Have you folks seen the class action lawsuit against Prosper? I got the letter in the mail on yesterday (6/1/2012). I'm not interested in participating in this lawsuit, but I'm wondering how this lawsuit could impact investors?
---------------------------------------------------------------------------------------------------------------------------------------------------------
Update from peter on 7/19/13:
This lawsuit has now been settled. You can read more about it here:
http://www.lendacademy.com/class-action-lawsuit-against-prosper-has-been-settled/
Haven't heard anything about it. According to the document, what are they being sued for?
I have been following this lawsuit closely - for those interested you can read about it here:
http://www.prosperclassaction.com/Basically, the suit claims that Prosper sold unregistered securities in the period before SEC registration and that was in violation of federal laws and they are asking for Prosper to reimburse them for all their investments in that time. I have never covered this lawsuit simply because I have been told by several people that it has very little merit and will not succeed. I am not a lawyer but on the advice of others I have never covered this lawsuit on my blog.
In the unlikely event it will succeed I really don't think it will have much material impact on Prosper. They have pretty committed VC backers who have continued to invest knowing full well this lawsuit was pending.
Peter, your blog is so important to the P2P lending world that I questioned the credibility of the letter since it was not mentioned on your blog. Soon as I got the letter I went straight to your blog to read about it. Thanks for explaining why it wasn't covered. The letter I received is almost identical to the info provided in the link. Thanks Peter.
The Class Action lawsuit against Prosper applies to all repackaged loans sold by Prosper to individual "Lenders" (loan purchasers) before the SEC (Federal Government) shut down Prosper's original platform in 2008 for illegally selling unregistered securities.
All decisions by the Court thus far have been in favor of the claimants and against Prosper. All indications point towards there being a very good possibility that the court will decide against Prosper when all is said and done.
If the Class Action lawsuit succeeds against Prosper, the likely result will be that all Lenders from Prosper's original platform will be given the opportunity to force Prosper to repurchase any and all delinquent loans during that time period. This is a total amount of approximately
$46million according to Prosper's own figures.
That is $46million that Prosper does not have. Such a ruling would likely bankrupt Prosper.
As can be seen in Prosper's quarterly SEC regulatory filings:
http://www.sec.gov/Archives/edgar/data/1416265/000141626512000295/p10q3d31d2012.htmProsper only had approximately $15million in venture capital money available to it as of the end of March, 2012 and were losing $1.6million of that every single month.
Prosper has already spent over $2million (and possibly close to $3million) in legal costs trying to defend against the class action lawsuit and have not had a single decision in their favor.
Also, a Prosper bankruptcy isn't the only possible downside to "Lenders" on Prosper's current SEC Registered platform. Prosper's current "Lenders" are lending money to Prosper, not to Prosper's Borrowers. Prosper's "Lenders" are unsecured creditors of Prosper and have no direct relationship with the actual loans to borrowers themselves. The actual loans to the borrowers are assets held solely by Prosper themselves. As such, it is possible (would have to be determined by the courts) and possibly likely that all assets of Prosper (potentially including these loans) would be liquidated as part of a bankruptcy proceeding in order to pay the $46million in restitution to the Class Action lawsuit.
This could potentially cause all of Prosper's current "Lenders" to lose all money that they currently have invested with Prosper.
I don't want this to descend into an anti-Prosper tirade that is commonplace on Prospers.org. I try and look at it objectively. And while I respect the views of ira01 and Xenon481 plus many others with similar views on Prospers.org they cannot be considered objective.
They have their opinion and I have mine. I have not sought independent legal advice on this lawsuit but I have listened to opinions expressed from both inside and outside of Prosper as well as those expressed on Prospers.org. The fact is that Prosper has continued to raise money successfully despite this lawsuit pending now for several years. That tells me that the VC backers in Prosper don't consider this lawsuit to be a material threat to their investment. If they did Prosper would have lost their support a long time ago.
I am not a member of this class (I started investing on Prosper is 2010) but if I was a member I would not be exempting myself. I hope the issue comes to a head soon so we can all put this behind us.
I am afraid you are not going to get what you seek from me. All I will say is this. I have spoken to other investors, some with significant sums in both LC and Prosper about their opinion on this lawsuit. They have said they didn't think the lawsuit would be successful. But I didn't probe any further so I cannot tell you the basis of their opinion.
I have had more communication but nothing I can share publicly I am afraid. Suffice it to say I am still investing in Prosper.
I don't share any details on the lawsuit because there is little be gained from saying something and not being able to back it up with any details. As is demonstrated from our conversation.
Wasn't asking for details, though. Sorry I wasn't clearer than I was on that in my most recent post.
So I think my Qs remain open.
