In the world of Mary Kay Cosmetics, recruiting new victims into the multi-level marketing (MLM) system and frontloading them with large inventory packages is critical to the survival of the company. The company and the upper levels of the pyramid rely on repeated ordering of products by beauty consultants, and little attention is paid to whether or not the consultants actually sell the products.

Hundreds of thousands of consultants lose money each year, and nearly half a million quit the “business” each year. Quitting consultants can return unsold inventory to the company, but only as much as has been purchased from Mary Kay in the last 12 months. Often, quitting consultants are left with hundreds or thousands of dollars of inventory they haven’t been able to sell and can’t return to Mary Kay.

Top 10 Red Flags for Fraud at Pre-Paid Legal Services, Inc. (NYSE:PPD)

1. Pre-Paid Legal press releases and earnings calls consistently tout the “record” numbers that the company has achieved. This leaves the impression that the business is increasing in strength.

TRUTH: Every key metric for Pre-Paid Legal’s business was down in 2008, again demonstrating the weakness of the business. The metrics showing rates of decline include total members (down 1%), new memberships sold (down 10%), total sales associates (down 4%), new associates recruited (down 18%), and associates making at least one sale (down 9%).