Nov 192009
 
 November 19, 2009  Business

Pre-Paid Legal Services Inc. issued a press release today indicating that it may be sued by the Federal Trade Commission over its Identity Theft Shield and Affirmative Defense Response System (“ADRS”) Program:

Pre-Paid Legal Services, Inc. (NYSE: PPD) announced that on November 18, 2009, we received a proposed draft complaint from the Federal Trade Commission (“FTC”) seeking permanent injunctive relief, disgorgement of proceeds and other relief, including costs, relating to our Identity Theft Shield and Affirmative Defense Response System (“ADRS”) Program. The proposed draft complaint alleges our ADRS program and related materials violate Section 5(a) of the FTC Act regarding asserted misleading representations, express or implied. The proposed draft complaint also names Harland Stonecipher, our Chief Executive Officer, and Mark Brown, our Chief Marketing Officer, as defendants. We previously received a Civil Investigative Demand from the FTC on March 23, 2007 on the ADRS program. We have made voluntary revisions to the marketing materials originally provided to the FTC in 2007 and 2009. The FTC may decide to commence federal court proceedings with this proposed draft complaint. The ultimate outcome of the matter is not determinable but we will vigorously defend our interests in this matter.

The news sent Pre-Paid’s stock nosediving to close 19.11% lower by the end of today.

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Updated Nov. 20: Following the reaction Thursday, Pre-Paid Legal issued a subsequent press release to “clarify” its first one:

We believe the proposed draft complaint from the Federal Trade Commission (“FTC”) referred to in yesterday’s release is the next step in an ongoing process between us and the FTC that began in March 2007. This process has been the subject of prior press releases and disclosures in previous public filings. The proposed draft complaint narrowly focuses on our Affirmative Defense Response System (“ADRS”) marketing program and specific representations regarding identity theft and data privacy issues. We believe the permanent injunctive relief proposed by the FTC pertains only to our ADRS marketing program.

We began ADRS in 2006 as a complimentary program for businesses to learn more about identity theft and data security. The ADRS marketing program is a small part of our core business model, and is associated with a relatively small percentage of our revenues. Regarding the proposed disgorgement of proceeds, we received no fees for the ADRS presentation so we believe there are no fees or proceeds at issue that would be subject to disgorgement. Even if the FTC were to pursue disgorgement of membership fees pertaining to the underlying memberships written in group accounts solicited through the ADRS program, such fees represent less than 2% of all our total membership fees collected since January 1, 2006 and represent approximately 4.5% of our current membership fees in-force. We have responded to each request from the FTC and will continue to cooperate with the FTC to reach a mutually agreeable resolution.

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