Pre-Paid Legal Services Inc.: Expert Report On

Expert Report on
Pre-Paid Legal Services Inc. (NYSE: PPD)

Robert L. FitzPatrick
Submitted to: Fraud Discovery Institute

Re: Analysis of Business Models and Marketing
Practices and Implications for Shareholders
1800 Camden Rd. Ste. 107, #101
Charlotte, NC 28203
Tel. (704) 334-2047
Fax (704) 334-0220
Email: RFitzPatrick@FalseProfits.com
Submitted:____________________________
February 22, 2009
©2009 Robert L. FitzPatrick

Expert Report on Pre-Paid Legal Services, Inc. 1
Pre-Paid Legal Services Inc.

This report takes a new and updated look at Pre-Paid Legal Services, Inc. (PPL) and – in
the current “post-Madoff” and Recession environment – makes a deeper analysis of the
main charges that have been leveled at the company over the last 8 years. These are:
• Pre-Paid Legal is not a “direct selling” company, but a bogus “business opportunity”
scheme in which money is transferred from hundreds of thousands of consumers who
are falsely lured to invest time and capital, only to inevitably lose money and quit the
scheme year after year, to the benefit of a handful of company owners and
recruitment promoters.
• Pre-Paid Legal is an “investor Ponzi scheme” in which funds gained from the fleeced
consumers are also used to manipulate Pre-Paid’s share price which further enriches a
handful of company owners at the cost of the company as a whole.
• The charges are inter-connected. Together they constitute a business model and a
money transfer system that are unsustainable and operate only to the benefit of a few
individuals. Both require sophisticated deception and diversion since the scheme is
destined to deflate or even collapse suddenly when full disclosures are made and
public awareness spreads.
Despite a massive decline in the broad stock market, Pre-Paid’s stock price is almost
exactly the same in February of 2009 as it was ten years ago. However, the market capital
capitalization has been cut in half. The massive stock buy-back program has devastated
the company’s net value, while upholding stock pricing, to the benefit of its largest
shareholders, directors and executives who have made millions from selling their stock.1
Pre-Paid Legal: The Amazing Shrinking Pyramid
“Share Price” Maintained while the Value of the Company was Cut in Half
1
Feb. 11, 1999: share price was $34.81 and market cap was $832 million (approx.)
Feb. 6, 2009: share price was $35.41 and market cap was $411 million

In December, 2007 I wrote perhaps the most in-depth analysis of this company that has
been provided to the public.2 Published at the beginning of 2008, and then updated with
Q-2’08 data, I entitled the 27-page research paper, Pre-Paid Legal Services, Inc., Portrait
of a Pyramid in Collapse. The report examined Membership and Associate enrollment
trends (negative), the incredibly low income averages of PPL salespeople (about $5 a
week), high failure and churn rates (about 50% a year), and tiny and unprofitable sales
per Associate (about 4), on average.
I projected the inherent requirements for enrolling sales people in a limited and
saturating market. Unlike other multi-level marketing schemes, such as Amway, Pre-Paid
Legal cannot readily expand to other countries. I showed that 1.6 million households, or
more than 1 in one-hundred homes had already worked for Pre-Paid as “Associates.”3
Some of the material from that longer report is included in this analysis.
I concluded that Pre-Paid Legal is a classic pyramid scheme. It depends on a
continuously expanding base of consumer investors (salespeople, called “Associates”)
whose money it siphons to a small group of promoters at the top. I showed that the
company has no sustainable customer base and no sustainable sales force. It cannot be a
legitimate direct selling company since virtually no salespeople earn a profit from retail
selling. Indeed, the vast majority of the “salespeople” never make even one sale!
Moreover, its “product” of legal services is misleadingly represented in substance and
value.4
2
Available as PDF download at
http://www.pyramidschemealert.org/PSAMain/resources/PPL.FitzPatrick.Report.2008.pdf
3
PPL’s sales are limited by its ability to recruit salespeople far more than the size of the market of
customers. It obscures this fundamental flaw by offering no information to investors about the size of the
market for salespeople. PPL only informs shareholders about “memberships” as a percentage of total
market potential, which it defines as 110 million households in the USA and Canada. In its 2007 10K, PPL
stated that it currently had 1.5% share and an additional 6% of households have previously purchased (but
no longer own) PPL policies.
What PPL omits is that about 1.5% of the total market of potential buyers have already become salespeople
for PPL! About one million of them quit the scheme and stopped using the product. How many people can
be PPL salespeople and whom would they sell to? The limit in the recruitment potential in any geographic
area (and eventually the globe) is the critical flaw of all “endless chain” scheme that masquerades as “direct
selling” company. They thrive only by offering a false income opportunity that is based on “unlimited”
expansion of “salespeople” in a finite world.
4
The earlier report extensively documented the misrepresentations about the PPL “insurance.” Among
these, the services exclude major areas of common need, such as divorce and bankruptcy, which is often
not realized by buyers, and it cleverly offers little “pre-trial” cost coverage, which preclude effective use.
However, the real value of the product can be plainly seen in the actual costs to the company to provide the
service. In its 10K for 2007, PPL assures shareholders it can afford stock buy backs because “Membership
revenues are more than sufficient to fund the cash requirements for membership benefits (at approximately
33%-35% of Membership revenues)…” In other words, a $300 a year “policy” costs the company less than
$100 in actual claims service. This is not due to actuarial outcomes. Rather, PPL pays only a flat fee to its
attorneys of about $80 per policy holder, regardless of the legal services. As the Barron’s magazine
explained, “You don't have to be an attorney to realize that $80 doesn't buy a lot of legal services these
days, when lawyers routinely bill at $200 or more per hour.” Barron’s concluded that Pre-Paid resolves this
seeming mathematical conundrum at the expense of the policy holder. “Pre-Paid's solution is to limit
benefits,” the Barron’s analysis stated.

