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.This is PPD over the last couple of days.
"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)
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 2009Friday, 03 April 2009Tuesday, 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.