Or at the VERY least: isn't it reasonable for the casual observer to assume, based on public facts, that ordering the class notices to go out affects the odds of a successful lawsuit?
Absolutely. Having it go this far is a setback for Prosper and its investors. My point is that even if the lawsuit is successful and the judge rules in the plaintiffs favor there is no guarantee that the amount of damages will be anywhere near the amount referenced in the lawsuit. I believe that Prosper will stay in business regardless of what happens with the lawsuit and so I continue to invest.
ira01 - are you a plaintiff in the lawsuit?
Nevermind. I read through your other posts and realized that you have some long-term beef with Peter that won't be resolved here anyways... carry on.
"So maybe the damages in that case would "only" be $25 million"
Well, they could always go to LC and apply for a loan. I'd be willing to pitch in $25 to help the cause.
ira01, I am not a lawyer so I cannot comment on your legal logic. My impression has been gained from conversations about the lawsuit with several different people who have far greater knowledge of this matter than I have. I am not going to give you any more details than that.
Anyway, we will find out more in a couple of weeks.
Prosper's David Silverman - resigned effective 12/20/12.
... Larry Cheng - resigned eff 12/22/12.
... Jeffrey Jacobs - resigned eff 12/17/12.
... James Catlin - resigned eff 12/13/12.
I gather they don't see any silver lining in Prosper's dark clouds.
...the same clouds which persisted over Rajeev V. Date after he left Prosper for the CFPB.
Plus, of course, co-founder Witchel is long gone, co-founder Larsen resigned as Pres. and CEO last March, and James Breyer resigned last June.
At this point, I can't fault anybody who might wonder if your steadfastly confident resources aren't a bit biased.
I am fully aware of the resignations and I know the reasons behind each one but I am not allowed to share that publicly. Suffice it to say I am still steadfastly confident in Prosper's long term prospects. You can call that biased if you like, but we are all entitled to our opinions.
I will be covering this news on the blog probably next week.
According to the Jan 9th Prospectus, David Silverman, Jeff Jacobs and Lawrence Cheng are still listed under the "Management" section, which states, "The following table sets forth information about the Company's executive officers and directors as of the date of this prospectus." It appears they still need to do a little updating to their Prospectus--yes, I actually do read (or rather skim through) the Prospectus from time to time.
I think a bigger issue (than who has resigned) is the cash flow issue at Prosper. Unless they secure another round of financing (to add to the over $70 million so far), Prosper won't have enough cash to continue operations regardless of the lawsuit outcome. According to the last 10Q, the Prosper burned through $4 million in three months; and they only had about $4 million cash on hand at the end of September. That is a more important issue at the moment.
Roy S..............One would not be going far out on a limb to suggest that the next round of financing is all but secured & that the announcement of such may be imminent.
NoGoodDeed - you seem to be very plugged-in to the drama around Prosper. What do you think is the most likely outcome for the company? Does it survive or does it go under this year?
My opinion is rather meaningless. But since you flatter me with the question, I'll throw a lengthy reply at you...
1) The trajectory of the lawsuit over the past 4+ years in the plaintiff's favor is unlikely to change. (Peter appears to have confidential sources. But I ask you, if a source keeps himself confidential, does that then make him more reliable??) Prosper will be forced to settle. It'll be painful. Will it kill Prosper? I don't know. The lawsuit has been successful holding the key (deep-pocketed) individuals responsible, and I don't know who will be made to pay what. ira01 seems in a position to have more insight here, maybe.
2) Funded Prosper listings have taken a recent downturn.
http://www.lendacademy.com/forum/index.php?topic=608.03) Employee turnover at the company seems awfully high (and fwiw, nobody from Prosper has been participating in this forum for quite some time now).
4) Cash: Prosper's cash burn rate has
GOT to be a huge concern. And although they had an insurance policy to protect (somewhat?) against lawsuits, it's been fully paid and I think Prosper used up much of that money to launch a promotion, IIRC. Meanwhile, I don't know when VC monies will dry up. There may or may not be another round or two. But there'll need to come a point soon where Prosper will need to present something brand new - if not completely re-invent itself - if they are to keep VCs supplied with hopium.
For recent Prosper lenders, meanwhile, they're doing fine ROI-wise. But looking at these issues Prosper execs are facing there at Sutter Street, we see the company is basically on life support.
Is Prosper likely to go under
this year? Historically, the VC's willingness to continue to throw money at Prosper always has me befuddled. So I don't feel comfortable giving a definite "yes". But perhaps the answer will prove to be more complicated than "yes" or "no". Rather, we may find that Prosper still exists 2 or 3 years from now, but in a form that has little resemblance to what it is today.