Endless Chain
In the report, I examined the primary structure and market practice, among others, that
identifies Pre-Paid Legal as a Bernard Madoff-type Ponzi scheme. It is its “endless chain”
pay plan. The plan authorizes and rewards every Associate to recruit others who are
similarly authorized and potentially rewarded, ad infinitum. Compounding the losses to
those in the bottom ranks, who are always the majority, the plan apportions more of total
commissions, per sale, to recruiters above on the chain than to retailers at the bottom.
Recruiting is the only viable means of reaching the favored positions on the pyramid. The
structure operates on a 3 x 3 matrix of levels, extending the PPL Pyramid further with as
many as 10 levels of “Executive Directors” from Bronze through Platinum.
Each Platinum Level Director can have 10 “legs” of “Executive Directors” directly
below. The structure makes no sense as a management program but perfectly leverages
recruitment, giving maximum financial advantage to those few at the pinnacle.
With a 50% turnover rate and the insurmountable number of levels a new recruit must
climb, each level requiring more and more recruits below, it is an engineered blueprint
for putting hundreds of thousands of consumers on a treadmill of futility. Thousands
upon thousands are doomed to spend money and invest time and hope in a fruitless
recruitment campaign until they are financially exhausted. 5
Pre-Paid Legal is an anomaly in the legal services field, which is characterized by
extraordinarily high retention rates.6 Pre-Paid, singularly, churns though half its
customers and sales people in a year and nearly two-thirds within two years. Pre-Paid is
the only Legal Services company that uses the controversial “multi-level marketing”
(MLM) model and the only MLM in the legal services field.
Just as Madoff’s strangely consistent and above-average returns were later recognized
for what they were – signs of wrongdoing, Pre-Paid’s uniqueness and its anomalous
market performance are red flags that the business is not operating in accord with
legitimate market forces. It is sustained by something other than market demand, price,
5
See “Ex-agents feel misled by Pre-Paid - Class-action lawsuit seeks relief of debt” by Melissa Davis
04/28/2002, Daily Oklahoman, “Coker was a volunteer deputy sheriff, policing his suburban Houston
neighborhood, when he discovered Pre-Paid in 1995. Swayed first by the company's product - and then by
its business opportunity - Coker began marketing Pre-Paid on a part-time basis. A talented salesman, Coker
swiftly rose to prominence within the company, achieving the rank of area coordinator, bronze executive
director, motivational speaker and national trainer. He was largely responsible for building the Pre-Paid
market in Houston and, at the height of his career, collected a $19,000 check for a single month's work.
Today, Coker stresses that he earned only $527.78 of that $19,000 check. The rest was an advance, which
he was expected to repay, with interest, if his Pre-Paid customers canceled their memberships before the
end of three years - as 71 percent of the company's customers do.”
Coker went on to claim in this article that many of PPL’s “successful” sales people were just living on
revolving cash flow of PPL advances that are later wiped out by PPL chargebacks and then replaced by
new advances. They can’t get off the treadmill, he asserted.
6
MetLife's Hyatt Legal Plans unit, the leading provider of group legal services, has an annual group
attrition rate of just 2% within two years, while Pre-Paid’s is about 66%. See “Law and Disorder” By
Andrew Bary, Barron’s April 26, 2006

