Pre-Paid Legal's Colorful Workforce
Pre-Paid Legal Services (PPD) says it just wrapped up its best recruiting quarter ever, signing on 45,962 new salespeople -- a 71% increase from last year. But new research by TheStreet.com suggests that the company is heavily reliant on a few rainmakers who use controversial hard-sell tactics that several state regulators are scrutinizing.
Pre-Paid, which declined to comment on the specifics of this article, relies on a system of grass-roots customer recruitment and intense recruitment of new recruiters to keep its revenue growing. The problem with that, says Len Clements, a prominent watchdog of the so-called multilevel marketing industry, was apparent at a Pre-Paid recruitment meeting he attended in December 2000.
Clements found himself in a room with Tommy Vu, the 1980s infomercial star widely sued by disgruntled students of his $15,000 real-estate sales "boot camp."
"Tom Vu takes out a five-dollar bill and wraps it around the microphone stand," recalled Clements, who has no financial stake in the company's stock. "Then he asks the audience, 'If I said you could take this $5 for $1 of your own, what would you say?'"I immediately thought, 'You'd be operating a Ponzi scheme.' But I didn't want to wreck the meeting." One former Pre-Paid star who said he was victimized by that scheme is Jeff Turnipseed.
Hard SellFor Turnipseed, selling Pre-Paid policies was never a problem. He could walk into a company, sign up a crowd and do it consistently enough to rank among Pre-Paid's top salesmen. He recruited almost no one, relying entirely on his own sales for handsome commission checks. But even Turnipseed couldn't overcome Pre-Paid's dismal customer retention rate -- roughly half the people who get a policy don't renew after one year. He found himself repaying Pre-Paid for the commissions he'd already collected on policies that wound up lapsing early. And his checks began to shrink. The more policies Turnipseed sold, the more customers canceled early, and the more money he had to return to the company. "I have spent more than two years talking to scores and scores -- if not hundreds -- of Pre-Paid associates and studying the Pre-Paid scheme," said John Dexter, an Oklahoma City attorney who's filed a class-action lawsuit against Pre-Paid on behalf of Turnipseed and other top earners. "And I have found there is no difference between the honest and successful Pre-Paid associate and the immigrant laborer who goes into debt to the company store." Pre-Paid declined to respond to direct allegations.
Getting SleepyThere is a keen difference between Turnipseed and several other Pre-Paid stars: Turnipseed has no rap sheet with regulators. Disregard Vu, once targeted with an investigation by the Florida attorney general's office for allegedly using "mind control" powers to scam consumers.
Viva Las VegasThen there's the National Audit Defense Network (NADN), also based in Las Vegas and the No. 1 Pre-Paid recruiter when Sylver was No. 2. Last year the Better Business Bureau of Southern Nevada fielded more consumer complaints against NADN than against any other company. Both the Nevada attorney general and the Federal Trade Commission sued NADN for promising customers tax refunds and then refusing to honor a money-back guarantee when the refunds failed to materialize. The FTC obtained a court order to shut the company down in February, although its Web site and phone lines continue to operate. NADN didn't return phone calls seeking comments for this story. Pre-Paid's current top performer, an organization called Advantage Worldwide, has earned regulatory scrutiny. Advantage Worldwide operates at the same the address and phone number of another company, Successtracks, which is run by Florida residents Bonnie Burke and Lisa Smith. In 1998 the U.S. Postal Service filed fraud charges against the pair's home-based business and took action to examine all mail "connected to the alleged unlawful activity" of that operation. The Postal Service's interest came three years after the Minnesota attorney general accused both women of operating an illegal "credit repair" scheme that promised to rid consumers of poor credit histories in exchange for a hefty upfront fee. "Defendants represent that the program is '100% legal' when, in fact, consumers who follow defendants' advice may violate several federal and state laws that prohibit false statements on certain loan and credit applications," the attorney general stated in a report. Neither Burke nor Smith was available for comment.
Student ProtestRanked just a few notches below Advantage Worldwide is a top Pre-Paid organization that recently came under fire at California State University. The student newspaper there published a story on Dominion Marketing last March, just after the company -- which sells and recruits for Pre-Paid -- refused to pay students for distributing fliers. Dominion said it expected the students to generate sales for their weekly $200 paycheck, despite advertising that no selling -- only flier distribution -- was required. Dominion Marketing did not return a phone message seeking comments.
Drano ShotOther recruiters deserve some mention as well. There's David C. Draney, the man behind an Arizona organization ranked among Pre-Paid's top recruiters early this year. An exhaustive identity search turned up only one David C. Draney in Arizona or anywhere else. Five years ago, Draney was cold-calling potential investors to ask if they would swap an eye or a kidney for $1 million. If they declined, he deemed them millionaires -- despite their low- or middle-income status -- and qualified them for high-risk investments typically reserved for the wealthy. Federal prosecutors indicted Draney and 12 others for raising millions of dollars through the sale of bogus securities. Although Draney's trial ended in a hung jury, two of his co-defendants were sentenced to prison. Draney couldn't be located for comment.
Cream of the CropThese are simply the most interesting alleged con artists uncovered through a random investigation of the top earners who compose that tiny fraction of Pre-Paid sales associates who actually succeed. Also worth noting but already made public: Paul J. Meyer, owner of a sales organization responsible for roughly half of Pre-Paid's business, came to Pre-Paid in 1998 with three FTC reprimands and one of the stiffest penalties ever imposed for overstating income opportunities. Fran Tarkenton, retired professional football player and former Pre-Paid director, paid six figures to settle charges brought against him in 1999 by the SEC for alleged fraud relating to an Internet software company. Although he vacated his Pre-Paid board seat, Tarkenton continues to be the company's most visible spokesman, beckoning Americans to Pre-Paid from television screens across the country. Clements -- who is both a supporter and a watchdog of multilevel marketing -- said Pre-Paid is a pyramid scheme that tarnishes an industry regarded, often unfairly, as illegitimate. He said a pending class-action lawsuit, which accuses Pre-Paid of being an illegal pyramid scheme, stands a "slam-dunk" chance of winning. Although he doubts the lawsuit will kill the company, he believes Pre-Paid will attempt to both save itself and appease federal regulators by halting the payment of recruiting commissions and bonuses to its sales force. With that incentive gone, he predicted, interest in Pre-Paid will rapidly fade. "As a network marketing opportunity, it will probably die a natural death of attrition in two to three years," likely reverting to its old role of direct sales firm.
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