Thursday, 19 March 2009 00:00

Cash Shortage in the Flim Flam Scam?

Shaunsnoll posed an interesting question in the comment section of the last Flim, Flam Scam article and I want to address it as its own post so I can include exhibits and charts. Shaun asked,

"Reggie, in your previous analysis you said this company has "38% or $22.4M of the total debt outstanding accure in less than one year" when i look through the financials though its not clear to me exactly when that debt will come due. it seems like with 26M$ in cash currently, this 22.4M$ debt coming due could really be what breaks this company, so would be good to know when exactly that is coming due.

PS: it just blows my mind everytime i see this stock rally....."

Well, Shaun, sharp rallies such as the one we just had are opportunities for the dispassionate fundamental investor. Price and value have significantly diverged in terms of this company and significant opportunity is at hand. Let me walk you through it a I see it.

The following table was derived from page 5 of my forensic analysis:

Year Share buyback Average price Total amount (US$) Most recent close Gain/(loss) per share Net average shareholder gain/(loss)
2004 1,453,318 $ 25.71 $ 37,358,071.00 $ 30.89 $5.18 $7,528,187
2005 457,362 $ 35.04 $ 16,025,809.00 $ 30.89 ($4.15) ($1,898,052)
2006 1959487 $ 37.47 $ 73,422,956.00 $ 30.89 ($6.58) ($12,893,424)
2007 1,318,724 $ 50.40 $ 66,457,372.00 $ 30.89 ($19.51) ($25,728,305)
2008 1,053,614 $ 42.44 $ 44,718,000.00 $ 30.89 ($11.55) ($12,169,242)
Total/Average 6,242,505 $ 38.12 $ 237,982,208.00 $30.89 ($7.23) ($45,133,311)

As you can see, the share buyback program is literally gutting the shareholder, thus far to the tune of nearly $33 million. Wealth destruction on a grand level, at least percentage wise. Wait, there's more...

Insider Sales of Stock (US$)
2004 $532,079
2005 $2,620,030
2006 $34,066,205
2007 $10,818,727
2008 $14,121,708
2009 as of Feb 17 $6,714,000
$68,872,749

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 prices and negative rates of return, producing significant benefit to themselves. I really do mean significant benefit at the expense of shareholders. Management has netted over $68 million from the sale of the stock into the corporate buyback program. This is over 150% of the shareholder wealth destroyed by the share buyback program! PPD used the money collected as membership fees from those who lack the analytical skills to determine what was going on for the purpose of overpriced share buybacks. From 2004 onwards, PPD has utilized US$237.98 million for share repurchase, out of which a full 28.9% (nearly 1/3rd) has gone directly to the insiders while the shareholders are getting burned by overpaying for the privilege of enriching the management and the board. 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 Reggie has reached - basically, the "Jig is Up!". Securities regulators, where art thou???!!! The Flim Flam Scam! I have made this very simple for any regulator to follow through. This begs to be investigated. If you are a shareholder of this company and continue to hold those shares after reading my research (which I have made available for free as a public service, see my subscription rates), I believe you to be a fool and you know the saying, "A fool and his money are soon to be parted". If you are short the company, remember, save your money and do something charitable with the profits. The monies were made by shorting a company which literally fleeced others who didn't know any better. Give back! It's the right thing to do. If you are a regulator and you ignore what you have read here, you are doing a disservice to your country. These may be strong, or unpopular statements, but hey, its how I feel and its from the heart!

I have even more stuff to make you love this company, for I haven't even addressed Shaunsnoll's question yet. Now, Shaun, they ended 2008 (last quarter) with roughly $26.528 million in cash. Look on page 37 of their annual report (the debt due line is highlighted in yellow: pdf PPD annual_report_2008 20/03/2009,02:51 749.07 Kb) and you will find contractual purchase obligations of $26.6 million due within one year. Of those obligations, $22.408 million is long term debt due. This would be a problem even if their business was humming along smoothly, which we all know it is not. So, you see, even without being a Ponzi scheme (which I feel they are) or a pyramid scheme (which I feel they are as well), they are probably going to implode for fundamental reasons. Of course, it would be sweet justice if they imploded for being a Flim Flam Scam, but hey, we should take whatever we can get.

