Pre-Paid Says Feds Looking at Trading

Pre-Paid Legal (PPD - Cramer's Take - Stockpickr) wanted regulators to look into trading in its stock. Now it's getting its wish, sort of.

The Ada, Okla., provider of legal services said Thursday afternoon that the Securities and Exchange Commission and the U.S. attorney for New York were examining trading in the company's stock ahead of Pre-Paid's release this month of fourth-quarter recruiting results. The attorney general issued a subpoena on the matter, and the SEC is conducting an informal inquiry, Pre-Paid said.

The weak results, and the departure of the company's president, spurred a 25% selloff in Pre-Paid shares following the release of the recruiting report in mid-January. Since then, the stock has continued to fall; it traded at $17.50 in after-hours action Thursday following the latest disclosure.

News of the inquiries come just two weeks after the company enlisted the support of Oklahoma Attorney General Drew Edmondson in its battle against short-sellers. At Pre-Paid's behest, Edmondson pleaded with the SEC to launch an investigation regarding the shorts, who profit when Pre-Paid's stock price declines.

In his letter to the SEC, Edmondson pointed out that Pre-Paid's short interest -- at 60% -- is among the highest on the New York Stock Exchange. And he went so far as to suggest that short-selling, which has been one of the few effective investment strategies in the recent bear market, should be outlawed.

Short-sellers have, in turn, accused Pre-Paid of stock manipulation. They believe Pre-Paid orchestrated a "pump-and-dump" scheme -- fueled in part by a favorable report from Gotham Partners -- that allowed Chief Operating Officer Randy Harp to sell high-priced shares just before January's fourth-quarter recruitment data broke a 38-quarter growth streak.

The company has since admitted to Bloomberg that it knew in early December, when Harp began selling shares, that its quarter was going poorly. But the public learned of Pre-Paid's slowdown only weeks later, when the stock already had begun sliding from a peak of $31 and Gotham Partners had liquidated 20% of its position.

Pre-Paid has long been a magnet for controversy. The company describes itself as a multilevel marketing company, which means that members pay a fee to join and then have an opportunity to make money two ways -- by selling a product, and by bringing on board more fee-paying sellers.