The Prosper "Quiet" Diary - millstones and milestones

[Investar]

Prosper Files Another S-1/A
New Registration Proposal Submitted To Securities and Exchange Commission
Arrived Monday Morning, June 1, 2009 

The 2009-06-01 document set is the 4th in a series put in front of the SEC since the October 15, 2008 shutdown. Prosper's complete document file on SEC/Edgar: http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001416265

(Seq 1) S-1/A THE REGISTRATION

Who really owns the notes (loans)? Prosper does. And where do lenders stand if Prosper goes belly-up? We won't know unless such event occurs. We might share in the crumbs or we might not. Money we hand to Prosper is not any more secure than any other. From highlights on page 5:

Security Interest—Ranking  "The Notes will not be contractually senior or contractually subordinated to any other indebtedness of Prosper. All Notes will be unsecured special, limited obligations of Prosper. The Notes do not restrict Prosper’s incurrence of other indebtedness or the grant or imposition of liens or security interests on the assets of Prosper and holders of the Notes do not have a security interest in the corresponding borrower loan or the proceeds of that loan. Accordingly, in the event of a bankruptcy or similar proceeding of Prosper, the relative rights of a holder of a Note, as compared to the holders of unsecured indebtedness of Prosper are uncertain."

This text is revised from the previous S-1/A. As I understand it, this has been one of the sticking points. Prosper has tried various methods to protect lenders by segregating borrower loans from other assets and liabilities. Nothing they tried would fit the regulatory mold our grandfathers and their parents fashioned in 1933.

(Seq 2) EX-4.2 BORROWER PAYMENT DEPENDENT NOTES

(Seq 3) EX-10.1 BORROWER REGISTRATION AGREEMENT

(Seq 4) EX-10.2 LENDER REGISTRATION AGREEMENT

Prosper does not intend to shut out the 'little guy' unless your state objects. State restrictions, if any, will be provided you in a supplement to the Prospectus.

13.  Financial Suitability Representations and Warranties.  "You represent and warrant that you satisfy the applicable minimum financial suitability standards and maximum investment limits, established for the platform or the Note Trader platform (or as set forth in a supplement to the Prospectus for residents of the state in which you reside), and you agree to provide any additional documentation reasonably requested by us, as may be required by the securities administrators of certain states, to confirm that you meet such minimum financial suitability standards and maximum investment limits."

As always, Prosper can change the terms you agreed to at any time.

21.  Prosper’s Right to Modify Terms.  "Prosper has the right to change any term or provision of this Agreement or the Prosper Terms and Conditions."

I urge you to read this round of documents. They may become the "approved" set that allows Prosper to resume operation. It is an awful lot to wade thru but I'm sure there are more items of interest than the few I have mentioned here. I gather the highlighted text on pages 5 and 6 of the S-1/A are of particular interest to the SEC. Please discuss .. .. ..

[Investar]

Prosper Files Another S-1/A
More Highlights in the 4th Proposal 

Open Market Notes will not be part of the 'new' Prosper after all. P2P Lending News believes the SEC forced Prosper to abandon the feature. Prosper’s first open market partner, sub-prime auto lender CPS, launched on the California mini-Prosper with 100 loans and there was interest from lenders who placed plenty of bids before the mini-platform shut down. P2P Lending News also reconciles the new filing with statements made by CEO Chris Larson on the official Prosper blog not long ago. The frustrated CEO's post appeared during the California experiment but was removed when Prosper returned to 'Quiet'.

There will be "floor" on borrower interest rates. The auction model for setting rates is not entirely abandoned but Prosper has established both top and bottom rates, apparently important to the SEC. Prosper and Lending Club Loan Discussions members point to a proposed Minimum Yield Percentage that will reset daily based on the average 3-year CD rate published by BankRate.com (see sample chart in their post). The maximum borrower rate remains at 36%. The proposed minimums are well below what responsible Prosper lenders have offered in the past.

The gang on the Pro$pers.org forum has expressed a plethora of opinions — including laments about too much government intervention. And that's the Prosper CEO's frustration exactly.

[go4reward]

The gang on the Pro$pers.org forum has expressed a plethora of opinions — including laments about too much government intervention. And that's the Prosper CEO's frustration exactly.

