Controversies
In 2001, the Wyoming attorney general announced, "when we discovered that Pre-Paid was using prohibited income representations to promote their multilevel marketing program, we warned them that the representations were prohibited by Wyoming law." Pre-Paid denied violating the law, but agreed to adjust its marketing messaging and pay $7,000, including $2,000 refunded to participants who alleged the company had misled them.[32][33] In the same year, the U.S. Securities and Exchange Commission (SEC) required the company to stop counting the commissions paid out to sales associates as assets instead of expenses, which reduced reported earnings by over half.[17] As a result, Pre-Paid amended its reporting and filed its 2000 financial statements in February 2002. The statements showed huge decreases in earnings (from $43.6 million to $20.5 million) and stockholder equity (from $147 million to $42 million).[34] Later that year, however, the Denver Business Journal reported that Pre-Paid earned a $27.1 million profit on $303.7 million in revenue, a large increase from its $1.9 million profit on revenues of $129.6 million in 1997, and its members had access to a network of 46 firms with 1,270 lawyers.[35]
In 2004, approximately 250 plaintiffs filed about 30 lawsuits in Alabama against Pre-Paid, all of which were dismissed or settled by 2006.[25] Pre-Paid faced two lawsuits in Mississippi, one in October 2004, and the other in February 2005. A jury ruled in favor of the company in the first suit. In the second, a jury found Pre-Paid and Stonecipher guilty of deceptive advertising and fraud[17] and required them, in November 2005, to pay $9.9 million in punitive damages.[36] TheStreet reported that Pre-Paid faced additional lawsuits filed by 400 Mississippi plaintiffs which were ultimately settled.[25] TheStreet also noted that the company had had some success in court, including the overturning of a fraud verdict and the defeat of a class action lawsuit alleging the company was a pyramid scheme.[36] The company and the U.S. Chamber of Commerce, which had Stonecipher on its board of directors,[18]
Pre-Paid's independent auditor was unable to approve the company's 2004 financial statements because of "material weaknesses" related to the processing of commissions.[17] Two weeks later, the company filed 2004 financial statements approved by its auditor, Grant Thornton.[38] New rules proposed by the Federal Trade Commission (FTC) required Pre-Paid to disclose to potential associates that less than 25 percent of its sales representatives sold multiple insurance plans in 2005, which the company confirmed in an SEC filing.[25]
In 2007, the FTC began investigating Pre-Paid's marketing of its identity theft service and Affirmative Defense Response System (ADRS), which the company developed to increase group sales.[39] Pre-Paid changed its marketing materials in 2009 after regulators found the company's claims about ADRS misleading.[40] According to an SEC filing, the FTC and Pre-Paid "[reached] a mutually agreeable solution", and in 2010 the agency ended its three-year investigation without any action.[39]
PrePaid was the top corporate donor to the 2008 re-election campaign for Utah Attorney General Mark Shurtleff, who has defended the operation of multi-level marketing firms in that state.[41]
