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Messages - ira01

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Investors - P / Re: Class action lawsuit
« on: January 03, 2013, 11:12:17 PM »
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.

Care to share the basis of THAT opinion?  Because the remedy for a securities registration violation is that the buyer gets to rescind any or all purchases of the unregistered securities, which means that Prosper would be forced to repurchase all such loans, for their full face value plus interest since their unlawful sale.  In my opinion, buyers would get to pick and choose which loans to tender back to Prosper, since the sale of an unregistered security is a voidable, but not void, transaction.  That means in essence that Prosper would have to repurchase all defaulted loans (or at least all those that defaulted before roughly the breakeven point), since obviously lenders would choose not to keep those, plus pay interest at the statutory rate on all those loans (for the many years since their origination).  That is likely to be $50 million, give or take. 

Even if the judge were to rule that lenders had to make an "all or nothing" rescission decision (which I believe would be wrong), the performance of P1 loans was so bad that there are still a ton of P1 lenders with negative returns, who would obviously choose rescission.  That would still cost Prosper a boatload of money, though not the $50 million.  I haven't calculated exactly how much, but IIRC the average P1 lender lost money on Prosper, so more than half of P1 lenders would choose rescission.  So maybe the damages in that case would "only" be $25 million, give or take.  But that is still probably more than enough to bankrupt Prosper. 

So I am very interested to hear your explanation for your belief that "Prosper will stay in business regardless of what happens with the lawsuit"  -- because that seems to stretch the bounds of logic.  But maybe I am missing something that you can fill me in on. 

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Investors - P / Re: Class action lawsuit
« on: June 09, 2012, 11:15:57 PM »
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.

Please believe me that I am not trying to turn this into an "anti-Prosper tirade" here.  I am interested in your opinion, and the basis for it. 

While you are correct that I and others on prospers.org are not really "objective" about Prosper, I find it interesting and amusing that you cite "opinions expressed from inside of Prosper" (i.e., its employees, officers and/or directors) as a basis of your opinion that the class action has no merit.  You don't think that Prosper insiders are even more lacking in "objectivity" about Prosper and the merits of the class action than I and other burned P1 lenders?  I stand to gain little more than "chump change" from a successful class action; but the Prosper insiders stand to lose their jobs (and in the case of the individual defendants, like Chris Larsen, potentially a big chunk of their personal assets).  So who lacks objectivity?

And who "outside" of Prosper did you base your opinion regarding the validity (or lack thereof) of the class action on?  You don't have to name names, but how about the basis for their opinion?  You admit that you didn't seek independent legal advice on this matter.  So I'm curious what types of sources you are basing your opinion on, given that the objective facts seem to support the validity of the class action?

Yes, the VC have continued to invest in Prosper, but in my personal opinion, that may have more to do with not wanting to throw in the towel on their already substantial past investments, than any legitimate assessment of the prospects of the class action. 

So other than the assertions of highly-self-interested Prosper insiders, and the continued investment of the VC, what else do you base your opinion on?  Because here's what's on the other side of the equation:

1)  Class counsel obviously believes strongly enough in the merits of the class action to invest millions of dollars of their time (and a non-trivial amount of expenses) on a contingency basis.  If Prosper wins, class counsel gets nothing.  Lawyers don't like to work for free, so contingency lawyers carefully evaluate their prospects of winning and collecting (and the likely size of their win).

2)  The California Court of Appeal rejected the attempt of several individual defendants to get themselves out of this case, finding that the case against them plead in the operative complaint was meritorious.

3)  The trial court granted the Plainitffs' motion to certify the case as a class action, over Prosper's objections.

4)  The only two lawyers of whom I am aware that regularly participate at prospers.org (regardless of any lack of "objectivity") certainly don't believe that the class action "has very little merit."

