Class Action Lawsuit Against Prosper Has Been Settled

Big news out of Prosper today. The class action lawsuit that was brought against Prosper and its directors back in 2008 has been settled. The news was announced in an 8-K just released this morning. The terms of the settlement was $10 million paid in installments over three years. Here is the exact wording from the 8-K.

In exchange for a full release of the Claims as to all class members against all defendants, and subject to Court approval, PMI agreed to pay settlement consideration in the total amount of $10 million according to the following schedule: (i) $2 million within 10 days of entry of an order by the Court granting preliminary approval of the settlement (“Preliminary Approval”); (ii) $2 million on the one-year anniversary of Preliminary Approval; (iii) $3 million on the two-year anniversary of Preliminary Approval; and (iv) $3 million on the three-year anniversary of Preliminary Approval.

While this is a major financial hit to Prosper it is still very good news. They have the cash to easily pay the first installment of this settlement. And it removes all the uncertainty about the suit that has been hanging over Prosper for several years. And if there is one thing investors dislike it is uncertainty.

The claimants were seeking over $47 million so the $10 million settlement is clearly a win for Prosper. In all of my off the record discussions with people over the last two years about this case this $10 million number was at the high end of the expected settlement amount. So, in that way it could be interpreted as a win for the claimants as well.

When the 8-K was filed this morning I reached out to Prosper president Aaron Vermut for an official comment. Here is what he said:

When we [the new management team] came on board with Prosper in January we had several items on our to-do list. One of these was a settlement of the class action lawsuit. Today, we are very pleased to check that item off our list. This settlement serves our members and shareholders and puts this matter to rest. We can now focus all our energy on continuing to grow Prosper and responding to the needs of our investors and borrowers.

I have never written much about this class action lawsuit mainly because no one would ever go on the record for me to give me an official comment. I didn’t want to publish an article that was purely conjecture and I am certainly no legal expert. And the impression I had was that the suit would never materially impact the viability of Prosper as a company. It seems that impression was correct.

If you want to read more about the suit there is a detailed thread on my forum that includes a wide variety of non-legal opinions. The official lawsuit page is here. But as Aaron Vermut said, we can now put this matter behind us. I expect we will see even more rapid growth from Prosper now as investors who have been waiting on the sidelines for this matter to be settled come on board. Onward and upward.

Comments

  1. Dan B says

    Gee, I wonder what the people at prospers.org will “talk” about now. :) My guess is that they will continue (at least for a while) as if nothing has happened. :)

    • says

      I have thought the same thing. They have certainly been the most vocal when it comes to this lawsuit. Just checked and there was no mention of it yet as of right now.

  2. says

    Today’s headline is fantastic news, not just for Prosper’s team (congrats guys!) but for p2p lending as a whole. In my opinion, this recent turn of events is even better than another month of record issued loans.

    And congrats to you Peter for having predicted this outcome. Onward and upward indeed.

    • says

      Thanks Simon. I agree this is big news for the industry. I hope Lending Club is happy at this result as well because it will certainly help propel the growth of the industry.

      And I must admit there were times when I had my doubts we would reach this outcome so I am very pleased that my prediction has come true albeit at a slightly higher number than I expected.

  3. Hippo387 says

    Thanks for the reporting Peter, this is huge news. For some people, this was a significant reason to be wary of Prosper. Now I think they can be evaluated on a more even footing with Lending Club.

  4. Ira01 says

    Peter, didn’t you claim here earlier that the lawsuit had little or no merit? A $10 million settlement shows it had a tremendous amount of merit, just as I said all along.

    • Dan B says

      Ira01………..Then again wasn’t it you who suggested that Prosper’s liability was way over $40 million, or was it $45 million? This settlement spread out over 3 years sounds like nothing more than a couple of slaps on the wrist.

      Frankly I’m surprised that you’re here right now. I would have thought that you’d be busy trying to figure out a palatable way of breaking it to the populace over at .org that Prosper isn’t going to out of business anytime soon…………….like many over there had suggested. Or was that really just mass wishful thinking? :)

    • says

      Ira, Whether or not the case had merit is still undetermined obviously because it didn’t go to trial. We can continue to argue that point or we can just move on as the Prosper management have chosen to do.

      You are right that I did share on the forum that I thought the case had no merit (based on what others told me) and whether or not that was true will now never be known. But I have always maintained that the end result of this case would have no material impact on Prosper.

