Pre-Paid Weathers Guilty Verdict

"This is less damaging or punitive than a qualified opinion," explained Fredric E. Russell, a Tulsa money manager with no position in the stock. "But Grant Thornton's inability or unwillingness to issue an opinion is at least a serious concern if not a real blow for Pre-Paid."

Cohan, too, voiced concerns about the company's internal controls.

"A lot of companies have poorly documented systems," Cohan acknowledged. "But on the other hand, I haven't heard of a lot of situations where auditors decline to issue an opinion because of this. So maybe Pre-Paid's situation is pretty bad."

The company warned on Tuesday that it may need several months to resolve the problem. In the meantime, investors will have no audited 2004 financial statements on which they can rely.

Guilty Verdict

News of the reporting problems came just days after Pre-Paid weathered a legal setback. A Mississippi jury last week found both the company and its founding CEO, Harland Stonecipher, guilty of fraud and deceptive advertising, according to plaintiffs' attorney Doug Minor.

Still, the company did escape without paying any punitive damages in a state known for its runaway jury awards.

"I think Pre-Paid was lucky," Russell said. "But a finding of fraud is not exactly the greatest news as far as goodwill and reputation are concerned."

Pre-Paid has been accused of overstating the coverage provided by its legal policies. In an earlier trial, the company prevailed. Pre-Paid expects that pattern to continue.

"We are very pleased with the jury's verdict and the impact this verdict may have on other pending litigation," Stonecipher said after the favorable ruling in October. "We hope this verdict, our first jury verdict in Mississippi, sets the tone for future legal developments in Mississippi."

Instead, a second jury has saddled the company with a guilty verdict and ordered that some -- albeit small -- damages be paid to four individual plaintiffs. For its part, the company has insisted that the damages, totaling $45,000, "were not based on the evidence" and has vowed to "seek post-trial relief, as necessary."