quality, or competitiveness. That rogue factor is the peddling of the bogus “endless
chain” income opportunity. 7
Pre-Paid’s stock price manipulation serves as part of the disguise to divert investor
attention away from this flawed model that relies on unsustainable money transfers, as
well as serving as second money transfer mechanism. The oddly consistent share price
gives the illusion of sustainability. In fact, the company’s value has been devastated, its
recruitment program is in steady decline and its market is saturated. The end is inevitable
and imminent. I showed statistics of steadily declining rates of enrollments and sales.
(See chart at the end of this analysis.)
Market Indifference
Overall, the securities market has paid little attention to these revelations about Pre-Paid
Legal. This is due at least partly to the market’s evident lack of understanding of the
nature of Ponzi schemes and to the well documented laxity of SEC regulators.
The failure of inquiry by financial analysts, the media or the regulators to see the basic
fraudulence of Bernard Madoff Investments, has shown that “endless chain” or “money
transfer” schemes can successfully mimic legitimate business, blend into the market and
operates with impunity for years, as long as they can continue to recruit more investors.
One key reason that endless chain or Ponzi scams now operate openly is because
securities brokers and financial analysts are referencing outdated and very short term
indicators – quarterly revenue expansion and positive earnings – for signs of legitimacy.
An apparent presumption that Ponzis and pyramids quickly collapse and are relatively
rare, in any case, has blinded many to the reality of long term pyramids operated by
respected and established business leaders and disguising themselves as conventional
businesses.
Many analysts and media are also misled by the schemes’ ability to grow even as they
inflict losses on thousands of consumers. This blind spot is attributable to the lack of
experience with or understanding of certain disturbing realities:
• The extreme lack of awareness and due diligence among millions of consumers.
• Millions of people can be driven into scams by economic insecurity and tricked by
images and rhetoric that play on deeply cherished values and hopes.
• The power of well honed pyramid solicitations that use cult-like persuasion tactics.
When the SEC takes no action against a company, regardless of whistle blowers and
critics and others hallmarks of wrongdoing, most brokers and many in the media dismiss
allegations and critical analysis. Lack of government oversight has served as a tacit
endorsement and encouragement of scams.
7
In a 2002 article, Forbes Magazine also questioned whether MLM was in the insurance or the pyramid
recruitment business ("Legal Trouble" by Elizabeth MacDonald, 06.19.02) "This is a curious business,
selling legal insurance--it is more selling than insurance. The customer forks over on average $251 a year
for the coverage. Only $83 goes to pay for supplying lawyers to customers. The rest goes to overhead and
profits. As for the selling part, Pre-Paid looks like a knockoff of Amway… But what's the hot sales item
here--the legal coverage or the right to sell other people this insurance?"

Pre-Paid’s accounting irregularities, outrageous claims about its “income opportunity”

(unlimited!) and product (justice for all!) and its Amway-type recruitment rallies (with
CEO Harland Stonecipher on stage ripping up hundred-dollar bills and calling for “three
cheers for greed”) have provoked spates of whistle blower charges, media mockery and
some investor skepticism.8 Perhaps no other publicly traded company has endured the
legal, financial and media challenges as Pre-Paid Legal Services, Inc. has faced down.
• Class action lawsuits charged that the firm operated as an illegal pyramid scheme,
yet failed to get traction with juries. 9
• Other suits that avoided the legal technicalities of pyramid scheme definitions have
focused on false and misleading income claims. At least one of these evoked a multi-
million dollar jury award, yet the case has done little to deter future enrollments.10
• Short sellers have preyed on the company for years yet with a massive stock buy-
back program and much of the stock in the hands of insiders and institutions, Pre-
Paid’s stock has successfully resisted short selling pressure, even as the broad stock
market has contracted.11
• Some in the media have chronicled a cast of sleazy characters who lead Pre-Paid’s
sales program, documenting their checkered pasts with regulators and lawsuits for
engaging in deceptive marketing. 12
8
Financial advisor, Peter Cohan, has previously called for PPL to be shut down by the government, called
the company a “pyramid scheme”, and described PPL’s founder, Harland Stonecipher as a practiced liar.
(“Pre-Paid Legal is in need of better reality, not better stories”, July 28, 2003, http://petercohan.com.) Yet,
as the PPL stock maintained its price and PPL vanquished legal challengers, he was quoted, "This is like a
Teflon company," said Peter Cohan, a Massachusetts investment strategist with no position in the stock.
"It's almost comical."
And, then, there is the cryptic advice on the Street.com’s Jim Cramer's Lightning Round, (1/9/09) “Pre-
Paid Legal Services: "This is supposed to be recession resistant, but I don't trust the business model. I want
to stay away from that one."
9
PPL’s 2002 10K disclosed, “Beginning in the second quarter of 2001 and through December 31, 2002,
multiple lawsuits were filed against the Company, certain officers, employees, sales associates and other
defendants in various Alabama and Mississippi state courts by current or former members seeking actual
and punitive damages for alleged breach of contract, fraud and various other claims in connection with the
sale of memberships.” The report noted 28 cases filed in Alabama and 14 in Mississippi. Others were filed
in Oklahoma, where PPL is based.
10
http://www.thestreet.com/print/story/10253221.html
11
A highly critical news article about Pre-Paid legal in the April 26, 2006 edition of Barrons, entitled,
“Law and Disorder” by Andrew Bary noted, “In recent years… Pre-Paid Legal Services has come under
attack for offering less comprehensive coverage than its salespeople may advertise… The company's sales
organization, too, has raised eyebrows on Main Street and Wall, where Pre-Paid has gathered a sizable
crowd of short sellers betting its stock price, now 35, will fall.”
12
Among them: Tommy Vu, “the 1980s infomercial star widely sued by disgruntled students of his
$15,000 real-estate sales ‘boot camp.’” And Marshall Sylver, “the target of a Nevada attorney general
probe for allegedly bilking consumers through a "Millionaire Mentorship Program.” And the National
Audit Defense Network (NADN) which both the Nevada attorney general and the Federal Trade
Commission sued. And, David C. Draney. ranked among Pre-Paid's top recruiters in 2002, whom Federal
prosecutors indicted along with 12 others for raising millions through the sale of bogus securities.