  5. Xraider says

    Thanks for posting. This is great news for all of us who were ripped off by Prosper in its early days.

    Even if I get one cent on the dollar on my losses, it will significantly improve my returns. Hmmmmm. I wonder if Prosper will show that in our ROIs?

    In all seriousness, Prosper’s conduct was extremely culpable. It’s lucky it was only sued on the technicality that it didn’t properly treat the notes as securities. The systemic problems at Prosper ran very, very deep. Anyone ever think about why Prosper made such significant changes to its platform — and management — over the last five years?

    Now I have to root for Prosper’s financial viability until the settlement is paid off. I think I can handle that.

    And Dan, thanks for your concern. We at .org have managed to do just fine without obsessing over the status of the class action.

    • says

      As someone who was not around in the early days of Prosper I cannot comment on that time from my own experience. But it has been pretty clear that there were some serious missteps taken during Prosper 1.0.

      • Alisande says

        I was one of the first group of Prosper investors, and therefore I read all this defense of them with utter astonishment. It certainly must be a very different company than it was when I joined. As soon as all my loans were paid or not (two with AA ratings made one payment and then disappeared), I bailed. If I can get even a few dollars from this settlement, I’ll be extremely happy. It’s funny to see people so late to the party minimize the damage that was done to many of the early adopters of P2P and brush off the lawsuit as if it were a slap on the wrist. Clearly they settled to avoid a larger payout.

        • Litos says

          I was with Prosper from the beginning Alisande. I made a few dozen investments, and had several go sour.

          I knew perfectly well that there was a risk my investments would go south – these are unsecured loans after all…. You win some, you lose some. And, the risk was not hidden by Prosper.

          I first learned of this lawsuit when I received a letter saying I am part of the settlement. I am annoyed by this waste of the courts’ time. I am irked that the original complainants are profiting from this lawsuit. And, I am irked that the lawyers will be taking home a hefty fee for this.

          The whole thing is silly and a bit shameful.

  6. Ira01 says

    @Dan B — I said that Prosper’s potential liability was around $40M. To get 25% of the maximum theoretical liability in settlement is an excellent result, and shows that the lawsuit was spot on.

    @Peter — nice spin, though completely unconvincing. Prosper wouldn’t be forking over $10M if it didn’t know that it was likely it would lose if the case were litigated. With a maximum liability of around $40M, and say a more likely amount of damages if it lost at trial of say $20M (and a possible smaller judgment as well), a $10M settlement says that Prosper put its likelihood of losing at trial at around 50%. Hardly the “meritless” case that Prosper (and you) have been claiming. And as to materiality, I think $10M is clearly a material number to Prosper, considering that it has never even come close to turning a profit.

    • says

      Whether or not this is a material number is subjective. It is certainly a bit more than a speeding ticket but at least it does not come close to bankrupting Prosper that you maintained it would on several occasions.

      Here is my final word on this. Prosper is a very different company from the 1.0 version that was the focus of this lawsuit. And p2p lending is different. Given Lending Club’s lead it is clear that the p2p lending industry is a growth trajectory that will see it issuing billions of dollars in loans this year. Prosper is now a strong number two player who is also experiencing rapid growth. This lawsuit will shortly fade into memory and be just a side note in the history of Prosper.

  7. Xraider says

    Of course, the fact that an SEC filing was made in the first place is proof positive that Prosper deems this material.

  8. Ira01 says

    @Peter — I never said a settlement would bankrupt Prosper. Indeed, such a statement would be nonsensical, since the idea of a settlement is to get paid. What I said is that a judgment would likely BK Prosper, which was and is a true statement. That is one of the reasons that the class would accept a settlement of $10M. Nevertheless, a $10M settlement is so far from a “speeding ticket” that your obvious bias appears to be clouding your judgment. If I recall correctly from Prosper’s last quarterly report, it had about $19M cash on hand. A $10M settlement is more than 50% of that — that is a huge amount of money from Prosper’s perspective. And while I realize that the money is to be paid over time, considering that Prosper is losing money every quarter (and that if I remember correctly, each quarterly loss is generally bigger than the preceding one), that doesn’t really help Prosper much.

    • says

      You are right. What you have said it the past is that the lawsuit would likely bankrupt Prosper – I don’t recall you ever mentioning a settlement.

      Look, I have never hidden the fact that I am a cheerleader for Prosper and for p2p lending in general. I have also never claimed to be an objective journalist and as numerous readers have pointed out I do see things through rose colored glasses. I don’t apologize for that, it is simply my style.

