Author Topic: Class action lawsuit  (Read 38145 times)

Pebbles

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Class action lawsuit
« on: June 02, 2012, 10:26:09 AM »
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?

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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/
« Last Edit: July 19, 2013, 03:52:43 PM by Peter »

DiligentiaLLC

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Re: Class action lawsuit
« Reply #1 on: June 04, 2012, 02:58:59 PM »
Haven't heard anything about it.  According to the document, what are they being sued for?

Peter

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Re: Class action lawsuit
« Reply #2 on: June 05, 2012, 04:56:59 PM »
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.
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Pebbles

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Re: Class action lawsuit
« Reply #3 on: June 06, 2012, 08:51:40 AM »
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.
« Last Edit: June 06, 2012, 09:04:16 AM by Pebbles »

Xenon481

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Re: Class action lawsuit
« Reply #4 on: June 07, 2012, 09:27:31 PM »
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.htm

Prosper 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.
« Last Edit: June 07, 2012, 09:45:22 PM by Xenon481 »
The Motley Fool says to Avoid Prosper Like The Plague.

Read about historical Prosper actions/problems at Prospers.org

ira01

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Re: Class action lawsuit
« Reply #5 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

Quote
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"?

NoGoodDeed

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Re: Class action lawsuit
« Reply #6 on: June 08, 2012, 03:22:40 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 .....

Hi.  I just now registered and hit the "Notify" button because I'm interested in the answer to ira01's question.
Disclaimer: Peter announced that I'm from a group with a vested interest in seeing Prosper fail. 
Also, Peter makes money referring people to Prosper.

Peter

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Re: Class action lawsuit
« Reply #7 on: June 09, 2012, 08:04:42 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. 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.
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Xenon481

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Re: Class action lawsuit
« Reply #8 on: June 09, 2012, 10:26:32 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 was very careful in my post not state any opinions. Everything that I said was pure fact as can be ascertained from the court website and Prosper's own statements in filings with the SEC.

The facts that I posted are purely objective because they are facts.

It is a fact that if Prosper loses this case, the liability that the class seeks is on the order of approximately $46million which Prosper's own filings with the SEC show that they do not have available to them. In fact, a liability of that size is more than half of all of the money given to Prosper by the VC firms in total in the almost 7 years of Prosper's existence.

This fact is in direct contradiction to your opinion:

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

The Motley Fool says to Avoid Prosper Like The Plague.

Read about historical Prosper actions/problems at Prospers.org

ira01

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Re: Class action lawsuit
« Reply #9 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":

Quote
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.

NoGoodDeed

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Re: Class action lawsuit
« Reply #10 on: June 09, 2012, 11:41:14 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 .....

Hi.  I just now registered and hit the "Notify" button because I'm interested in the answer to ira01's question.

Hey, guys, there's still this.
Disclaimer: Peter announced that I'm from a group with a vested interest in seeing Prosper fail. 
Also, Peter makes money referring people to Prosper.

Peter

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Re: Class action lawsuit
« Reply #11 on: June 09, 2012, 11:57:15 PM »
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.
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NoGoodDeed

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Re: Class action lawsuit
« Reply #12 on: June 10, 2012, 12:00:31 AM »
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.

Any sense of whether or not they thought we'd get to the point of Class notifications going out? 
Disclaimer: Peter announced that I'm from a group with a vested interest in seeing Prosper fail. 
Also, Peter makes money referring people to Prosper.

Peter

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Re: Class action lawsuit
« Reply #13 on: June 10, 2012, 05:26:17 PM »
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.

Any sense of whether or not they thought we'd get to the point of Class notifications going out?

That is a fair question. I am going to do some digging this week and see if I can find out some more. I can only ever get off the record comments from these people but I will see if there is anything I can share and report back.
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NoGoodDeed

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Re: Class action lawsuit
« Reply #14 on: June 12, 2012, 07:27:31 AM »
That is a fair question...

With that reply, we know that the opinion ("...I have been told by several people that it has very little merit and will not succeed") you've relayed to your readership predates the recent progress in the lawsuit.

And with the recent progress, it's reasonable to assume that there's a good possibility these "significant" investors have dutifully adjusted their assessments of Prosper and the shelf life of the lawsuit-will-not-succeed assessment may have expired with last month's court ordered Class notifications.
« Last Edit: June 12, 2012, 07:31:47 AM by NoGoodDeed »
Disclaimer: Peter announced that I'm from a group with a vested interest in seeing Prosper fail. 
Also, Peter makes money referring people to Prosper.