Yet, in the pre-Madoff environment, Pre-Paid Legal endured, maintained its stance of
legality, and outlasted most lawsuits and critics, seemingly no matter what the facts
showed. As long as its revenue was growing and the company claimed profitability, it
was accepted as legitimate by many in the financial world and the media.
Pre-Paid’s narrow escapes from exposure and collapse of consumer belief began when
The Wall Street Journal documented the company’s accounting irregularities that
resulted in huge financial restatements and losses to investors. However, accounting
problems had begun earlier.13 The WSJ article, January 17, 2001 “Pre-Paid Legal's
Accounting for Commissions Draws Fire” by Jonathan Weil, reported that to lure new
recruits PPL paid its salespeople a three-year advance commission on sales and then
claimed these payments as assets, not expenses. The classification of those payments as
assets had obvious positive effects on the balance sheet and P&L statement.
The company also obscured the massive liability of customer cancellations. As the
cancellations occurred, the company sought to recover the advance payments with
“chargebacks”. However, with more than half of the sales force quitting the business
within a year or having no future sale commissions to charge against, many of these
refunds were not recoverable.14
PPL claimed the money for these non-recoverable chargebacks was covered by “lost”
commissions from the sales people who quit. PPL’s enormous liability of lost advance
payments from cancellations, it claimed, was paid for by the consumers’ lost
commissions.15 Cash flow depended on recruiting.16 It turns out that the vast majority of
all PPL “sales” are made only by a small fraction of the newest recruits, the same group
in which about half quit within a year.17 When the SEC ruled against it, Pre-Paid slashed
its 2000 per-share earnings 42% to 81 cents and its 1999 results 66% to 57 cents.
Nevertheless, the stock market has not responded significantly to these or any other
disclosures and SEC remains silent.
13
Financial analyst Peter Cohan, summarized two SEC actions against PPL and their consequences. “In
1994,” he wrote, “Pre-Paid wanted to do a public stock offering, however the SEC said no unless Pre-Paid
expensed its customer acquisition costs instead of amortizing them. Pre-Paid fought the change but
ultimately capitulated – devastating its balance sheet. Stockholders’ equity fell 90% to $2.4 million; assets
declined 69% to $11.1 million; and 1993 net income of $306,000 became a net loss of $613,000.”.
14
The Wall Street Journal quoted Douglas Carmichael, an accounting professor at Baruch College in New
York, "Their accounting doesn't portray economic reality. And economic reality is going to catch up with
them one way or another. So it's a stock to avoid."
15
This balancing act between unrecoverable commission advances and the “lost commissions” of the newly
recruited salespeople who subsequently quit is still PPL’s key to viability. From the 2006 10K, “We
estimate unrecoverable advance commission balances when expected future commissions to be earned
on active Memberships (aggregated on an associate-by-associate basis) are less than the unearned
advance commission balance.”
16
PPL acknowledges that its dependence on recruitment for cash flow in the 2007 10K, “Since the cash
advanced at the time of sale of a new Membership may be recovered over a multi-year period, cash flow
from operations may be adversely affected depending on the number of new Memberships written…”
17
The pattern of most PPL “sales” being generated by the “last ones in” is a hallmark of the endless chain
model. In 12 months between the end of ’05 and ’06, PPL disclosed data that showed that only 14% of all
the “sales” Associates ever made a sale in 2006 and of those, over half were made by the newest enrollees
(the last ones in).

