With a chart like an erratic EKG,

Pre-Paid Legal Services

(PPD)

has never been a stock that let investors sleep easily.

The Oklahoma-based company is, in essence, the Amway of litigation, selling limited-coverage legal plans instead of cleaning supplies. It dominates a small but growing niche of the insurance industry, promising select legal benefits to more than 1.36 million customers. And it relies on a swelling multilevel marketing sales force -- often as bent on recruiting as on selling the company's $25-a-month legal policies -- to maintain healthy and sometimes explosive growth. (For a story on the colorful backgrounds of some of the top recruiters,

click here.)

To the naked eye, Pre-Paid looks impressive. It posts double-digitprofit growth just about every quarter. It practically mints money, reporting a whopping 67% surge in cash flow last quarter. It hasn't a cent of long-term debt.

But the stock is also volatile. It's been as high as $48 and, duringone rough era, as cheap as pocket change. It shed 80% of its value during a dramatic plunge last year and, even after doubling in price, currentlysports a fairly modest P/E ratio of 14.

The most eye-popping characteristic is Pre-Paid's short interest. Bears have swarmed into this stock almost since it began trading. Today -- with a staggering 75% of the float shorted -- those sellers are betting greater fortunes than ever that Pre-Paid will continue to spiral.

For now, the stock is right at $20, a couple of bucks shy of where itwas five years ago. The ride to that $2 loss has been jarring, to say theleast, making some investors fortunes while costing others considerable wealth.

Money Press

There is no question that Pre-Paid is a profitable company that enjoys consistent -- and sometimes phenomenal -- growth.

Last year, Pre-Paid collected $304 million in revenue primarily fromthe sale of its flagship legal services plan. That represents a 23.6%growth in annual revenues during a year when the Sept. 11 terrorist attacks sent many companies into steep decline.

Besides cash, the company's only real assets are its 1.3million-plus customers and -- arguably even more valuable -- the nearly300,000 sales associates who sell Pre-Paid policies and can recruit othersto do the same.

In 2001, Pre-Paid collected roughly 20% of its membership revenue from company salespeople who own Pre-Paid policies themselves. It tapped the same group for $17.5 million worth of training and supply fees. Also, it retained $20 million worth of commissions from inactive sales associates who no longer qualified to collect the payments.

All told, nearly one-third of the company's 2001 revenues came from the pockets of Pre-Paid's sales force. The rest came from lower- andmiddle-income customers, roughly half of whom cancel their Pre-Paidpolicies after less than a year.

New Math

After paying the sales force and lawyers and other overhead, Pre-Paid wound up with 2001 profits of $27.1 million or $1.26 per share.

The previous year, Pre-Paid posted profits of $43.6 million or $1.92per share. But those were roughly chopped in half after the

Securities and Exchange Commission

ruled that Pre-Paid couldn't treat advanced commissions to its sales force as balance-sheet assets, forcing the company to instead expense them on its earnings statement.

That switch marked the third time in company history that the SEC stepped in and forced Pre-Paid to adopt more conservative accounting. Although the two previous changes turned profits into losses, the third left the deepest scar on Pre-Paid's stock chart. The stock plunged from $48 to $10 in less than five months.

In late 2000, when Pre-Paid's stock was still flying above $40, a feared stock expert took aim at the company.

Mark Roberts of the independent research house Off Wall Street hung a sell rating on the stock, highlighting Pre-Paid's slowing growth rate and,more importantly, its heavy reliance on aggressive accounting. Robertspredicted the stock would fall into the mid-$20s and, if the SEC stepped in, possibly much lower.

It went to $10 before the SEC even ruled Pre-Paid's accountingimproper. And as the stock plunged, Pre-Paid Chief Executive HarlandStonecipher threatened lawsuits against those (including

TheStreet.com's

Herb Greenberg) who'd leveled criticism against his company. The lawsuits never materialized.

Meanwhile, the biggest buyers of the stock have remained virtually unchanged: Tom Smith, a former Mary Kay board member and multilevel marketing stock enthusiast whose two family partnerships own a 20% stake in Pre-Paid; sales associates, who regularly purchase stock through an "associate investment club"; and the company itself, which has spent nearly $100 million to repurchase its outstanding share count by 17% since 1999.

Lack of Guidance

During the past year, two major investment firms have dropped theircoverage of Pre-Paid, leaving the company with a very limited analystfollowing.

ABN Amro cut Pre-Paid, along with all other "special situation" stocks, after it bought out ING Barings last year. And Chicago-based William Blair dropped Pre-Paid last summer, shortly after initiating coverage with a strong buy recommendation -- and seeing the company fall 21% short of its earnings expectations.

That leaves Standard & Poors, with a tepid "accumulate" rating, and a handful of obscure firms -- like New York's Robotti & Co. -- that have pushed the stock for years.

Robotti analyst Alan Weber maintained a "strong buy" recommendation for Pre-Paid's stock throughout the SEC accounting controversy. But Weber not only owns Pre-Paid's stock. Pressed for disclosure, he also admitted that he's technically a Pre-Paid sales associate.

So without the usual touts, Pre-Paid must point to its own numbers as evidence of its strength. The company has reported 30 consecutive quarters of customer and sales growth. And following its most recent restatement, Pre-Paid claims to use conservative accounting practices that are directly opposite those that toppled

Enron

.

Short-sellers scoff. Not only is Pre-Paid's growth slowing, they say, but the company's future is threatened by a wave of lawsuits filed by itscustomers and sales force. They accuse Pre-Paid of being an illegalpyramid scheme that's rife with con artists.

Both sides continue to do battle. And the thinly traded stock remains vulnerable to price swings. For now, it remains almost smack in the middle of its record highs and lows -- poised for either a massive short squeeze or total obliteration, depending on whom you ask.