      One more point: I get the impression that you still think that the Prosper of today is just like the Prosper of 2008. Yet they have a new executive team, new board, new business model, new growth trajectory, vastly more loan volume and I don’t think there is a single senior manager at Prosper today that was employed there in 2008. You can continue to maintain your negative opinions of the company, of course, but in 2013 you are criticizing an entirely different organization.

  9. Stuff says

    Wait, so the class action suit was so trivial, meaningless, and without merit to the point that Mr. Renton deemed it not worthy of a single blog post during the 5+ years since it was filed – and repeatedly mocked it on his forum. Yet, the rumor of a settlement in this allegedly trivial nuisance suit is now being billed by the same Mr. Renton as “big news” and the most significant development in months, one which will blow open the doors to Prosper’s prosperous future?

    How does this compute?

    • says

      Fair points. There probably should have been a post on the blog about the lawsuit. But as I said above I struggled with how to cover this story intelligently when I have zero legal experience and could get no one to comment on the record for me.

      The lawsuit was pending before I started this blog and remained pending during the entire time I have run the blog. There were certainly developments in the past two and a half years, that is for sure, but none that indicated a conclusive outcome was imminent.

      I am ok with taking criticism for this, my main excuse is that it was a difficult topic for me to cover.

  10. Stuff says

    Mr. Renton. Thank you for your response.

    I am basically okay with your answer, but note also that you have previously suggested you had numerous off-the record conversations with Prosper executives on this topic, so you clearly had access to information about the “nuisance suit” which you now refer to as a lingering “dark cloud.” Further, it appears you are frequently willing to discuss other matters where you are privy primarily to off-the-record information – and willing to speculate on sensitive matters. Just this week, you publicly speculated about a LendingClub IPO. Is this just wild speculation on your part – or based on off-the-record insider information?

  11. Hippo387 says

    Stuff, Xraider, Ira01 — you all are arguing technicalities but missing the main issue for people interested in P2P lending. No matter what one’s previous perception of Prosper 1.0 or the lawsuit, it’s over. For lenders and borrowers in Prosper 2.0, that’s good news because it removes uncertainty.

    Despite your criticism of his reporting, Peter has been gracious in allowing you to keep making the same points (over and over) here and on the forum. He deserves credit for that.

  12. Ira01 says

    @Peter — Your comments about how Prosper today has a new Board and management team are certainly correct, and are a welcome change (although a way-too-long-delayed one). However, it appears that no matter how much such things change, things still remain the same there. For example, it appears that Prosper still can’t perform its core accounting and reporting functions accurately — it had to re-issue 2012 1099-B’s early this year, after numerous lenders reported they were full of errors. http://www.prospers.org/forum/prosper_sending_out_incorrect_2012_1099bs-t29009.0.html It’s AQI Rules have misfired. http://www.prospers.org/forum/prosper_automated_quick_invest_rules_misfiring-t28986.0.html It continues its efforts to hide as much information as possible, rather than being transparent. http://www.prospers.org/forum/prosper_removes_list_of_bidslenders_from_loan_request_page-t29194.0.html It continued to mess up making payments on the loans it failed to file BK claims on. http://www.prospers.org/forum/bankruptcy_update-t22912.0.html And as recently as last month, it continues to be unable to properly service loans and to fix such errors through ordinary customer service channels, as opposed to having to send multiple emails to the executive team. http://www.prospers.org/forum/help_prosper_didnt_take_payment_now_charge_late_fees_sending_collection-t29635.0.html

    • says

      Ira, Rather than deal with each one of these issues in turn let me say this. Prosper is far from perfect, but the new management team is executing well and making improvements that will get Prosper on a strong financial footing. This is still a relatively new space and many of these issues you mention apply at Lending Club as well.

  13. Ira01 says

    @hippo — I do give Peter credit for not blocking or erasing critical posts here, and to responding to posts about his past erroneous claims with good cheer.

  14. Shawn says

    Peter,

    Having been extremely busy lately, I haven’t checked the blog much lately and when I do I ghost and don’t contribute anymore, but I feel the need to jump on this one real quick. While I don’t think you let these other guys bother you (as you shouldn’t), I just want to say thanks for the post and well done on handling the issue (covering while avoiding speculation, etc) and still maintaining the bigger picture regarding Prosper and P2P lending as a whole.

