The Prosper "Quiet" Diary - millstones and milestones

[Investar]

Class Action Law Suit
Suitors Dress in a Fresh Suit for their Courtroom Appearance 

On February 26, 2009 the disenfranchised lenders filed a "1st Amended Complaint" against Prosper et al. The lead actor from Piedmont, Alabama who had asked to be excused in January was not named this time. No new actors replaced him as a lead plaintiff. The amended class action is brought by Christian Hellum of Los Angeles County, California and David Booth of Pompano Beach, Florida. At this writing, the new document has not been scanned to the court's virtual archive.

Respecting decorum and personal privacy, the Prosper 'names' of the suitors will not be disclosed in open forum. Suffice it to say LendingStats calculates that the gentleman from California suffers a late-default-charge-off ratio of 21% on $18,000 invested. He does maintain a positive return on investment (ROI) of 5.5%. The plaintiff from Florida suffers a 47% failure ratio on $77,000 invested and suffers a –4.9% ROI. The Alabama gentleman who rested has a 5.9% ROI on $30,000 with a failure ratio below 11%.  

In addition to seeking remedy from Prosper Marketplace itself, and from "John and Jane Does 1 thru 100," the seven individually named defendants are:
 - Christian A. Larsen, age 47, Chief Executive Officer, President and Director
 - Edward A. Giedgowd, age 52, Corporate Secretary, Chief Compliance Officer and General Counsel
 - Kirk T. Inglis, age 42, Chief Financial Officer
 - Douglas Neal Fuller, age 49, Vice President of Operations
 - James W. Breyer, age 47, Director
 - Lawrence W. Cheng, age 33, Director
 - Robert C. Kagle, age 52, Director
Other principals not named are:
 - S. Catherine Muriel, age 54, Chief Marketing Officer
 - Christopher Denend, age 41, Chief Technology Officer
 - Rajeev Date, age 37, Director
 - Paul M. Hazen, age 67, Director (had been named but was released)

Activity dates entered on the court calendar are unchanged. The two are; March 18 to hear Prosper's Demurrer and April 17 to entertain Complex Litigation.

edit to update the 1st Amended Complaint has been scanned in.
Go to the court's Register of Actions, Case CGC-08-482329 —> click "View" on the Feb 26th entry

[deskguy]

 i've never read the suit. are these guys claiming it is prosper's fault that they made such poor loan choices?

 deskguy

[Beerbud1]

Hopefully reading this won't melt your brain (originally posted at prospers.org)

I point you to events before the October 2008 shutdown of Prosper. This is not part of legal action since the shutdown, but explains why unrest developed inside the Prosper lending community over time.

Frustrated by Prosper’s non-responsiveness to its lenders, several lenders retained legal counsel to advise Prosper of their concerns. Their letter to Prosper outlined those concerns in detail and included proposals to resolve them. They invited Prosper to provide a written response. Prosper did not respond.

Read the complete letter and a dozen pages of discussion here
Pro$pers.org - Prosper Lenders Retain Legal Counsel

Scanned copy of the actual document here


EXCERPTS FROM THE LETTER

June 3, 2008
Edward A. Giedgowd, Esq.
Chief Compliance Officer and General Counsel
PROSPER MARKETPLACE, INC.
111 Sutter St., 22nd Floor
San Francisco, CA 94104-4540

Dear Mr. Giedgowd:

I represent a group of Prosper lenders who are frustrated about the platform and its nonresponsiveness to lender concerns. This letter summarizes these lenders’ major concerns, and proposals for addressing them. This letter is sent with the hope that these issues will be resolved quickly and informally.


I.    Failure to Provide Accurate Information About Risks Presented By Certain Locations or Types of Loans

It has become apparent to lenders that Prosper has permitted loans to originate in states where it cannot or will not make meaningful efforts to collect on late loans ...  Prosper has not informed lenders that the difference in state laws, or in Prosper’s own collection practices, may impact Prosper’s fiduciary duty to collect lenders’ funds in the event of delinquency, or that sales of those loans upon default may result in lower prices ... 

