Pre-Paid Prevails in Mississippi Case

TheStreet.com/October 20, 2004
By Melissa Davis

Pre-Paid Legal Services (PPD:NYSE - news - research) can now savor a courtroom victory of its own.

The legal services company, dogged for years by lawsuits and complaints about its coverage, won a trial on Tuesday against two plaintiffs in Mississippi. The company successfully defended itself against allegations that it had defrauded the two customers by exaggerating the services provided under its legal policies.

After paying $1.5 million to settle a slew of similar complaints in early 2001, Pre-Paid vowed to fight off copycat lawsuits in court. It has since won dismissals in other big cases -- namely those filed by shareholders and its sales associates -- and can now add a trial victory to its list of achievements.

The company itself disclosed nothing about the trial's outcome. But plaintiffs' attorney Doug Minor confirmed the "very disappointing loss" for his clients.

"We accept that this jury felt that these two plaintiffs had not proven their case," Minor told TheStreet.com late Tuesday. "You win some, and you lose some. ... But we have many other plaintiffs, and we are committed to continuing the litigation and going forward in the three counties set for trial next year."

Minor's law firm, which includes former U.S. Attorney Brad Pigott as a partner, represents more than 400 people who are suing Pre-Paid in Mississippi state courts. Two of next year's trials are scheduled in Mississippi counties that are notorious for their runaway jury awards.

Still, some had expected a different verdict from the first trial.

"This is like a Teflon company," said Peter Cohan, a Massachusetts investment strategist with no position in the stock. "It's almost comical."

Pre-Paid employs multilevel marketing -- the sales strategy made famous by Amway -- to sell memberships that exclude full coverage for common legal problems such as bankruptcy and divorce. As a result, customers can unexpectedly face hefty retainer fees in addition to their monthly premiums. Unhappy customers have filed multiparty lawsuits in Alabama, also known for its big jury awards, as well as in Mississippi.

Pre-Paid has long denied the merits of such cases. But even the company's recent victory has failed to change the minds of critics like Cohan. He continues to question both the value of Pre-Paid's product and the tactics the company uses to recruit those who sell it. He points to the company's high churn rate as evidence of a failed business model.

"I haven't seen anything that convinces me that this is a sustainable business model -- and yet, it keeps on going," he said. "They keep recruiting more customers and more sales associates. I guess there's a sucker born every day."

Still, Pre-Paid can no longer boast the explosive growth it once did. The company has instead weathered a slowdown that is typical in the multilevel marketing industry.

The company's stock has also stalled. After peaking near $50 in late 2000, the stock -- heavily shorted by hedge funds -- has slipped. It dropped 11 cents to $25.65 on Wednesday, despite the courtroom victory, thus continuing to trade well within its 52-week range of $21.57 to $28.75 a share.

Cohan, for one, is glad he has avoided the stock altogether. He views Pre-Paid as a poor choice for long investors and short-sellers alike.

"The company doesn't seem to be growing very much or shrinking very much, either," he said. "And the stock price doesn't seem to be going anywhere. You need volatility to make money, so I just don't see how you can win."