Seeing Pre-Paid Legal in the Post-Madoff Era

Despite the losses they inflict and their clearly defined hallmarks of scams – overpriced
and misleadingly hyped offerings, little retailing, total reliance on recruiting of investors
for cash flow, siphoning most of total payment to the top – business opportunity schemes
such as Pre-Paid Legal still benefit from a widespread popular belief that they are viable
sales businesses for the “average Joe.”
Over time, losses caused by such scams can rival the losses caused by the Bernard
Madoff type of Wall Street Ponzis. Though at fist glimpse the Madoff Investor Ponzi and
PPL consumer scheme may appear world’s apart, in fact, they are fundamentally the
same.
Both remain viable only as long as they continue to convince new investors to make
capital investments. A business opportunity scheme like PPL, however, has the additional
burden of persuading the 50% who withdraw from the scheme every year after suffering
losses that their financial losses were their “own fault” and not due to the scheme’s model
that predetermined and caused their losses.
The survival of the business opportunity scam depends on its ability to obscure the harm
and losses that an endless chain pay plan causes and to falsely persuade investors that an
endless chain recruitment plan is viable for all. Ponzi perpetrators such as Madoff, on the
other hand, survive only as long as they can conceal the fact they are running an endless
chain model. The Pyramid perpetrator openly promotes and champions the endless chain.
The Ponzi operator covers it up and denies the use of the endless chain.
The “Biz Op” perpetrators are masters of mass deception. Ponzi perpetrators, like
Madoff, are masters of concealment. The Biz Op scam tells the investors that the endless
chain is a great benefit to them, and that all can recruit and profit from their own
“endless” downlines of new investors. The Ponzi operator convinces investors they are
not in an endless chain.
Among Biz Op participants, such as PPL “Associates”, the delusion of profit is typically
manifested in euphoria and great hope. Some exhibit pronounced personality changes as
they experience the thrill of impending wealth or expected relief from debt and worry.
This is clearly manifested at PPL meetings that draw as many as 10,000 fans, mot of
whom will have “failed” and quit the scheme within a year or two. Many investors in the
scam find renewed faith in their future and align themselves with the scheme in cult-like
fealty which they believe will deliver them into financial success and security.
The delusion of profit among Ponzi participants, such as Madoff investors, is less
visible. They quietly go about their lives making purchases and life choices and incurring
debt, secure in the false faith that their money is safe and growing and their futures are
bright.
Biz Op scheme investors typically suffer their financial losses quickly, usually within
one year, when they fail to enroll new investors. This pattern is perfectly followed at
PPL. Some consumer investors may maintain their faith and hope for years and
consequently lose much more. Divorce, loss of credit, home foreclosures, even suicide
are not uncommon among big time losers in multi-level marketing Biz Op schemes.
Relationships are frequently destroyed along the way from recruitment efforts that sought
to “leverage” trust and family ties.

Losses to Madoff Ponzi investors, on the other hand, are discovered only when the
schemes collapse, which may be years after the scheme started. It comes in one swift and
devastating blow of discovery, followed by rage or despair.
In the PPL Biz Op pyramid scheme, the same percentage of investors will lose as in the
Madoff Ponzi, but their losses are inflicted one person at a time, quickly and
continuously as the later investors fail in their mission to bring in enough new recruits.
When the Ponzi scheme collapses, investors discover all at once that they have been
defrauded and their funds are gone. In the PPL type scheme, investors lose their money
individually and may not realize they were defrauded. Realization of fraud may never
occur unless the fraudulent nature of the scheme is exposed and explained in the media
or by government prosecutors. Without exposure or law enforcement, most victims of
Pyramids attribute their losses to their own inability to find other investors, still believing
the endless chain recruitment to be a feasible mission, at which they personally “failed.”
Though the timing and the manner of losing their funds and their expressions faith may
differ, in fact, harm to the later investors in both the PPL Pyramid and the Madoff Ponzi
occurs immediately upon investment. Recouping the investments was impossible from
the start for virtually all.
Of the two models of fraud, the Ponzi scheme is the more vulnerable. Exposure or public
questions can cause immediate collapse. Withdrawal by any existing investors may cause
potential new investors to avoid the scheme. And financial investors may exercise more
oversight and skeptical inquiry than a hopeful consumer pursuing a Pyramid Biz Op. The
current Recession will undoubtedly spawn new Ponzis as desperate and disillusioned
investors seek unconventional means to find higher returns, but the Recession also
exposes existing Ponzis when other desperate investors seek to withdraw funds as they
face needs for immediate cash.
In contrast, the Recession is an unmitigated boon for some promoters of Pyramid Biz
Op schemes that promise an “unlimited” income. The unemployed, the debt-ridden, and
those who have lost life savings in stocks and real estate are in desperate search for an
“income opportunity.” Multi-level marketing schemes, claiming to be “recession proof”
and an “alternative to Corporate America” are hyping their recruitment and new schemes
are being created daily.
PPL follows this script precisely, with its CEO currently on a “bail out tour” and reciting
his usual income opportunity claims with renewed vigor. On its website, PPL posts its
press release, Economic Slump - Not For Some, and subtitled, In These Tough Economic
Times, Pre-Paid Legal Services, Inc. Independent Sales Associates Experience Continued
Success “While many businesses are shutting down or laying off employees, Pre-Paid
Legal is still, not only a rock solid company, but succeeding with a sales force of over
400,000 Independent Associates across North America… Chief Financial Officer of Pre-
Paid Legal Services, Inc, Steve Williamson had this to say about this year's growth: "In
tough economic times we see increased interest in people wanting to market our Legal
Services Plans as Independent Sales Associates.
This is followed by the usual routine of selected success stories and the absence of
factual information about average incomes, failure rates, business model based on
recruiting (which dooms the great majority to suffer losses in lower ranks), the

