Thursday, March 26, 2009

Shorts Do Battle with PrePaid Legal Services

Similarities between PrePaid Legal Services (PPD-$30.39) and Bernie Madoff? The company, which markets prepaid legal plans, is actually nothing more than a pyramid scheme, alleges Barry Minkow’s The Fraud Discovery Institute.

PrePaid principally derives the bulk of its revenue through the multi-level marketing of membership fees and enrollment costs slapped on new sales associates. The 10Q Detective notes that key metrics slipped year-on-year, with the volume of total new membership subscriptions and the number of new sales associates recruited in 2008 falling 9.8% and 17.8 percent, respectively, to 552,327 and 122,225.

Is the company involved with a tug-of-war with short-sellers? Although retention characteristics continue to disappoint, the board authorized an additional one million share repurchase last month. PrePaid has spent more than $110 million on stock buybacks in the last two years—or about 82 percent of total cash generated from operating activities! In 2008, the company spent $44.7 million alone, retiring one-million (+) shares at an average price of $42.44 a share. Given the stock’s [three-month] average volume of 86,496 shares traded per day, it would take about 20 days to cover total shares [known] shorted.

Could a
cash shortage be on the event horizon? Reggie Middleton, another well known short-seller certainly thinks so. The company must report first-quarter 2009 earnings by May 15—just in time for May option expirations….

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.


Davis Freeberg said...

Equating them with Madoff seems a little heavy on the rhetoric, but I do agree that there are some serious issues with their business model. Not sure how this one ends up turning out, but with so many great brands at fire sale prices, it'd take a lot before I was interested in something like PrePaid Legal.

ShortBus said...

Insiders have been selling, while at the same time the insiders have been doing buybacks.

Net transfer of wealth from the customers to the management.

peter north said...

David, have you looked at PPD recently? If there was ever a more perfect example of moral, ethical and legal lapses in judgement in a publicly traded company than Prepaid Legal, I haven't seen it.

Please turn on the heat on these crooks!

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