II.    Poor Collections Results

Lenders have been expressing concern about the extremely poor collection performance for more than a year ... Adding to that concern is the lack of any information – specific or general – about the status of collections on particular loans. My clients have not been furnished with any information about efforts to collect on their late loans, including whether the collection agency has even successfully contacted the delinquent borrowers ...

III.    Failure to Sell Defaulted Loans

My clients are dismayed by the increasingly large portfolio of non performing loans on the platform, and Prosper’s refusal to sell them. [ Your agreement with lenders promises ] Notes that become over 120 days past due are charged off and offered for sale to an unaffiliated debt buyer authorized and willing to purchase consumer loans ... Many lenders have loans that are eight or nine months past due, or more.  The older these loans become, the less they are worth – and the more likely the borrowers are to file for bankruptcy. Prosper controls the timing of the debt sales, and does not appear to be abiding by the terms of the [ contract with lenders] ... Prosper’s failure to hold quarterly debt sales has resulted in clear harm to lenders. 

IV.    Failure to Prosecute “New Agency Test” Lawsuits

Last year, Prosper invited lenders to opt in or out of a series of planned lawsuits against 66 borrowers whose loans were more than four months late. The lenders who opted in to these suits have not been told whether suit has actually been filed on each of the loans. It appears that where suits have been filed, they have not been served, since very few proofs of service have been filed with the courts. It therefore appears that the cases have not been litigated aggressively – or, in most cases, at all.
 
V.    Failure to Protect Lenders’ Interests After A Borrower Claims to Have Declared Bankruptcy

Prosper's fiduciary duty towards its lenders requires that Prosper act in a manner that is most likely to protect the interests of lenders on loans where the borrower has filed or states their intention of filing for bankruptcy.

Prosper [ is ] treating loan 2139 (listing number 23444) as being in bankruptcy for more than a year based solely on the borrower’s claim that she was “going to” file. Prosper did nothing to verify the borrower’s claim, and has not yet sold that loan. The loan continues to show that it is both in collections and in bankruptcy, and the lenders do not know whether it truly is ... [ (other examples are cited) ] ...

These loans highlight the harm caused to lenders by Prosper taking the unsubstantiated word of borrowers ... Prosper [ should ] verify that [ a bankruptcy ] petition has been filed, and [ should ] file all documents needed to protect the interests of the lenders [ and] the lenders’ claims, challenge the dischargeability of any loan obtained fraudulently or too close in time to the bankruptcy filing, and verify that the bankruptcy actually results in a discharge of the Prosper loan.

VI.    Failure to Honor Repurchase Guarantee

Lenders have identified cases of apparent identity theft after loans go late. One example is Listing No.102017, where the borrower represented himself to be a woman who had a credit history extending back 12 years and a six-figure income.  In reality, the borrower was a 22 year old man. Prosper inexplicably refused to honor its identity theft guarantee on this loan ...

Lenders are also concerned by the fact that Prosper has essentially stopped repurchasing loans under its identity theft guarantee. To date, Prosper has repurchased 122 loans. These include the 66 New Agency Test loans and a handful of loans Prosper repurchased due to credit data issues. [ But ] Prosper has repurchased only one loan that originated after August 1, 2007 despite the fact that more than 40% of all Prosper's loans originated after that date. It is extremely unlikely that there has only been one identity theft loan in all that time ...

VII.   Failure to Protect Lenders From Other Instances of Borrower Fraud

Prosper’s fiduciary duty requires Prosper to protect lenders from garden variety fraud, as well.That includes borrowers who take out loans with no intention of repaying them, such as the loan resulting from Listing 71273, which funded after lenders warned Prosper that the borrower had posted his lack of intent to repay the loan as well as admitting that he lied about the purpose of the loan. Not surprisingly, after Prosper permitted this loan to fund, the borrower defaulted. 

letter continues....