chargebacks that wipe out “advances” and the absurdly small number of retail sales per
Associate, etc.
And, PPL, in classic fashion plays fast and loose with numbers to spin the illusion of
“momentum” in the face of overall decline. It states, “With Associate Recruiting on the
rise, up 44.9% in their 3rd quarter from the previous quarter, Pre-Paid Legal is
anticipating continued success through 2008 and beyond.”
Recruiting did in fact rise for the 3rd quarter in 2008 over the previous quarter, but PPL
fails to explain that recruiting results for that quarter were, in fact, 13% lower than the
same time period the year before, membership sales were flat, and annual drop-out
(failure) rates of Associates remained unchanged at about 50%.
Pre-Paid Legal’s Actual Associate Recruitment Trend18
Q-3’05 to Q-3’06 – Down 37%

Q-3’06 to Q-3’07 – Up 2.7%
Q-3’07 to Q-3’08 – Down 13%
Three-Year Associate Recruitment Trend: – Down 44%
If PPL were a newer scheme or offered a less restrictive product (e.g. miracle fruit juice,
cancer-curing herb or age-reversing facial cream, for example, or anything else that could
readily cross national boundaries), the Recession might indeed give it a second life at the
expense of those lured into its money trap. However, PPL has hit the wall of market
saturation – 1.6 million households having already worked as “associates” – and
“information” saturation – negative publicity, lawsuits, investor skepticism and the
aggregate negative experience of a million ex-Associates. The Recession cannot save it
from decline.
Pre-Paid’s Investor Ponzi Scheme

Pre-Paid Legal carries out a classic Madoff-style money transfer when it recruits
Associates to recruit Associates to recruit Associates, etc. Bernard Madoff managed his
own recruitment of new investors whose money he transferred to earlier ones. PPL
induces the new investors to recruit their own “downline” by promising them a portion of
the investments of each new investor. This offer is formulated to motivate recruiting by
offering an increasing percentage of the money the higher one moves up the chain.
The PPL product – of very dubious value, misleadingly represented, and quickly
abandoned by most investors – serves as the financial instrument to facilitate the endless
chain transfer. The largest part of the money that consumers invest in the business and
product, more than a third, is transferred to the recruiters. The new recruit is persuaded to
try to continue adding to the length of the “endless” chain. Since this is mathematically
impossible, the vast majority inevitably fail and quit.
The market for these investors to build their own downline is saturated, but the overall,
available market of consumers who can be tricked into trying is still viable, through
18
From PPL’s 10Q filings for Q-3 of ’06,’07,’08. “New sales associates recruited”.37,820 in Q-3’08,
43,555 in Q-3’07, 42,395 in Q-3’06 and 67,321 in Q-3’05.

declining. In this way, PPL can endure for a time even as it leaves behind a trail of losing
investors, with as many as 90-99% “failing.”
Transferring Customer Investments to Insiders

