Pre-Paid Suffers Legal Setback

"It seems like, if they're stupid enough to go along with his scheme, he has no respect for them," noted Cohan, an investment strategist with no position in the stock. "And I still don't understand what the value of the product is. ... They somehow manage to attract people as customers and associates who have a tragic weakness in their personality that makes them susceptible to predatory, psychological reprogramming."

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Setback

In her 43-page ruling on Wednesday, Oklahoma federal judge Robin Cauthrin thwarted Pre-Paid's attempts to block a lawsuit that the company has always portrayed as frivolous. Although Cauthrin granted Pre-Paid's motion to dismiss outright fraud charges, she did so "without prejudice," leaving the door open for plaintiffs' attorneys to gather more evidence and reargue the charges. In the meantime, Cauthrin said the 30-year-old company -- which points to its sustained growth as a sign of credibility -- had failed to disprove the central allegation that it is an unlawful pyramid scheme peddling its "business opportunity" as an illegal security to the public.

"Although the inherently fraudulent nature of any pyramid scheme is based on its fundamental instability, growth in and of itself, even over an extended period of time, does not necessarily defeat plaintiffs' allegations that Pre-Paid is an illegal pyramid scheme," she wrote. "The relevant inquiry is not how long an enterprise has sustained itself but whether the market would become saturated if associates were to actually achieve the financial gains promised. ... Thus, the court finds that plaintiffs' allegations that Pre-Paid is a pyramid scheme are not facially defective or clearly refuted by defendants' arguments or evidence."

Interestingly, the ruling was issued by a judge that some observers had viewed as friendly to the company. Last year, the same judge threw out a shareholder lawsuit accusing Pre-Paid of misleading investors about the true profitability of the company even after the Securities and Exchange Commission forced Pre-Paid to adopt more conservative accounting methods that cut reported earnings in half. That lawsuit is currently under appeal.

Pre-Paid also faces another class-action lawsuit from associates, headed for a certification hearing in January, and a slew of multiple-party lawsuits filed by disgruntled customers in Mississippi and Alabama counties known for their runaway jury awards.