Have you heard of the new GM (Government Moter)? It is the same exact concept here. More government control over private sectors. "Pay Czar" by the Obama Administration on TARP funded companies. It all points to more regulations.

[Investar]

Class Action Lawsuit
Litigants Meet In Court For The Very First Time

June 11, 2009 marked the official start of what is expected to become a Class Action law suit against Prosper in due course. For the very first time, a clutch of lawyers gathered before a judge in a courtroom in California to confer on matters related to Prosper's alleged violation of securities laws. Following oral presentation on Complex Litigation Status of the case (not the case itself, mind you) the court said the group needs to talk more about this and reserved the afternoon of July 9 to continue their Case Management Conference.

And there you have it, day one with a sitting judge, a court clerk, and a court reporter, and everything. The great wheels of justice uttered their first small squeak and moved ever so slightly off dead center in matters versus Prosper.

Demurrer (updated edit)
During the conference Prosper Board of Directors members Breyer, Cheng and Kagle got a ruling on Demurrer of Outside Directors. A May 7 hearing on their plea had been usurped by other courthouse traffic. They said arms-length oversight of an entity such as Prosper does not make them culpable for the company's trafficking in unregistered securities. Judge Kramer ruled in favor of the Directors and effectively dismissed Messrs. Breyer, Cheng and Kagle from the list of named defendants. The ruling was tentative.

The judge's decision came despite these directors are hardly disinterested third parties according to Prosper's S-1A registration at the US Securities and Exchange Commission. "Beneficial Ownership" on page 90 shows James W. Breyer directly owns convertible preferred stock in Prosper Marketplace and is deemed to indirectly own or control other interest that gives him a 17.6% stake in the company. Robert C. Kagle holds 16.7% of the company via Benchmark Capital Partners LP and LLC where he is managing member, although as such, he disclaims beneficial ownership except that it is his money. Of the three, Lawrence W. Cheng is the only one with no vested interest in the outcome of pending litigation.

According to sources inside the legal community Judge Richard Kramer's action is not unusual. It was consistent with expectations based on historical practices, the liability risk of outside directors is very low. The list of named defendants has been pared down to just Prosper Marketplace itself and these four main operatives:
 - Christian A. Larsen, age 47, Chief Executive Officer, President and Director (14% ownership stake)
 - Edward A. Giedgowd, age 52, Corporate Secretary, Chief Compliance Officer and General Counsel (1% ownership stake)
 - Kirk T. Inglis, age 42, Chief Financial Officer (less than 1% ownership stake)
 - Douglas Neal Fuller, age 49, Vice President of Operations (no ownership stake)

John B. Witchel holds a 13% interest in Prosper (with Jessica W. Wheeler, JNTN) but is not named in the suit. Mr. Witchel resigned as executive Secretary and Chief Technology Officer of the company on July 31, 2008.

Prosper's prediction on things to come
Although we remain optimistic, we could end up on the hook for nearly a hundred million dollars. "The Company has assessed the contingent liability related to prior sales of loans on the platform and has determined that the occurrence of the contingency is reasonably possible but not probable and that contingent liability ranges from $0 in the event the company prevails to a maximum of $97.2 million which represents the remaining outstanding principal amount of $66.8 million and loans charged off of  $30.4 million as of March 31, 2009." (SEC S-1A; 01 JUN 2009; pg F-41)

[Investar]

Class Action Lawsuit
Jun-18-2009 10:30am — hearing on Motion For An Order Granting Class Certification — postponed indefinitely

This key hearing did not take place. Class action status is not granted. Prosper Marketplace is not listed as a "New Case" on The Rosen Law Firm website, nor is it posted to their roster of ongoing class action cases. I inquired of Green Welling, the California law firm representing disenfranchised lenders in consort with The Rosen Law Firm of New York.