In addition to gaining revenue by means of an endless chain pay scheme, PPL has yet
another aspect to its Madoff-like plan. It uses large amounts of the consumer payments
and investments to repurchase its own stock. The largest beneficiary of this plan is a
handful of insiders who have been selling their stock for tens of millions of dollars.
The stock buy back plan has served to inflate share price – against short seller pressures
and to combat actual declines in business development – though the net value of the
company has dwindled by a half in the last 10 years.
In 2007, for example, the company stated that it repurchased $66.5 million in shares
which bolstered the share prices. At present the market capitalization of PPL is $363
Million, making this stock back equivalent to 18% of the company’s current value.
Insiders then sold off $16.9 million of their own shares during this time, and amount
equivalent to 25% of the total purchased by the company. The main sell-off was made by
the largest single shareholder, the Company CEO, Harland Stonecipher, who received
approximately $8.5 million for his shares.
In the last three years, insiders sold approximately $81 million of their shares and
exercised options for another $5.5 million.
The insiders on the receiving end of revenue in 2007 that is supplied from the mostly
failed “Associates” include:
• Martin H Belsky, Director
• Peter K, Grunebaum Peter K, Director
• Randy Harp, Chief Operating Officer
• Kathleen Susan Pinson, Officer
• Thomas William Smith, Director
• Harland Cecil Stonecipher, Chief Executive Officer
• Charlie Stephen Williamson, Chief Financial Officer
There has been no insider purchase of PPL stock within the last year. “Insider
Sentiment” for PPL is rated as “Negative” by online research services, basing the rating
on the huge sell off of their shares.19 This is in sharp contrast to Harland Stonecipher’s
“bail out tour” pronouncements of growth and optimism that aimed at selling consumers
the “business opportunity.”
19
A Nov. 16, 2006 published analysis of Pre-Paid Legal by Tejas Securities Group, Inc, noted that “Last
week, insiders attempted to sell $27.4MM of stock at a price of $42.91, or 37 cents shy of the highest level
during 2006. We find it troubling that the sales were announced at 5:09pm on Friday afternoon of a holiday
weekend. These shares were purchased by the Company itself as part of its stock repurchase program. We
believe that these insiders would not have been able to complete these sales in the open market without
significantly impacting the share price… Rule 144 “dribble out” restrictions would have restricted sales
during a 90 day period to far less than last week’s attempted transaction… the seller of 125K shares,
Harland Stonecipher (Chairman, CEO and President) has earned over $2MM per year for each of the last
three years in salary and bonuses. Furthermore, he disposed of another 111K shares in March 2006.”
(http://www.tejassec.com/)

The PPL buyback program inflates stock prices and, like all such stock repurchase
schemes, only benefits investors who actually sell shares. In the last three years, that
would be the company’s CEO and a few other officers and directors, to the tune of nearly
$90 million.
To appreciate how the stock repurchase program, which upholds share price, benefits
those who can sell out at the right time consider the December 10, 2008 transaction of
Director Thomas William Smith. He sold 308,922 shares, about one-third of all his
company holdings, for $11.3 million. That is an average selling price $36.58 per share, a
17% premium over the stock’s current price, about 10 weeks later, or an additional $1.6
million.
CEO Harland Stonecipher did even better. On April 25, 2007 he sold 100,000 of his
shares, about 11% of his holdings for $6 million. That’s an average price of $60, nearly
double what those shares are worth today, a $2.9 million benefit.
This stock buy back is occurring as Pre-Paid Legal’s recruitment – the very heart of its
future revenue – is declining. Additionally, an increasing share of PPL’s total revenue is
coming from Associates, not Members, indicating a reduced productivity of the sales
force.
The cash for these purchases is therefore not coming from growth or increased
productivity, but purely from current cash flow. It was used to buy back shares rather
than expand the business, increase benefits or incentives to the sales force, improve the
product offering or issue dividends to all shareholders.
PPL's One-Way
Cash Flow
In light of the company’s downward recruitment trend and market saturation this
management strategy appears all the more a calculated money transfer, a looting of the
company’s resources before the inevitable end. The funds are coming straight out of the
pockets of the failed Associates – about 30% of PPL revenue is sourced directly from the
Associates. This money transfer is repeated year after year, as long as new recruits in
adequate numbers can be found.