[Beerbud1]

EXCERPTS FROM THE LETTER continued....


VIII.   Failure to Provide Accurate Performance Information

Prosper misrepresents the value of lenders’ portfolios, both on each lender’s individual overview page and on its Marketplace Performance page. On the lending overview page, the interest rate is artificially inflated since it does not take into account the lack of interest actually paid on late loans ...

With collections remaining at less than 20%, Prosper must adjust the manner in which it reports account values to lenders. A loan that is four months late is worth significantly less to a lender than one that is two days late. Loans in bankruptcy likely have no value. Despite this, Prosper portrays all loans, regardless of their status, at full face value, including accrued interest and late fees, which substantially overstates the portfolio's real value. Prosper must provide lenders with more accurate loan valuation. 

IX.    Retroactive Changes to Terms of Service, to the Detriment of Lenders

Prosper has repeatedly amended the "Lender Registration Agreement" and terms of service [ without obtaining lenders' consent and, ] until recently, not even notifying lenders of such changes. [We believe ] Prosper has no authority to unilaterally amend any agreement governing the relationship between the parties, particularly in a retroactive fashion.

One change that resulted in significant lender concern was Prosper’s unilateral decision to permit borrowers to obtain second loans without having paid off their first loans ...  Many lenders would not have made loans in the first instance had they known that Prosper might later permit second loans ... [ (examples cited) ].

[ Another change, ] Prosper unilaterally decided to move collections away from Penncro to AmSher, which charges lenders a higher fee. At the time of this switch, Prosper promised that lenders would not be charged more than they would have been had the loans remained at Penncro. After it was pointed out ... lenders were actually being charged the higher AmSher fees, Prosper stated that this was due to a "coding error," and that Prosper would reimburse lenders the over charges ... no such reimbursement has yet occurred ...


Prosper unquestionably has a fiduciary duty to lenders, which it has breached in many respects. The foregoing are areas where breaches have clearly and repeatedly occurred, and which must promptly be addressed to avoid litigation. I look forward to your written response, with the specific steps with which Prosper will address these concerns, by June 24, 2008.

Signature 

cc: John B. Witchel
Christian A. Larsen
Kirk T. Inglis
James W. Breyer
Lawrence W. Cheng
Paul M. Hazen



**this post has been edited by Investar for clarity, context, and to update links - all with Beerbud's permission and with Investar's thanks for background information so helpful to those unfamiliar

[go4reward]

moderator edit message subject to staff review

[aurel57]

Investar, thanks for your hard work compiling this information. I do hate to see Indiana is on LC "out" list. I may have to set up a mail box out of State if it comes down to that and see if it will work?

[Beerbud1]

moderator edit message subject to staff review

[Investar]

Class Action Law Suit
Litigants Duck April Showers, Look Beyond May Flowers

MAR-16-2009: TRIAL MOTION ON MAR-18-2009 IN DEPT. 304, DEMURRER TO COMPLAINT OFF CALENDAR PER REQUEST OF THE MOVING PARTY. NOT REPORTED. CLERK: JIROQUE.

Prosper's first day in court didn't happen. Again. Pushed off-calendar by request of the moving party. The "moving party" is the one who makes a motion before the court. This date was to hear the "Demurer" - which Prosper brought - so I believe we have a classic stall tactic on Prosper's part.

Decorum allows either party to delay at least once on any matter for no good cause whatsoever although the excuse given is often six pages long. And this is at every step of the way, no less. I suspect Prosper sees little hope their Demurer can succeed but are using it as a procedural delay. This may demonstrate why many jurisdictions have done away with the Demurrer process altogether. Seems reasonable to figure Prosper would report for the "Complex Litigation" hearing on April 17 (date at the behest of the lenders) and politely remind the judge their Demurrer hasn't been heard yet and that would be that. Nothing accomplished. No forward movement. Two delays for the price of one.