5)  The class action's main claim is that Prosper violated federal securities laws by unlawfully selling unregistered securities -- the notes that Prosper 1.0 sold to its "lenders," which needed to be registered as securities.  Apparently you believe that those notes were not securities, and thus did not have to be registered (since there is no dispute that Prosper sold them to P1 "lenders," and that they were not, in fact, registered).  However, the SEC has ALREADY DETERMINED that the notes were indeed securities that needed to be registered, and that Prosper did indeed violate federal securities laws by selling them without registration.  Indeed, the SEC ordered Prosper to "cease and desist" such activities immediately, which Prosper did (with a minor and short-lived attempt to circumvent the SEC by briefly re-opening under state law, before realizing the foolishness of that course of action, shutting down again, and repurchasing all P2 notes issued).  Needless to say, the SEC is the government agency tasked by Congress with overseeing the federal securities laws, and as such, it is the foremost expert in the reach and application of those laws.  So while you believe that the class action has no merit, the SEC has already determined exactly the opposite.  Now you are perfectly free to argue that the SEC is wrong, but I hope you can see that you really have to make a persuasive case (which you haven't yet) for deciding that the SEC is wrong and you are right.  Have you even read the SEC's cease and desist order to Prosper?  You can read the whole thing here -- http://www.sec.gov/litigation/admin/2008/33-8984.pdf

And here is the "good part":

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Thus, the Prosper notes are securities under Reves because: (i) Prosper lenders are motivated by an expected return on their funds; (ii) the Prosper loans are offered to the general public; (iii) a reasonable investor would likely expect that the Prosper loans are investments; and (iv) there is no alternate regulatory scheme that reduces the risks to investors presented by the platform.

As a result of the conduct described above, Prosper violated Section 5(a) of the Securities Act, which states that unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.

Also as a result of the conduct described above, Prosper violated Section 5(c) of the Securities Act, which states that it shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security.

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Investors - P / Re: Class action lawsuit
« on: June 07, 2012, 10:48:07 PM »
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.

Who told you that -- Chris Larsen?  I am a lawyer, and I think the class action has a whole lot of merit.  And there is at least one other California lawyer who posts regularly at www.Prospers.org, and she also thinks the class action has a lot of merit. 

Are you aware that several of the individual defendants in the class action sought to have themselves dismissed from the lawsuit for a variety of legal reasons that generally amounted to "the lawsuit has no merit (at least as to some of the individual defendants)" -- and that the California Court of Appeal ruled that they could NOT be dismissed on those grounds, and that they had to remain as defendants in the case?  You can read the Court of Appeal's decision at http://www.courts.ca.gov/opinions/archive/A127660.PDF

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In the unlikely event it will succeed I really don't think it will have much material impact on Prosper.

Are you kidding?  If the class action goes to trial and the class wins, the judgment may well be around $50,000,000, perhaps more.  That is easily large enough to most likely bankrupt Prosper.  You don't consider that "material"?

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Prosper stopped performing debt sales after December 2007 in direct violation of their legal agreements with lenders.

Yes, that is absolutely correct.  The Lender Registration Agreement then in effect obligated Prosper to hold regular sales of loans that were 4+months late to Junk Debt Buyers.  The LRA gave Prosper no discretion with that, and no legal authority to choose to hold these seriously delinquent loans.  Then around March 2008, Prosper decided that a JDB offer to purchase the portfolio of 4+month late loans would not be honored, because of supposedly "unacceptable conditions" that the JDB attached to its offer.  Prosper refused to tell its lenders (who were the legal owners of the loans in question, and for whose sole benefit Prosper had a legal obligation to act) what those supposedly "unacceptable conditions" were, and simply refused to sell the loans, thereby breaching its legal obligations to its lenders. 

Many lenders believed that the "unacceptable condition" was a provision that would have required Prosper to repurchase any loans from the JDB that turned out to have been procured through identity-fraud.  Prosper (though not its lenders) would have been dead-set against such a pushback provision, because under the terms of Prosper's so-called "100% identity-theft guarantee" (which Prosper also generally ignored), it would have been obligated to then repurchase all those loans from its lenders, at 100% of principal -- which could have been quite costly to it.  So, it appeared, that Prosper put its own self-interest ahead of the interests of (and Prosper's duties to) its lenders.

For some historical perspective, see:
http://www.prospers.org/forum/prosper_debt_sale_crashes_and_burns-t7527.30.html
http://www.prospers.org/forum/shouldnt_we_have_had_an_update_from_doug_fuller_by_now-t7466.0.html

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