Pre-Paid Legal Services Confirms SEC Probe

Pre-Paid Legal Services Inc. said on Thursday that U.S. prosecutors and the Securities and Exchange Commission are investigating trading in its shares ahead of an announcement that sent the stock down 26%.

The company said after the close of trading on Jan. 3 that its membership had declined for the first time in 39 quarters. The shares plummeted 25% the next trading day. The company, which sells insurance policies that pay for some legal services, has about 1.4 million members who pay about $21 a month each.

Ada, Okla.-based Pre-Paid said it learned earlier this week of an informal SEC investigation and received a subpoena from the U.S. Attorney for the Southern District of New York.

The company said both sought information “relating to trading activities in the company’s stock in advance of the January 2003 announcement.”

The U.S. attorney’s subpoena indicates there is a criminal investigation of the trading, said Alan Bromberg, professor of securities law at Southern Methodist University. A spokesman for the U.S. attorney’s office declined to comment. Pre-Paid declined to comment.

The news came out after the close of regular stock market trading. Pre-Paid’s shares fell to $15.69 in after-hours trading after closing at $18.20, down 27 cents in regular trading on the New York Stock Exchange.

Bromberg said in an earlier interview that Pre-Paid Chief Operating Officer Randy Harp may have violated insider-trading laws when he sold $1.6 million of stock on Dec. 4, a month before Pre-Paid announced that its streak of quarterly membership growth was ending.

Harp couldn’t be reached for comment Thursday.

In the month preceding Harp’s sale, Pre-Paid’s shares had risen 27%, boosted by two positive reports on the company’s prospects.

The first came Nov. 7 in a news release from SM Berger & Co., Pre-Paid’s investor relations consultant. The statement predicted another record quarter. On Nov. 22, hedge fund operator Gotham Partners Management Co. called Pre-Paid shares “extremely undervalued at current market prices.”

New York Atty. Gen. Eliot Spitzer and regulators, including the SEC, are trying to determine if some hedge funds broke securities laws by publishing research on the Internet.

The probe, which appears to be speeding up as more hedge funds are being questioned and more regulators get involved, is sending shivers through the loosely regulated, $600-billion hedge fund industry. The SEC is said to be considering tighter controls over the funds.