The judge's decision to 'sustain' the Demurrer of Prosper's Outside Directors impaired the "1st Amended Complaint" by the lenders of February 26, 2009. "Technically, there was a valid complaint on file after the demurrer was sustained," a spokesperson from Green-Welling said. "However, only the company—and not the individual officers—remained as a Defendant. Because we believe the individual officers are subject to liability, we needed to file a Second Amended Complaint." Green Welling explained, "...the Court sustained Defendants' Demurrer to the operative complaint but granted us leave to amend. We will file an amended complaint shortly that addresses the Court's concerns and are confident the case will proceed." The lenders were instructed to file their amended complaint by July 10 according to Minutes of the June 11 proceedings that became available on the Court's website.

According to Minutes of the June 11 hearing, other matters addressed were "what's next." The Court and counsel discussed "discovery, protective orders, mediation, the amended complaint, a possible demurrer, and motion for class certification." The judge pointed to items both parties should give thought to and, off the record, provided advice on his department's policies and procedures. The two sides were instructed to get together and agree on a 'Protective Order' and submit it to him before the next meeting. He made himself available to assist them via telephone conference on this and other matters.

Otherwise, the court suggested "everything else be put on hold until the next conference." The judge did say 'discovery' could continue once the two sides had their 'protective' ducks in a row. Green Welling advised me they had already accomplished "discovery of Defendants and certain non-affiliated third parties and expect that process to continue after the filing of the amended complaint."

Next (and only) scheduled court date now:
• Case Management Conference - Thursday, July 9, 2009 at 3:00 PM (Pacific)

definition PROTECTIVE ORDER:  You may know "Protective Order" from domestic disputes where one party is prohibited from approaching another, often within a specified distance. But more broadly, it is an order that prevents the disclosure of sensitive information except to certain individuals under certain conditions. It is commonly used to protect a party or witness from unreasonable or invasive discovery requests (for example, harassing questions asked/taken in a deposition). Courts are concerned pre-trial "Discovery" is properly regulated for two reasons: one is to facilitate the search for truth and promote justice; the other is to protect the legitimate privacy interests of the litigants and third parties.

definition DISCOVERY: In law, "Discovery" is the pre-trial phase in a lawsuit in which each party requests documents and other evidence from various parties. They compel the production of evidence by using a subpoena or other devices, such as requests for production of documents, and depositions. In other words, discovery includes (1) interrogatories; (2) motions or requests for production of documents; (3) requests for admissions; and (4) depositions.

« author edit  This post is updated to correct inaccuracies, thanks to clarification from Green Welling. I am a lay-person doing my best to interpret a complex profession and its somewhat arcane procedures. I correct myself when I discover (or am told) I have erred. »

[Investar]

Prosper Files Proposal Number 5 with the
Securities and Exchange Commission, Friday, June 26, 2009

This package includes the usual S-1/A filing document with Section 10 exhibits we've seen each time such as EX 10.1 Borrower Agreement and EX 10.2 Lender Agreement. But for the the first time we find Section 5 and Section 8 exhibits attached. Prosper's legal counsel, Morrison & Foerster renders a "Securities Opinion" in EX 5.1 and a "Tax Opinion" in EX 8.1. Also new is EX 25.1 Statement of Eligibility Under Trustee Indenture Act of 1939. In it, Wells Fargo Bank National Association reports their financial condition, hence their appropriateness and ability to act as Prosper's banker.

For the first time we find Prosper's legal and financial arms adorning a package offered to the SEC with their own ribbons and bows. Lawyers in particular hesitate to bind their name to these sorts of things unless they are convinced there can be no argument against their blessing. The fact that Morrison & Foerster christened this offering with their own declaratives bodes well for its success.

Also of note, this filing comes within 30 days of the last one. Based on LendingClub, this is the rapid response interval long awaited. It strongly suggests the SEC and Prosper came to terms last round and this is the 'clean-up' filing. If so, entries such as Form EFFECT or Form CORRESP will appear in Prosper's SEC document file shortly. There may even be a big announcement from Prosper itself?   

file of all Prosper documents at the SEC (here)

[Investar]

Prosper and NASAA Hammer Out
Settlement Plan to Pay State Penalties

Prosper and the North American Securities Administrators Association (NASAA) finalized a template consent order, the plan under which Prosper will pay penalties to the 50 individual states, up to an aggregate $1 million, as they agreed to do last December when the NASAA consortium of state regulators declared Prosper's Promissory Notes were unregistered securities. The payment plan was finalized on April 21.