    I think you are correct about the settlement that it can be seen as a victory for both sides. Prosper gets rid of it and the claimants (which based on when I entered Prosper would include me) get a higher amount than some projections. I don’t think a settlement can ever speak to the merits of the case and usually just means it’s beneficial to both sides and hence why it’s a settlement not a judgment. The reasons Prosper may have paid more probably include saving further legal costs and removing that burden and not necessarily what they thought of the merits, though saving face (in form of NDA) is usually part of a settlement.

    Either way, even though I got burned in Prosper 1.0, I’m glad I have the same perspective as you in that you can’t dwell on the past.. those negative returns are in the past and I re-entered (even with hesitation at first) and am now making good money well above and beyond what I lost. It’s those that are too hurt by losses and don’t put their money at risk again that keep losses and never gain, and I’m glad I haven’t. Also glad that even with mistakes, Prosper blazed the trail so that others (including their successors!) could learn and improve. Very rarely is the first company in an industry/innovation the one to succeed but what they start is so much more important.

    So anyway, ignore the naysayers (as you, I, and many others do), and thanks again!

    ~Shawn
    Prosper lender “shawnww2″

    • says

      Hi Shawn, Good to hear from you again, it has been a while. The dissenters do not bother me at all, I am happy to have a healthy debate. I know many 1.0 investors never came back but as you say, they have missed out on earning great returns in 2.0. Loans issued by Prosper in 2009 and 2010, in particular, have performed extraordinarily well. So, people who came back for more, as you did, have been well rewarded to giving Prosper another try.

  15. CA-Lender says

    Wow, nice comments, from both sides of the coin (ie Prosper 1.0 investors and Prosper 2.0 investors).

    In those famous words of Rodney King “Can we all just get along”…and move on to more productive topics?

  16. Bluestem says

    Doesn’t matter which side won, I will never loan even a penny on Prosper again. They never lost money I did, but they made money from me and a lot of other people out there

    • says

      Yes Bluestem, there are a lot of early investors in the same boat as you. Many people lost money. While I certainly understand your decision to never lend money again I can tell you that Prosper is a very different company now than it was in the early days. Now, most well diversified investors are making healthy returns.

  17. Willy05 says

    With an early start, over time I invested over $40,000 in Prosper loans with a net loss of about $2,100. The bid model was defective in that lenders bid too low for the relative risk. Prosper’s due diligence was defective as well. I’ll get back a bit over half of my loss with the lawsuit settlements. This is the only class action I have ever been involved in that resulted in a reasonable recovery. (Yes, legal fees are always too high.) The initial settlement payment was received in August, 2014.

    I currently invest using Lending Club. I have a net return of over 8% to date. I also purchased some of the stock at the IPO. That the stock price is heading back towards the IPO price reflects the realization that, tho much improved, due diligence is still not up to the task. The databases developed should allow for better identification of those at high risk of default. For those on the outside, a 5% loss rate can equate to 1/3 of the income so a nominal 15% return becomes 8% net. In more adverse times these rates could greatly implode further. A further sign of problems is that so many defaults incur in the first year of a loan – this suggests intent, failure to disclose all liabilities and possible fraud. For lending Club or other P2P companies to really succeed they need to work aggressively to analyse defaults and lower the gap between gross and net returns.

    • says

      Willy, I can tell you that in my conversations at both Lending Club and Prosper they are very, very focused on detecting fraud. They have very sophisticated systems in place but it is certainly not perfect and some people fall through the cracks. Most people who intend to defraud do so without making even one payment and the percentage of those borrowers is thankfully low.

      • Willy05 says

        Thanx Peter. I believe the current models are based primarily on traditional self reporting and credit scores. Both P and LC have accumulated enough data at this point to better identify those less likely to meet their obligations. Its not enough to increase the lending rate. They should take additional protective steps as obtain income verification and require co-signers in as many as a third of loan requests. By analysis I’m referring to more sophisticated statistical analytical methods than those currently in use.

        Success would lie in reducing the gap over time between the nominal and actual return. This could lead to lower nominal rates but higher actual return to lenders. The changes recently made in LC rates went slightly the wrong way

        Donna, since you didn’t receive payment there’s a problem with your claim. You need to contact Prosper or the Claims administrator.

  18. Donna says

    ANy word on payment of the claim? I did not opt out but yet have not had any correspondence regarding payment. Can anyone answer where things stand at this time?

    • says

      I am not part of this lawsuit but I have heard from other investors that the first payment was received in the third quarter last year. There should be a second payment coming in Q3 this year.

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