More on my earlier takes on Prepaid Legal Services if you are new to this conversation:

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.

Last modified on Thursday, 19 March 2009 00:00

52 comments

  • Comment Link NDbadger Sunday, 22 March 2009 01:09 posted by NDbadger

    Naked capitalism has a good description of how the Private Public Investor Partnership works (link below). It is a total rape of the taxpayer, and awful policy. Everyone should really contact their representatives to complain.

    http://www.nakedcapitalism.com/2009/03/investor-on-private-public-partnership.html


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  • Comment Link Reggie Middleton Saturday, 21 March 2009 22:53 posted by Reggie Middleton

    Opinion of the Appeals Court ruling: http://www.ponzipluspyramidequalsprepaid.com/CircuitCourtRuling.pdf

    The ruling itself: http://www.ponzipluspyramidequalsprepaid.com/StafanchikFTCCase.pdf

    Press release: http://www.ponzipluspyramidequalsprepaid.com/PPD_FTC_release.pdf

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  • Comment Link NDbadger Saturday, 21 March 2009 22:38 posted by NDbadger

    none of those links work.

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  • Comment Link Reggie Middleton Saturday, 21 March 2009 09:27 posted by Reggie Middleton

    Opinion of the Appeals Court ruling: http://www.ponzipluspyramidequalsprepaid.com/CircuitCourtRuling.pdf

    The ruling itself: http://www.ponzipluspyramidequalsprepaid.com/StafanchikFTCCase.pdf

    Press release: http://www.ponzipluspyramidequalsprepaid.com/PPD_FTC_release.pdf

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  • Comment Link tradingbr Saturday, 21 March 2009 09:19 posted by tradingbr

    The reason one cant expect much of the SEC is because if they do something about PPD then they will have to shutdown the entire MLM industry. Its a legitimate business according to current law and I dont believe there are rules or guidelines on how much revenues must come from new members and how much from business so the SEC would be breaking new ground

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  • Comment Link tradingbr Saturday, 21 March 2009 09:15 posted by tradingbr

    The FT article is talking about CFTC regulated funds. In the case of PPD, what I think would be helpful would be class action lawsuits, more exposure of their deceptive practices.

    a 60 minutes segment like reggie suggests would be also appropriate since so many citizens have been involved and got scammed by then. In a time like this something needs to be done to prevent people from paying to work and waste their time enriching a few execs. I dont think anything will come out of the SEC though, PPD has a business that is dressed well. The FTC might have something to say about their false claims

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  • Comment Link thecreature Saturday, 21 March 2009 08:49 posted by thecreature

    Apologies if you've already seen it...

    US federal regulators have warned of a “rampant Ponzimonium” as they disclosed they are investigating “hundreds” of possible scams in the aftermath of the $50bn fraud allegedly perpetrated by Bernard Madoff.

    http://www.ft.com/cms/s/0/fd01b70c-1584-11de-b9a9-0000779fd2ac.html

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  • Comment Link thecreature Saturday, 21 March 2009 06:01 posted by thecreature

    I like how you picked up Reggie's technical terminology "doo doo"

    When we "doo doo" becomes spoken daily on CNBC and WSJ, then you know that it might be time to find new investing targets... like "ka ka". :D

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  • Comment Link shaunsnoll Friday, 20 March 2009 19:03 posted by shaunsnoll

    wether its legal or fraudulent or not, there cash flow is falling apart and they are in deep doo doo.

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  • Comment Link tradingbr Friday, 20 March 2009 17:57 posted by tradingbr

    I would agree that PPD resembles madoff. The difference is that the business have been around for so long that they can claim that they 'tried' an approach(MLM) and it didnt work but it doesnt mean that their INTENTION was to run a ponzi.
    They can just say 'we tried a method to market our legal insurance service, it didnt work, how could we know', then they get sued for deceiving member after they got the facts that it didnt work and not shutting it doen earlier but its clear that they are TRYING to have a legitimate business and dress it decently hence no shutdown.
    They can always claim they are incompetents and failed, nothing illegal about that

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  • Comment Link shaunsnoll Friday, 20 March 2009 17:44 posted by shaunsnoll

    if congress got involved that would be amazing. my confidence in our gov lately really couldn't be lower, something to give me a shred of faith would be welcome.


    their revenue recognition is prety weird too, wish i had some time to tear open the financials, there is some shady stuff in every corner i look at of their 10k.

    even if this was a legal business and no fraud with good management i still think they are going down....