The next question, I suppose, is: should Prosper lenders worry? I'm not sure that they do. The concern that borrower's repayments would go to creditors (instead of lenders) should Prosper declare bankruptcy seems to have been recently addressed with their new remote bankruptcy vehicle, Prosper Funding, LLC. There remain older concerns, however. Off the top of my head: 1) Little transparency on the collections front, and Prosper not filing any claim if a borrower declares bankruptcy and 2) the lender agreements commit lenders to any modifications of the agreement whether the lenders sign the modded agreements or not. As of this writing, a lender seems to be preparing to take the issue of Prosper's lack of performing its fiduciary duties to Small Claims court.
Thanks for the lengthy response. I not as bearish as you, but it is good to understand the risks.
NoGoodDeed,
Thanks for your detailed opinion. As to your first question, I intend to be covering this story next week, I am still waiting for a couple more pieces of information and I will be publish an article on the blog.
Once again I am not going to comment on the lawsuit other than this. My understanding is that the judge has deferred making a final decision in the case at this time.
I continue to believe that Prosper will not only survive this year, but they will have a great year.
Let me also explain why I am bullish on Prosper's long term prospects regardless of the lawsuit. Lending Club has shown that this industry has tremendous potential. It is highly likely that within five years the industry will be issuing multiple billions of dollars in loans every MONTH. Within ten years it could easily be tens of billions of dollars a month. Prosper is the clearly entrenched number two player in this market. I believe this is why their investors are patient and keep pouring money in. They have known about the lawsuit for four years and yet they continue to invest. I believe this is because they see a long run play where a new multi-billion dollar industry is being born and they want to be a part of it.
And for the record, I have never hidden the fact that I make money from referring people to Prosper as well as Lending Club. I also never pretend to be completely impartial. I am bullish on p2p lending and I want to see a thriving industry. Do I put a positive spin on things? That is my nature so I can certainly be accused of that. But I never try to mislead anybody nor do I withhold information that I think would be important for my readers to know.
I think the bottom line for most of us here regarding Prosper is that we don't want to lose our money. Personally, I could care less if Prosper lives or dies as long as my investments continue to be serviced as intended, i.e. people are able to make loan payments and I benefit by earning interest. In this regard, I take some pleasure in NoGoodDeed's comments today because even (s)he admits that Prosper Funding LLC has probably taken care of the issue. (And, in my opinion, in a worst-case scenario Lending Club wouldn't want the reputation of P2P lending to take a hit so they would have an interest in acquiring Prosper to save the loans and gain the customer base.)
At any rate, I think NoGoodDeed's biggest mistake is to think we care about Prosper beyond its impact on our own money. The rants don't strike me as being concerned with people's money, they just seem like rants, and I'm not sure why it's worth the time if (s)he doesn't also have something to gain from the conversation. I think there are a lot of crappy companies out there but I don't go looking for web forums just to point it out to others. So, in conclusion, I'm inclined to ignore anything NoGoodDeed says unless hearing about what (s)he has to gain from the conversation.
NoGoodDeed -- I wasn't questioning your character, I was questioning your motivation. We all have some motivation to participate in the forum. I made mine very clear -- to make money (and hopefully not lose it!). Peter's motivations are pretty clear because he transparently writes about them (he promotes the industry, he's an investor, he's optimistic about all of it). Understanding this helps me evaluate what he's saying. So that's what I was asking for from you -- where are you coming from? What's your stake in all this? You're clearly passionate about it and I'd like to know why. Are you involved in the lawsuit, are you a burned investor, or are you just a truth-teller with an interest in the industry? Give us some context to help evaluate your information.
When it comes down to it I don't really care about Prosper or Lend Academy's pro-P2P bias or your bias. You're probably a great guy. But I just care about my investments in the context of this forum.
I actually value NoGoodDeeds presence here in the forum. I always like to hear views contrary to my own, so I hopefully don't get caught with blinders on.
I must say that I have also found value in NoGoodDeeds posts and enjoy reading them if they conflict or not with my opinion- Either way it's stimulating and encouraged deeper thought and evaluation which I believe we can all be reminded of the importance of questions one's own opinion.
Here are some updated facts in the Class Action Lawsuit against Prosper:
- Prosper filed a "Motion For Summary Judgement" with the court, requesting that the case be immediately ruled in Prosper's favor without going to trial.
- The judge ruled to deny Prosper's motion, stating that Prosper's arguments for summary judgement in their favor were not valid for a number of reasons including the following:
So, the lawsuit has been settled for $10 million with $2 million due immediately. I was wrong in thinking it would be less than that and others were wrong thinking it would be more.
http://www.lendacademy.com/class-action-lawsuit-against-prosper-has-been-settled/Xenon/IRA01/NoGoodDeed - anyone want to comment?
Hmmm. How about this: Lending Club will do an IPO next year...