NASAA is recommending that the states adopt the framework. The $1 million penalty would be allocated among the states where Prosper conducts business, based on the promissory note volume in each state. However, Prosper will not be required to pay the portion alloted to a state if it does not participate in the group settlement. Each state and the District of Columbia is free to seek its own recourse independently. There is no deadline for the states to decide whether to enforce the consent order.

A majority of the states are expected to join the enforcement action. A working group of regulators from approximately 20 states had already formed to seek a collaborative approach in 2008 before NASAA took action. As of March 31, 2009 Prosper had accrued approximately $506,000 in connection with this contingent liability. They arrived at the figure using standard accounting practice (SFAS No 5). They looked at the nature of the settlement agreement, whether the states had given any indication of their concern regarding the sale of the promissory notes, and the probability of states opting out of the settlement to pursue their own litigation. Prosper said penalties will be paid promptly after a state reviews and agrees to the language of the consent order.

source: Prosper SEC form S-1/A 06/26/09 page F-40

[Investar]

SLIGHTLY OFF TOPIC
How Busy Is The SEC These Days?

Setting aside special problems like Bernie Madoff and the rest of the ivory towered corruption, countless hours preparing to sit and then sitting in front of hearing panels in the Senate and House answering the same questions over and over, and time required to satisfy heightened interaction with the Treasury Dept and the FDIC, just how busy is the United States Securities and Exchange Commission (SEC) these days?

Each new entity seeking registration with the SEC is assigned a "CIK" number.
Here's a small handful of 'em P2P lenders have been following:
1409970 = LendingClub - filed first Form S-1 document on 06-20-2008
1416265 = Prosper
1431328 = National Retail Fund
1463888 = IOU Central
1465988 = Loanio - filed first Form S-1 document on 06-22-2009

In just 12 short months the SEC has seen 56,000 new entities clamoring for their attention. That's an average of 215 new filers each and every working day. Mercy. No wonder Bernie Madoff remained 'at large' so long. The SEC has been aptly described as not very good at preventative medicine, much better at forensic exercises, rounding up the culprits after the fact and counting the corpses. I think I understand why.

Consider 56,000 filers at 200 to 300 pages per filing. That's a stack of paperwork amounting to 8 piles, each one higher than the Washington Monument — and someone has to read all that. Now consider that Prosper alone has submitted 5 times. Now you're looking at something like enough Washington Monument sized stacks to fill the grand stone obelisk — and that's only the stuff from new filers they have to read and respond to!

[deskguy]

 investar, i noticed the p2p site IOU Central in your list in your last post. never heard of it before but signed up for email notices. do you know anything about it? its website is a little short of information beyond the boilerplate. 

 deskguy

[Investar]

investar, i noticed the p2p site IOU Central in your list ... do you know anything about it?

I started the thread "IOU Central seeks operation in USA" on the board "Peer-to-Peer Lending" and posted what I have.

[go4reward]

Even California has IOU now.

[Beerbud1]

Prosper has added a Colorado associate to the case:

http://www.mofo.com/attorneys/12824/biography.html

[Investar]

Prosper Files Yet Another S-1/A
6th Amended Registration Proposal Is Submitted To SEC

Prosper filed yet another amended Form S-1 with the United States Securities and Exchange Commission on Thursday, July 9, 2009. This 6th attempt to gain approval for a securitized consumer loan marketplace followed just 12 days (8 working days) after the 5th set of documents arrived at the SEC on June 26.

 

[Investar]

Class Action Lawsuit
Prosper Wins A Temporary Reprieve
Second Session in Court July 9, 2009

ORDER SUSTAINING DEMURRER TO FIRST AMENDED COMPLAINT
During the courtroom session on July 9, 2009, the judge officially handed down his ruling on the Demurrer by Prosper's Outside Directors. Judge Richard Kramer found the lenders failed to "state facts sufficient to constitute a cause of action" in two of their six allegations. There was insufficient evidence each lender should receive up to $10,000 in addition to recovery of their actual losses (item 3 of 6 in the complaint). There was insufficient evidence Prosper's three outside Directors failed due diligence in determining how the Promissory Notes in question should be sold. There was not sufficient evidence the directors failed to exercise reasonable care when they agreed to the structure of the loan sales (item 6 of 6).

