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 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: pdf  PrePaid Legal Services Actionable Intelligence Report - Pro 2009-03-14 06:51:32 675.65 Kb.

I have decided to make it free as a consumer service, thus to that end I will release the Professional Forensic Analysis as well (this one time). Enjoy: pdf  Prepaid Legal Services Forensic Analysis - Pro 2009-03-19 14:20:00 288.45 Kb . This latest report is from the perspectice of an investor or shareholder while the previous report was a summary intelligence note, suitable for a broader audience, ex. regulators, politicians, etc. I obviously believe this is a no-brainer short proposition, but there is risk entailed so reader beware. There has been a bit of research, or shall I say whistle blowing, in regards to this company. It would be a shame if it were to all be ignored. For your entertainment, here is additional commentary and research from:

A refresh of my recent REIT analysis should be about within 24 to 36 hours, with special addendums for Pro susbscribers.