who owned the stock could collect 40% per year in share lending revenue. As long as stock stayed at about the same price, the returns to owning the stock and collecting the share-lending revenue amounted to a fantastic return.
Although MBIA destroyed Gotham, Ackman turned out to be right on PPD. And on MBIA.
Finally, hate to repeat the semantics, but the customers/employees are only paid if they recruit more customers/employees. That is the essence of a definition of a pyramid scheme. It's not a Ponzi scheme.
The saturation argument is more relevant to the pyramid schemes, since in Ponzi schemes the existing investors are often sold more securities whereas in pyramid schemes money usually has to come from new recruits. The PPD stock does seem to sell off periodically when it looks like the pyramid is about to stop growing due to saturation.
BTW, the yahoo link that you posted showed minimal insider sales for the last six months most likely because they are being investigated for the practice.
If you look lower on the same page you will see about 99.5% of the activity has been sales and divestments (with a purchase of just 7 shares, probably a trading error:-).
I definitely appreciate the intelligent debate, but I still stand behind the ponzi argument. The "investors" in this case are the sales agents that are required to pay a fee upfront, and that fee is used to buy shares directly from management, which increases the price in a thin float.
By the way, did you see the news yesterday? If the stock's a pump and dump scheme, this ought to trigger something. I can't see them being able to sell 25% of the shares outstanding to the market at anywhere close to these prices unless many people think the stock is legit.
With a price elasticity of 1, the stock should go down by about 25% on this news, if it's just a regular stock. Unit elasticity being a total guess, of course.
---
Pre-Paid Legal's largest shareholder may sell stock
By BLOOMBERG NEWS
Published: 3/4/2010 7:34 PM
Last Modified: 3/4/2010 7:34 PM
Pre-Paid Legal Services Inc. said its largest shareholder, Thomas W. Smith, resigned from the board and is considering whether to sell all his stock.
Smith’s departure wasn’t the result of disagreement over “operations, policies or practices,” the Ada-based company said in a separate filing. Smith holds about 2.58 million shares, or almost 26 percent of the outstanding stock, Pre-Paid Legal said.
The shares rose 20 cents to $41.86 in New York trading Thursday, valuing his stake at $108 million.
Pre-Paid also announced this week that founder Harland Stonecipher will step down as chief executive officer and president, effective April 2. Stonecipher, 71, will remain chairman. Chief Operating Officer Randy Harp, 54, was named president, and will share the CEO job with Mark Brown, 56, the chief marketing officer.
A call made by Bloomberg News to Pre-Paid spokesman Steve Williamson after business hours wasn’t answered. A message left for Stonecipher and Smith wasn’t immediately returned.
The company arranges legal services for clients who pay a monthly fee in advance.
Read more from this Tulsa World article at http://www.tulsaworld.com/news/article.aspx?subjectid=298&articleid=20100304_298_0_PePiea996333
Somebody seems to have taken notice of the discussion on Prepaid Legal. The stock went up after the news you posted. How do you dump that much (and at least to me, untrusted) stock on a thin float when at least a few of the guys that can count consider it a scam?
Those 40 Puts Impl. Vol. are ripping!
And for good reason. The stock and interest in it is on the down move...
Maybe some of those insiders know something that we don't. This is what happened after the SEC inquiry was announced.
Related Articles/PostsI feel that I have handed this company's transgressions to the SEC on a silver platter (see the latter part of this post). We shall see what comes of it. F
When I first came out with the PPD research (which I released for free as a public service, may I add), many were doubtful as the market was literally manipulat
"I definitely appreciate the intelligent debate"
I second that!
I wish the moderator of this site would block some of the more prosaic comments and attempt to limit postings that add value to the conversation instead of so much pablum.
There are probably many great addendum's to the posts but with 100+ comments on every byline it's difficult to locate them.
If that's the case, why is management always a net seller of shares versus a net buyer?
Not over a 10 year period. Come on now.
Ackman was right on MBIA, period. It's just that timing on something like that is difficult. He was right on PPD because the SEC and other relevant enforcement agencies haven't been doing their job. If you can make an investment based on the fact that an obvious scheme will stay in business despite the fact that fundamental market investors are confident it will collapse and it is impervious to prosecution, then that points to an inefficiency in the system. I'm not say Ackman is not a smart guy, but the thesis of the long play relied on those expected to police the public markets and consumer's interests turning to look the other way.
If it's not a ponzi scheme, then it wouldn't collapse if the company stopped charging employees to work there. We both know what will happen to share buybacks if that will happen.
Me: "It's also the case that if the valuation is right, a shrinking company can be a good investment. Not every company that doesn't grow is a sham or a bad investment."
Reggie: "Not over a 10 year period. Come on now."
Of course it can be a good investment over a ten-year period if the price is right.
Suppose that a company trades at five times earnings, distributes 2/3 the earnings and reinvests 1/3, and since it's not a very good company grows at -3% per year despite the reinvestment. The long-run internal rate of return on is 20%*2/3 -3% = 10 1/3%. So
As a practical example, take for example BPT. That's a company with a shrinking production. Yet it will produce a good buy-and-hold return if bought at the right price.
"[T]he thesis of the long play relied on those expected to police the public markets and consumer's interests turning to look the other way."
I agree about the consumer product regulators and disagree about the securities markets regulators. So far, nobody has produced any convincing evidence that the shareholders are scammed in any way.
Furthermore, I assumed that you are taking the outside shareholder's perspective, not the persepctive employee/customer/agent. If you want to make the case that one should not join PPD as a employee/customer/agent, the case against joining is strong. However, I think by default zerohedge readers take the persepctive of the shareholders, I would guess.
In a separate reply, you also write about the insider transactions being influenced by an investigation. This is probably true. However, as far as I recall, PPD management has always been investigated by SEC for things such as insider trading. Nothing has ever stuck. One of the reasons why nothing has stuck I believe is that the insider sales have been small throughout the history compared to total distributions to all shareholders (dividends and repurchases). That's just a guess.
Now, would I consider the stock a better investment if insiders would be small buyers instead of small sellers? Absolutely. But since the vast majority of the US companies have insiders net selling, I don't think this is really the smoking gun that predicts massive market-relative underperformance for PPD.
Is this a safe stock or a good investment? Probably not, and definitely not to a retail investor who can't collect the share-lending revenue. And it may be a great short even considering the special rates if shorted right before the pyramid scheme on the consumer/employee/agent side collapses. Timing will be everything.
Is this the same Harry Stonecipher who got his ass kickedd out of Boeing?
Prepaid legal is OBVIOUSLY a ponzi scheme. I've known this for almost ten years now. When I was 19, I answered an ad in the paper for a "job."
I was met with people from prepaid legal, asking me for 300 bucks or something to sign up, to sell legal services to others.
Any company that asks you for that kind of money for a JOB is a scam. I've known they were a scam for years. I'm surprised that other people have taken that long to notice...
Thanks for the post. It is as you predicted. It is time to start working people who care into the SEC. Needs the right people.
I know you don't need a job but I am going to write my congressmen (and woman).
No kidding.
AARP is in the boat----one of the biggest jokes.
thanks for all your hard work Reggie