MAR-18-2009: COMPLEX LITIGATION CASE MANAGEMENT CONFERENCE, PREVIOUSLY SET FOR APR-17-2009, IS CONTINUED AT REQUEST OF THE PARTIES. NOTICE BY PLAINTIFFS' COUNSEL. NOT REPORTED. CLERK JOSE RIOS-MERIDA, D-304.

But then on the heels of Prosper's delay, the lenders asked the court to postpone the April 17th 'main event step one' as well. Motion for "Complex Litigation" had been brought by the disenfranchised lenders without objection by Prosper. In fact, Prosper paid a $7,000 fee to the court related to the request. The court now hopes to hear "Complex Litigation" argument on April 30, the new date. No new date for the Demurer yet.

Demurer: (previous discussion here)
Complex Litigation: (previous discussion here)

MAR-23-2009: AMENDED NOTICE OF MOTION FOR AN ORDER GRANTING CLASS CERTIFICATION, APPOINTING CLASS REPRESENTATIVES AND CLASS COUNSEL, AND SO ON, FILED BY THE PLAINTIFFS

This new document relates to the origination of the law suit where the disenfranchised lenders first announced their intention to seek class action on behalf of all lenders who wish to join them. This was the first motion set aside back on January 7, 2009. At this point I guess we can call it the 'main event step two'. The court has set the morning of June 18 to hear this Amended Motion For An Order Granting Class Certification. If it happens, the action begun November of 2008 will finally be underway.

Recapping then, motions the court is presently entertaining are:
1) Certification of the law suit as a Class Action
2) Formal recognition of the law suit as a "complex litigation" case
3) The Prosper Demurrer - current status is "off calendar-off calendar" and it is unclear whether Prosper will re-file this motion
•) Hearing of the actual "Securities/Investment Complaint" of November 26, 2008 as amended Feb 26, 2009 is not yet scheduled

edited for clarity (I hope) and to update developments

[Beerbud1]

Exactly.....I believe they are also hoping to hear good news from the "SEC" on their secondary market application. I beleive they think that if their application for a secondary market is approved that would diffuse the argument of the "cease and desist" order. IMHO....

[Investar]

  ... I believe they are also hoping to hear good news from the "SEC" ... that if their application for a secondary market is approved that would diffuse the argument of the "cease and desist" order. IMHO....

Approval by the SEC would certainly put Prosper in a more fashionable light, but it doesn't change the fact the SEC caught them wearing sneakers to the fancy dress ball. My understanding is that the operation of the primary platform is at question here. By approving a new set of clothes for Prosper, the SEC underscores the fact Prosper's old attire was inappropriate. But I understand what you are saying. Some of the "old" Prosper will be swept into the "new" Prosper and approved. I suppose that could diffuse some of the side arguments in court but I don't see it materially affecting the main point of contention.

[Investar]

Class Action Law Suit
Anticipating The MAIN 'Main Event'

I have read the FIRST AMENDED COMPLAINT FOR VIOLATION OF THE CALIFORNIA AND FEDERAL SECURITIES LAWS and DEMAND FOR JURY TRIAL filed by the Plaintiffs (disenfranchised lenders) on Feb 26, 2009. I found the document pretty straightforward, not as difficult as I had anticipated. Here are the main talking points:

What will be argued
Noting an individual lender may have experienced this problem or that along the way, the law suit declares these are the Prosper transgressions that all lenders have suffered. "The Code" referred to here is the California and federal securities laws that apply. The court must decide:

   (a) Whether Prosper violated the Code by offering and selling securities under the Code.
   (b) Whether Prosper violated the Code by acting as a broker-dealer in the securities transactions.
   (c) Whether the Individual Defendants and Does were controlling persons of Prosper as defined by the Securities Act.
   (d) Whether Prosper violated the Securities Act by selling unregistered securities.
   (e) Whether the Individual Defendants and Does were controlling persons of Prosper as defined by the Securities Act
   (f) The nature and extent of relief to which Plaintiffs and the Class are entitled under the Code and the securities.