Prosper's reprieve is short lived at best. In the order, the judge granted the lenders "leave to amend and file a Second Amended Complaint" and ordered the document to arrive at his court no later than the next day.

ORDER - STIPULATION AND PROTECTIVE ORDER
Also during the July 9 session, the judge recognized the "Protective Order" drafted by Morrison & Foerster, Prosper's law firm, and ordered the parties to follow that protocol when making interrogatories, motions or requests for production of documents, requests for admissions into evidence, and when taking depositions. Issuing a Protective Order is standard practice as preparation for a case gets underway.

ORDER GRANTING APPLICATION OF NICOLE K. SERFOSS
Nicole Serfoss of Morrison & Foerster's Colorado office was recognized as "Pro Hac Vice" member of Prosper's legal team. Ms. Serfoss was brought on board to assist, ostensibly to broaden the experience of the 2005 law school graduate who, in 2006, joined the firm's Litigation Department. The court extracted a $250 application fee for the privilege. She joins Paul Friedman, Prosper's lead attorney in the matter. 

2ND AMENDED COMPLAINT FILED
Late the next day, July 10, lender's filed their Second Ammended Complaint For The Violation of California and Federal Securities Laws. Among four others, Prosper Directors Breyer, Cheng and Kagle were named. An attorney at Green-Welling confirmed, "Plaintiffs filed a Second Amended Complaint, again naming the individual officers. As such, the individual officers are back 'in' the case." No date was set to hear the new complaint.

The judge's decision to 'sustain' the Demurrer of Prosper's Outside Directors impaired the "1st Amended Complaint" by the lenders of February 26, 2009. "Technically, there was a valid complaint on file after the demurrer was sustained," the spokesperson from Green-Welling explained. "However, only the company—and not the individual officers—remained as a Defendant. Because we believe the individual officers are subject to liability, we needed to file a Second Amended Complaint." A scan of the three Orders of July 9 and the new lender's Complaint of July 10 are available on the court's website.


definition PRO HAC VICE:  Latin for "for this occasion" or "for this event" (literally, "for this turn"). The phrase usually refers to an out-of-state lawyer who has been granted special permission to participate in a particular case, even though the lawyer is not licensed to practice in the state or jurisdiction where the case is being tried.

definition PROTECTIVE ORDER:  You may know "Protective Order" from domestic disputes where one party is prohibited from approaching another, often within a specified distance. But more broadly, it is an order that prevents the disclosure of sensitive information except to certain individuals under certain conditions. It is commonly used to protect a party or witness from unreasonable or invasive discovery requests (for example, harassing questions asked/taken in a deposition).

definition DEPOSITION:  An important tool used in pretrial discovery where one party questions the other party or a witness in the case. Often conducted in an attorney's office, a deposition requires that all questions be answered under oath and be recorded by a court reporter, who creates a transcript. The transcript becomes available for court proceedings. The deponent (interviewee) usually has an attorney present during the process.

definition PROOF OF SERVICE (routinely "POS"):  If you visited the court's website you've seen lots of these. It means there's been a paper shuffle among parties involved. "Proof Of Service" is a secondary document filed with the court swearing that a primary document has been served to affected parties in the lawsuit. It names that document and the parties served. A majority of items filed with the court will be accompanied by a POS.

[NewHorizon]

Prosper Files Yet Another S-1/A
6th Amended Registration Proposal Is Submitted To SEC

Prosper filed yet another amended Form S-1 with the United States Securities and Exchange Commission on Thursday, July 9, 2009. This 6th attempt to gain approval for a securitized consumer loan marketplace followed just 12 days (8 working days) after the 5th set of documents arrived at the SEC on June 26.

 

I don't know how often the SEC needs to deal with 6 tries (and counting?) at an S-1/A from a given organization, but they have both my sympathy and admiration.

Separately, Mr. Larsen's name appears a few times on the "SIGNATURE" page.  Nice to see that the last of these, which was misspelled "Larson", is corrected in version 6.