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  • Comment Link yhong71 Friday, 20 March 2009 16:57 posted by yhong71

    just out of curiosity...as i do not live in USA. For the past 40 years of my life, i only had need for legal service when i purchase my house and took out a loan. In total, maybe visited lawyer office 3-4 times. I am not sure how often an ave american would need the service of a lawyer.

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  • Comment Link Reggie Middleton Friday, 20 March 2009 16:51 posted by Reggie Middleton

    I'm not a lawyer, but...
    Buybacks are legal, stock manipulation is not. In addition, the management and board are fiduciaries for shareholder capital. As I see it, they have not acted in the shareholders best interests by purchasing the stock in lieu of growing the business and the evidence of such is prolific.

    - the fact that the insiders purchased absolutely no stock, yet sold 35% makes the case even stronger. I can see a class action shareholder lawsuit here, then again I am not a lawyer.

    Fundamentally, this is the exact same situation as Madoff, they are funneling the shareholders own capital into share buybacks, shrinking both the capital base and shares outstanding, thus there is no real return on investment, just the charade of such. The shareholder's money is slowly being siphoned off by management (they seem to be the only one's making money here). As with Madoff, those who cashed in early get their money back - with profits. Those that are waiting as if this is a truly long term investment will probably get close to nothing.

    Legally this is not a Madoff case, but economically and fundamentally it is very, very similar. As we have seen with the 90% tax on AIG bonuses, Congress is more than willing to get creative in righting what they perceive to be a wrong. I wouldn't be surprised at all if Congress is reviewing this.

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  • Comment Link tradingbr Friday, 20 March 2009 16:39 posted by tradingbr

    PPD could be sued for deceptive marketing tatics, but the buybacks are legal, futhermore insider selling is legal as well. Having a failed business model is legal as well, its a US company, you are allowed to fail there(unless your a bank that is)
    They WILL probably get into trouble for deceiving their sales people, but I dont think this will be a madoff like shutdown

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  • Comment Link Reggie Middleton Friday, 20 March 2009 16:25 posted by Reggie Middleton

    If you haven't noticed I have a pretty rich constituency here. Expect some press coverage and regulator attention to come shortly.

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  • Comment Link tradingbr Friday, 20 March 2009 16:16 posted by tradingbr

    I would agree with that but even though I'm short I dont expect government action. Herb greenberg had ripped this company for a long-time and nothing happened. I hope I'm wrong, I contacted people from Bloomberg and the WSJ asking them to investigate the matter but I sure heck not counting on anything like this

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  • Comment Link shaunsnoll Friday, 20 March 2009 16:10 posted by shaunsnoll

    great, i'll be looking forward to that, would be interesting to send this all to PPD investor relations and see if they care to respond too.

    they used a big piece of thier WFC long term debt loan to repurchase treasury stock too. these guys are majorly stupid.

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  • Comment Link Reggie Middleton Friday, 20 March 2009 16:07 posted by Reggie Middleton

    There cashflow is highly suspect and is dependent on perpetrating the fraud that their membership opportunity is lucrative. If, or more likely, when the truth gets out their cash flow evaporates, nearly instantaneously. Remember, they are selling faux money making opportunities with a prepaid legal service attached, not necessarily legal services.

    It is my opinion that cash flow is extremely fragile. If the Fairfield U's professors math analysis is published through a venue such as 60 minutes, I would think that would be 15 to 20% of their prospective cashflows gone that quarter. In addition, their business model is predicated on continuously shrinking the shares outstanding. That is something they can not afford to do much longer.

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  • Comment Link tradingbr Friday, 20 March 2009 15:57 posted by tradingbr

    PPD might be a PSO scam but they are not going bankrupt this year. They generate around $60m in cashflow a year, plus they can always sell assets and stuff like that.

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  • Comment Link 123burke Friday, 20 March 2009 15:48 posted by 123burke

    Reggie, I just read the 9th Circuit Court Ruling from the FDI's site. One more question for you. Why is this company even Trading?

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