Provided the suit is successful and you elected to join the "Class" ....

What you will do
Give back all loans you made from the period January 1, 2006 to October 14, 2008. All loans — no pick and choose, all or none. You will surrender your Lender Promissory Notes for the the paid, the currently performing, the late, delinquent, otherwise faulty, defaulted and the charged-off.

What you will get
Your money back plus "interest at the legal rate, or damages" and "such other further relief as the Court may deem just and proper." What damages, the interest rate to be paid, how loans with "paid" and "current" status will interplay in the formula, and so on, are not specifically addressed — will be resolved as the case progresses.

What you might get
In addition to restoration of a lender's original investment, Treble Damages are sought. On page 4 of the scanned document, "...each Plaintiff and Class Member is individually entitled to treble damages not to exceed $10,000..." and on page 24, Prosper is "liable to each Plaintiff and Class member for treble damages not to exceed $10,000 per each violation and reasonable attorney fees and costs, in addition to..." their money back.

Treble damages are defined as a statute that permits a court to triple the amount of the actual (or compensatory) damages to be awarded, generally in order to punish the losing party for willful conduct. Treble damages are a multiple of, and not an addition to, actual damages. Thus, where a person received an award of $100 for an injury, a court applying treble damages would raise the award to $300.

SHOULD I JOIN THE LAW SUIT ?
There is plenty of time to decide. So far, all we know is that the lawyers fees could consume about 1/3 of whatever recovery you stand to receive. If recovery is compensatory only, many will be better off staying the course. That is, if more than 66% of your portfolio dollars are "current" you may end up behind the eight ball if you join the actors.

But if Treble Damages are awarded in addition to the compensatory amount, the picture changes completely. And in addition, attorney's fees may and could be awarded by the judge over and above the class settlement. Participating lenders could be made 100% whole, plus a stipend for their tribulation and discomforts.

The most important thing right now is to confirm Prosper has your most current email and snail mail info on file so you are not overlooked. At the appropriate time (months from now) you will receive a document detailing the Class Action and requiring your decision within a specific time frame. Not to worry, there will be plenty of discussion here on SCP Forum and elsewhere at that time to help you decide!

[Investar]

Prosper SEC Registration
3rd Amended S-1 Filing

Prosper filed a 3rd Amended S1 Securities Registration Statement with the Securities and Exchange Commission on April 14, 2009. It contained revisions and clarifications asked by and for the SEC's approval. The document was the culmination of dialog between the parties after the 2nd Prosper filing January 16, 2009.

DATED APRIL 14, 2009
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

1  Form S-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
2  Exhibit: BORROWER PAYMENT DEPENDENT NOTES
3  Exhibit: BORROWER REGISTRATION AGREEMENT
4  Exhibit: LENDER REGISTRATION AGREEMENT
5  Exhibit: HOSTING SERVICES AGREEMENT
6  Exhibit: PROSPER-FOLIOfn SERVICES AGREEMENT
7  Exhibit: SOFTWARE LICENSE AGREEMENT

Link to above documents on SEC/EDGAR website:
http://www.sec.gov/Archives/edgar/data/1416265/000110465909024058/0001104659-09-024058-index.htm   

Consensus said this one looks to be real close to going effective. Prosper's 2008 financial statements are included in this update. For the first time their secondary market partner, FOLIOfn has been identified. Certain state specific restrictions have been included, indicating there has also been discussion with at least some of the 50 states, each of whom will render a final 'thumbs-up' or 'thumbs-down' decision on Prosper following SEC approval.