Appendix:
PPL’s March to Saturation in North America20
Year Associates Active Annual Total
(Salespeople) Associates Growth Associates
Recruited at end of Rate 12/31/95 to
During the year 9/30/2008 (total
Year recruited +
those already
enrolled at
12/31/95
1995 78,281
1996 69,789 110,350 41%
1997 58,121 123,470 12%
1998 75,737 159,268 29%
1999 92,644 204,137 28%
20000 97,617 242,085 19%
2001 122,192 286,488 18%
2002 155,663 341,116 19%
2003 108,557 329,600 -3%
2004 107,552 343,696 4%
2005 242,223 468,365 36%
2006 172,999 444,499 -5%
2007 148,802 442,361 -0.5%
2008 89,722 -20%21
first nine first nine
months months
Total 1,541,618 1,619,899
20
PPL offers no information to investors about the size of the market for salespeople or about the market
potential of the existing salespeople to build “downlines”, the main feature of the pay plan. How many
consumers are in that market? And how many new Associates do the existing Associates need for most to
even have a chance at profitability? PPL also does not account for the spreading negative influence of
failed “Associates.”
Instead, PPL obscures from shareholder view its obvious and inevitable march to saturation of the sales
Associate market. It only informs shareholders about “memberships” as a percentage of total market
potential, which it defines as 100 million households in the USA and Canada. In its 2006 10K, PPL stated
that it currently had 1.5% share and an additional 6% of households have previously purchased (but no
longer own) PPL policies. However, already, about 1.6% of the total market of potential buyers have
already become salespeople for PPL! About one million of them quit the scheme and stopped using the
product.
21
PPL’s 10Q for period ending September 30, 2008 states, “Total new associates enrolled during the first
nine months of 2008 were 89,722 compared to 112,773 for the same period of 2007.”
This figure equates to a 20% decline only in enrollment for the first nine months. It does not reflect the
actual decline in the total number of Associates because PPL does not disclose the total number of active
Associates in its quarterly reports. If dropout rates have also increased, the true decline could be much
higher.

Robert FitzPatrick Credentials

1522 Lilac Rd., Charlotte, NC 28209
Tel. (704) 334-2047, Fax: (704) 334-0220
Email: RFitzPatrick@FalseProfits.com
Web: http://www.FalseProfits.com
Robert L. FitzPatrick is an expert in examining and revealing deception and fraud in

bogus home-based businesses. He is an author, teacher and internationally recognized
authority in multi-level marketing schemes and pyramid sales fraud. He is a catalyst
and leader in the international effort to end the pervasive fraud in the multi-level
marketing business.
He is the author of False Profits, the first book to critically examine the multilevel marketing industry.
He was featured on NBC Dateline, ABC World News, and he was interviewed by correspondent Mike
Wallace on CBS 60 Minutes. He has been interviewed live on NBC Today show, Canada's CBC
National News and on several BBC radio news programs aired in the UK. He has been quoted in
many newspapers, including the Wall Street Journal.
False Profits was a featured resource at the 2003 annual meeting of the Association for Professional
and Practical Ethics. The related booklet, Pyramid Nation by Robert FitzPatrick, has been translated to
Chinese and used by government regulators in writing China's first laws on pyramid schemes. His
essay, "The 10 Big Lies of Multi-Level Marketing", has been translated into four languages and
posted on numerous websites.
In June 2005, Robert FitzPatrick was asked by the Central Bank of Sri Lanka to address banking
representatives from that country as well as India, Bangladesh, Bhutan, Maldives and Nepal in Sri
Lanka's capital, Colombo. The Sri Lanka presentation was later published as part of a national
consumer education campaign against pyramid schemes.
Robert FitzPatrick has conducted seminars for staff of Federal Trade Commission, state Attorney
General's offices, US Postal Inspector and members of the White Collar Crime Center in Richmond.
He was a featured speaker at the 2006 annual meeting in San Francisco of the Association of Certified
Fraud Specialists and the 2003 of the National Association of Consumer Protection Investigators. He
has developed informational resources for consumers, journalists, academics and regulators including
a multi-media PowerPoint presentation and a statistical analysis of the losses suffered by participants
in multi-level marketing schemes. He also published a widely read booklet on the landmark federal
case brought against the Amway Corporation.
Robert FitzPatrick founded and serves as president of Pyramid Scheme Alert, the first international
association t o expose a n d prevent pyramid scheme fraud. PSA's website,
http://www.pyramidschemealert.org, is visited each month by thousands of consumers, regulators and
journalists worldwide. He personally responds to hundreds of consumer and news media inquiries. He
has served as consultant and expert witness for Attorney General or State Attorney offices in four
states, the US Dept. of Justice, and in numerous cases involving distributor fraud and pyramid
schemes.
Since 1983, he organized and managed national trade associations that advocated the interests of
independent distributors in three industries and spoken at industry conferences in Canada, England
and the US. He organized international conferences in Brasschaat, Belgium and Guadalajara, Mexico,
for manufacturers and distributors in the digital and litho printing industry. As a strategic consultant,
he has provided guidance and executive coaching in the field of manufacturer/distributor relationships
where factors of trust, integrity and sensitive communications are critical to the business. His
corporate clients include Fujifilm, DuPont, Epson, and many others. Robert FitzPatrick’s CV can be
found at http://www.falseprofits.com/FitzPatrickCV08.doc.pdf

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©2009 Robert L. FitzPatrick