Pre-Paid Suffers Legal Setback

Pre-Paid Legal Services PPD has failed to convince a federal judge that the company is not an illegal pyramid scheme.

The legal services provider, which employs the same controversial marketing strategy made famous by Amway, this week lost a motion to dismiss a class-action lawsuit filed by sales associates who feel they were scammed by the company. The ruling opens the door for a full-blown trial that could prove devastating to the so-called multilevel marketing, or MLM, company.

"It should surprise nobody that has either studied or been the victim of Pre-Paid's MLM business practices that the judge would rule in favor of the associate plaintiffs when the case was presented by a competent law firm," said one hedge fund manager with a large short position in the stock. "This case goes to the heart of their MLM practices, and the judge appears to agree it has merit to proceed."

The lawsuit, filed 17 months ago by legal giant Lieff Cabraser Heimann & Bernstein, accuses Pre-Paid of violating federal securities laws by enticing the public to invest in a business opportunity that almost always fails. Participants pay at least $65, and as much as $249, for the right to sell Pre-Paid legal policies and recruit others to do the same.

But many recruits never even recoup their investment, let alone achieve the financial security Pre-Paid touts. Based on Pre-Paid's own financial reports, experts say, the average associate paycheck -- actually lifted by the handful of millionaires at the top of the chain -- comes in at only $3 a week.

Peter Cohan, a business consultant who recently interviewed Pre-Paid CEO Harland Stonecipher for an upcoming column in Oklahoma City Business, said the company seems to knowingly lure people into a money-losing trap. He said he was struck when Stonecipher quickly dismissed the 80% of his sales force that earns very little or nothing.