At this point the dialog between the SEC and Prosper remains a private matter. After the fact (following approval) the SEC will post their side of the story to EDGAR. You can get an idea of the kind of thing going behind the scenes by viewing similar posts related to LendingClub's approval. Click any of the HTML entries here and view the "filename1.pdf" letters to LendingClub.

EDGAR is "Electronic Data Gathering, Analysis, and Retrieval" system, the searchable collection of materials submitted by every domestic public company that reports to the SEC. Link to Prosper's full document file:
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001416265

[Investar]

Class Action Law Suit
Prosper Answers, Directors Protest,
Court Adds a Hearing Date

On April 15, 2009 Prosper, et al, provided their written answers to the suitor's 1st Amended Complaint for Violations of Securities Laws presented February 26, 2009. The answers were provided by the corporation and defendants Larson, Giedgowd, Fuller and Inglis. In the 4 page document, the defendants denied "generally each and every allegation of the Complaint" and further claimed no one had suffered any harm "by reason of any act, omission, or conduct on the part of the Defendants." Then they curtly denied each specific allegation. 

At the same time, in a separate set of documents, three of Prosper's board members complained charges against them were irrelevant. Directors James Breyer, Lawrence Cheng and Robert Kagle filed a new Demurrer. The original demurrer discussed here had been brought by the company officers and subsequently withdrawn. The new "Outside Director's Notice of Demurrer" included an "Appendix of Non-California Authorities in Support" apparently on behalf of the three. The court immediately set a date to hear whether these directors are appropriately included in the proceedings. Two other directors are non-party to the suit now.

Recapping then, the court is presently expecting to entertain:
1) Formal recognition of the law suit as a "complex litigation" case on April 30.
2) Demurrer by the Outside Directors on May 7.
3) Certification of the law suit as a Class Action on June 18.
‡) The MAIN EVENT, hearing the actual Complaint for Violations of Securities Laws of November 26, 2008 as amended Feb 26, 2009, remains unscheduled.

[Investar]

... the defendants denied "generally each and every allegation of the Complaint" and further claimed no one had suffered any harm "by reason of any act, omission, or conduct on the part of the Defendants."

Amongst the legal mumbo-jumbo such as "doctrine of estoppel, latches, and pari delicto" as a defense, Prosper denies that the loan notes are securities and claims they are/were exempt from registration. This is despite we have a Cease and Desist Order from the SEC for the very reason THEY WERE securities and Prosper was trafficking in them illegally. I found that just a tad amusing. They are also attempting to exclude at least some of the borrowers who absconded with the cash by claiming it's too late now — Statue of Limitations under 15 USC § 77m of the Corporate Code, you know.....

This may be a good one for COURT TV after all.

[Investar]

 Prosper SEC Registration
 3rd Amended S-1 Filing
 Prosper filed a 3rd Amended S1 Securities Registration Statement with the Securities and Exchange Commission on April 14, 2009.

Borrowers will be AA, A, B, C and D only

Prosper will discontinue service to borrowers in Credit Grades E and HR. "E" borrowers had credit scores 599-560, "HR" borrowers scored 559-520. Thanks goes to P2P Lending News for pointing this out. Per page 23 of the S-1a:

Q: Who are our borrowers?

A: "... a borrower must have a credit score of at least 640 (before October 16, 2008, the minimum was 520) in order to post a listing on our platform, except that the minimum is 600 for borrower members who (1) had previously obtained a Prosper loan and paid off the loan in full, or (2) are seeking a second loan and otherwise eligible for a second loan. In the future, Prosper may allow borrowers with a credit score below 640 to post listings and obtain Prosper borrower as long as bids are made primarily from friends and family."

To clarify, new borrowers will be AA, A, B and C only. Prosper will discontinue service to Credit Grades E and HR altogether. Only previous customers in Grade D will be serviced ("D" borrowers scored 600-639). They do leave themselves a little wiggle room for fostering the "Friends and Family" protocol that was introduced shortly before the shut-down.