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Will the SEC "Do the Right Thing"? The Flim Flam Scam FINALLY Gets Hit with a Fact Finding Inquiry
I 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. From Reuters:
Oct 6
(Reuters) - Pre-Paid Legal Services Inc (PPD.N) 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.
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.See the following excerpt from my March article on this company (Flim, Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause your wealth to Scram? Wednesday, 18 March 2009)
Before I get started, I would like to
make clear that all comments and written material in this post, and
previous posts concerning Prepaid Legal Services are my opinion, unless
expressly indicated otherwise. As I understand the concept, it is not
libelous if I state the following as my opinion as opposed to stating
it as fact. With that being said, my opinion is that Prepaid Legal is a
SCAM! In addition, it is a scam that is a public company that deserves
scrutiny. To add to that, it is a scam who is a scrutiny deserving
public company whose fundamentals are collapsing. Long story short,
price has significantly diverged from value, and that price has
diverged significantly to the upside. When comes the reversion to the
mean, or the discovery of the truth, I foresee signficant downside
movement.My PPD opinion has garnered significant interest. We shall see what comes of it. Let me posit this - Bernie Madoff
was able to attract a lot of investors by basically giving them what
they wanted vs. the truth. He gave them a steady return, year after
year, despite the fact that the market became highly volatile and
produced losses. He delivered this until the volatile markets caused
his Ponzi scheme participants to call him on his bluff. Well, PPD has
produced steadily increasing EPS, quarter after quarter. They even have
a relatively low risk stock (on the surface and at first glance). Look
below (this was pointed out to me by a financial reporter):
Share-related PPD Industry Sector S&P Market Cap N/A 474 1,776 14,578 Beta 0.83 1.15 1.01 1.00 Hmmm! PPD seems to
be quite the safe stock in that it is less volatile than the broad
market, its market sector AND its industry. It seems almost tailor
made, if you know what I mean (wink, wink!). If I didn't know any
better, I would believe that their share price has actually been
managed on a relatively small float, you know as in periodic share
buybacks! It appears as if this blogger is calling them on their EPS
bluff. EPS goes up, economic value and aggregate equity value goes down
along with shareholder wealth. Hmmm!Here is an excerpt from the Professional Forensic Report:
A large
portion of PPD shares were held by the board of directors and the management of
the company which, apparently, incentivized the management to continue to
buyback shares at higher rates at a significant benefit to themselves. PPD used
the money collected as membership fees for the purpose of share buyback,
instead of investing those monies into growth opportunities to replace their stagnating
membership base and sales. From 2004 onwards, PPD has utilized US$237.98
million for share repurchase, out of which a full 28.9%(or nearly 1/3rd)
has gone directly to the insiders. This
begs the question of the prudent use of shareholder capital, and the prudent
man rule. In addition, the rate of insider sales this year has eclipsed that of
all previous years since 2004! It appears as if management has come to the same
conclusion that we have reached - basically, the "Jig is Up!"
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.For those of you who may be angered by
reading such, well, damn skippy you should be angry. This is blatant
manipulation of the accounting system. Now, you are armed with the
information and knowledge, let's see what you are going to do about it.
We shall see what comes of it.If you have not read it already, I suggest you read my free summary on PPD:
PrePaid Legal Services Actionable Intelligence Report - Pro 2009-03-14 06:51:32 675.65 Kb.
There are more articles for those who want to delve deeper...Tuesday, 07 April 2009
Friday, 03 April 2009
Tuesday, 07 April 2009
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. (PPD) (NYSE: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.
- advertisements -
Yes, PPD is a ponzi scheme stock inside of a ponzi stock market inside of a ponzi economy. Sort of like a CDO cubed.
I think the PPD short story is pretty widely known as it has been among the NYSE stocks with the highest short interest for many years.
Thanks Reggie! Keep the heat on these dirtbags. If ever there was a stock that deserved to be a zero, it's PPD.
By the way, if you are short a stock that goes to zero, you don't have to pay capital gains taxes, right?
Good info....Thanks. Perhaps you could look into a couple of other Ponzi schemes, ie Social Security (not), Medicare and what we are about to be treated to, Healthcare (not).
Thanks...
Not sure if my prior comment came thru... Barron's article from April 2006 laid out the bear case for this stock and raised some early red flags... Surprised they haven't run a follow-up article:
http://online.barrons.com/article/SB114566822496733153.html
Barrons ran a story on these clowns on April 26, 2006:
http://online.barrons.com/article/SB114566822496733153.html
You anonymous guys, listen up. Reggie was not pumping anything. I provide fundamental analysis and opinion, not timing or trading advice. I don't pump anything. Obviously you have me confused with James Cramer. Simply reference the picture above the next time you start to get us mixed up.
Nobody is right all of the time, and when I am wrong I will be the first to admit it. To date (at least on the blog), my fundamental analysis has been pretty much on the money. I cannot control stock prices, and in particular, I cannot deflate bubbles prematurely. I firmly stand behind Wynn and PPD analysis, and if you look at the numbers I have been optimistic, if anything. We are, in my opinion, in the midst of a bear market rally that is unjustified by the fundamentals. That is why I have switched to a market neutral strategy until 1+1 again equals 2. Until then...
I really dislike accusations of "pumping" or "pushing", etc. Math is math, facts are facts, and opinions are just that - opinions. Market prices do not always correlate with all three.
Reggie, welcome to the trade off Anonymity provides. Please remember that I am not one to preach the "don't feed the trolls" line since I like to jump into that particular puddle. Do yourself a favor and ignore it. That is until the work goes MSM hit jobs than I strongly suggest you have a good plan in place so those that read your actions under stress don't get a free ride.
All The Best
Gotta love the business opportunities in the US and the way regulators actually.. well... regulate. If a ponzi can run for 10 year past the point of discovery and referral to the SEC then no wonder the US has so many.
Herb Greenberg chased this one for years, too, without much effect.
Reggie was pumping VERY hard on this when the stock was in the high 20s/low 30's (and MANY expiry months ago), so I think he is a bit early on the fist pumping. Although his analysis is dead on when it comes to PPD this is an excellent example of just how dangerous it is to bet against fraud (and bubbles for that matter).
JD
first time i looked hard into PPD was about 7-8 years ago and I came across too many opinions that they were a ponzi scheme.
i looked into them because i was actually approached at a gas station, while pumping gas, by a PPD guy who wanted me to sell the service. had to be back in 2001 at the latest.
so great call, in that your timing was much better than those who thought this 8 years ago, but just relax on all the self congratulatory kudos.
if anything this makes up for Reggie's WYNN short foaming at the mouth back when it was $20/share in the Spring.
Haven't visited Reggie's site in a while. Nice job. When is ZH going to start featuring forensic analysis from CitronResearch.com?