Lockyer Not Above a Little Legal Aid

California Atty. Gen. Bill Lockyer’s warning to Gray Davis this summer to avoid what he labeled “puke politics” struck a memorable blow on behalf of integrity in public discourse. One can only wonder if Lockyer has as sensitive an eye for what might be termed “puke businesses.”

The thought arises because of Lockyer’s relationship with an outfit called Pre-Paid Legal Services Inc. As its name implies, this Oklahoma company markets insurance-like plans that supposedly grant subscribers access, for a monthly fee as low as $16, to first-class legal representation on a wide range of civil and criminal matters. In the words of an animated come-on posted on the company Web site: “You’ll be able to say, ‘I’m going to talk to my lawyer about this’ -- and mean it!”

Lockyer made a public appearance at a huge rally the company staged Nov. 8 at the Long Beach Convention Center, where -- depending on whom you ask -- he either extolled its goal of bringing reasonably priced legal services to the masses and hung around for a couple of hours (according to Pre-Paid officials) or delivered a routine “stump speech” and quickly departed (according to his staff).

What isn’t disputable is that in the week following this appearance, Lockyer’s campaign chest was fattened by a total of $20,000 from several Pre-Paid executives, including founder and Chief Executive Harland Stonecipher. Ex-football star Fran Tarkenton, who was formerly a Pre-Paid board member and still maintains business ties with the company, chipped in an additional $5,000.

Lockyer’s spokesman says the attorney general was invited to the Long Beach event by former Oklahoma Atty. Gen. Mike Turpin, an old friend who is now a lawyer on Pre-Paid’s roster. The spokesman also observed that Lockyer already had raised $10 million for the 2006 election, as though to suggest that the $25,000 from the folks at Pre-Paid is a mere bagatelle. (Lockyer is expected to run for governor.)

Yet clearly, the A.G. should be asking himself if Turpin has hooked him up with the kind of company that, as California’s chief consumer protection officer, he might more wisely keep at arm’s length. For a clue, I would suggest that he check out the “legal proceedings” section of Pre-Paid’s most recent annual report.

There, the company discloses that as of the end of last year, it was facing 28 customer lawsuits involving 298 plaintiffs in Alabama alleging fraud and other offenses; 14 lawsuits involving 428 plaintiffs in Mississippi; and a lawsuit by former sales representatives seeking class-action certification in Oklahoma. These suits seek hundreds of millions of dollars in damages.

Earlier this year, Pre-Paid received a subpoena from federal prosecutors in Manhattan, seeking information about New York Stock Exchange trading in its stock, apparently by one of its top officers, just before its announcement of disappointing results for the fourth quarter of 2002. The Securities and Exchange Commission said it was opening an inquiry on the same subject.

It’s never a good sign for a company when the “legal proceedings” section of its annual report makes for such absorbing reading. When I asked Lockyer’s office whether he was aware of this information before attending the company’s rally and accepting its cash, I was thanked and told: “He is now.” But they didn’t say if he’ll return the money.

For its part, Pre-Paid says that Stonecipher was traveling and unavailable, and thus couldn’t reply to my questions about its business or relationship with Lockyer. In its annual report, the company says it will “vigorously defend its interests” in the lawsuits.

Perhaps the most interesting thing about Pre-Paid is that the company doesn’t merely sell legal plans; it also peddles “business opportunities.” Pre-Paid is a multilevel marketing enterprise: After you sign on as a company sales agent, or “associate” (by paying a fee), you’re supposed to earn commissions not only on the legal plans you sell to customers, but on the plans sold by other salesmen that you recruit into your own network. The company’s latest annual report discloses that commissions on new policies get divvied up among an average of 18 salespersons.

The Oklahoma lawsuit brought by former associates alleges that Pre-Paid has systematically overstated the popularity of its legal plans -- and, in turn, the sales force’s potential commissions. The complaint further suggests that the company’s promotional efforts are aimed more at recruiting salespersons (who usually must buy a legal plan to receive commissions on those sold to others) than acquiring customers.

Among other things, the company encourages recruits to enroll in its company’s “Fast Start to Success” program, a sort of motivational training session, by paying graduates of the program an enhanced commission rate. Signing up for “Fast Start” costs as much as an additional $149, from which CEO Stonecipher was paid a $10 bonus per enrollee from 1999 through 2001, to the tune of $2.8 million.

The core question about Pre-Paid is whether what it sells is worth buying. The company compares its products to health insurance policies, but only about one-third of its monthly membership fees go to actually providing services. By comparison, even bad HMOs typically spend more than 85% of their revenue on medical care.

One way Pre-Paid keeps its expenses down is by excluding services on which the average person might expect coverage. Among legal issues not covered within the basic plan are divorces, separations, bankruptcies, DUIs and drug-related matters.

Members are eligible for a 25% discount from their plan’s lawyer’s fees for representation in any such cases. But because there’s no contractual ceiling on what the standard fee might be, the discount’s value is dubious. The basic plan provides for up to 60 hours of a lawyer’s time for the defense of a civil suit, but I’d wish good luck to any defendant who enters a courtroom after only 2.5 hours of pre-trial preparation, which is all the plan provides for members the first year.

These factors may explain why Pre-Paid has recently run into difficulties expanding its business. Over the last 12 months, sales of new plans have declined by as much as 14% compared with year-earlier periods; the recruiting of new salesmen has declined by 40%. These are particularly worrisome figures because only about half of all new customers renew their policies for a second year.

Pre-Paid Legal does have plenty of fans, including many politicians who have been plied with its campaign contributions. Last year, for example, Oklahoma Atty. Gen. Drew Edmondson personally lobbied the SEC to investigate whether short sellers had been driving down the price of Pre-Paid’s stock by circulating negative stories. “I have recently been made aware of a market practice known as ‘short selling’ and am amazed that it is legal,” he wrote the agency.

Leaving aside whether the people of Oklahoma are well served by an attorney general for whom the commonplace practice of short selling comes as a big surprise, Edmondson’s letter demonstrates that in the marketplace for politicians, Pre-Paid knows how to get value for money.

That’s what’s so disquieting about Lockyer’s apparent nonchalance about the company’s campaign contributions. Pre-Paid hasn’t been accused of doing anything illegal in California, as Lockyer’s spokesman points out. But the former governor hadn’t done anything illegal when the A.G. lit out after him for his negative campaigning. Now that Lockyer has taken Pre-Paid’s money, can we be sure that he’ll be watching the company as sternly as he watched Gray Davis?

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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.