Controversies

In 2001, a 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 Pre-Paid to stop counting the commissions paid out to sales associates as assets instead of expenses, which reduced reported earnings by over half.^[18] 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^[18] and required them, in November 2005, to pay $9.9 million in punitive damages.^[36] TheStreet.com reported that Pre-Paid faced additional lawsuits filed by 400 Mississippi plaintiffs which were ultimately settled.^[25] TheStreet.com 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,^[19] called the lawsuits "frivolous" and "abusive".^[37]

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.^[18] Two weeks later, Pre-Paid 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]