The State of Washington’s Department of Financial Institutions, Securities Division has issued a Consent Order, sanctioning Prosper Marketplace for violating the Securities Act of Washington.

The Securities Division tentatively found that Respondent Prosper Marketplace offered and sold investments in the form of small loans through its website. Approximately 1,860 Washington State residents invested $6,452,422 in these loans. The Securities Division tentatively found that Respondent Prosper Marketplace violated RCW 21.20.010, the anti-fraud provision of the Securities Act of Washington, by failing to disclose material facts of the investment, including details of the company’s business model and the risks of the investment

Respondent Prosper Marketplace waived its right to a hearing and to judicial review of this matter and pay a $36,025 fine.

Finally, Prosper agreed to to cease and desist from violating RCW 21.20.010, the anti-fraud section of the Securities Act of Washington.

The actual document can be read here.

The State of Oregon’s Order to Cease and Desist, assessing civil penalties for the  sale of unregistered securities to Oregon residents can be read here.

According to the document, Oregon residents have financed over 30,000 Prosper loans totaling more than $2.8 million, but Prosper failed to provide lenders with the information typically required of a securities registrant – and failed to inform prospective investors that the securites were not registered.

The State of Oregon ordered Prosper to pay the sum of $15,000 in civil penalties to the General Fund of the State Treasury.

A press release issued by the Department of Consumer and Business Services can be read here.

Text version follows:

For immediate release: June 25, 2009

Lisa Morawski, 503-947-7897

Kevin Anselm, 503-947-7498

State Finalizes Agreement with Prosper Marketplace Over Sales of Unregistered Securities

(Salem) – The Oregon Department of Consumer and Business Services – Oregon’s securities regulator – has signed a final consent order with Prosper Marketplace Inc., a San Francisco-based online “peer-to-peer” lending service, to resolve matters relating to the sale and offer of unregistered securities and the omission of material facts in connection with the offer, sale, or purchase of a security.

Prosper had been subject to a multistate investigation, and the order announced today completes Oregon’s case. The order requires Prosper to pay a fine of $15,000, representing Oregon’s pro-rata share of a $1 million settlement negotiated by a working group of state regulators formed by the North American Securities Administrators Association (NASAA). The working group included representatives from Oregon and Washington.

Under the terms of the settlement, Prosper also agreed to comply with Oregon’s securities registration laws.

“The notes issued by Prosper are securities, but they were not properly registered for sale,” said David Tatman, administrator, administrator of the department’s Division of Finance and Corporate Securities.

Securities sold in Oregon must first be registered with the division; the registration ensures a security is evaluated for financial condition and the validity of the operation. During the investigation of Prosper, the division also found the firm failed to provide investors with necessary information, such as its financial statements.

Prosper – which is licensed in Oregon as a consumer lender – provides a private online lending “marketplace” that allows prospective borrowers and lenders to find one another. Through its Web site, Prosper conducts an electronic auction to fund unsecured promissory notes. The Web site features a list of potential loans, and investors bid against each other to finance the loans. Funds from the lowest bidders are pooled together to fund the loans. Prosper issues notes to those lenders funding the loans and services the notes.

From February 2006 to mid-October 2008, Prosper offered and sold promissory notes with fixed annual interest rates ranging from 7 percent to 36 percent, amortized over a three-year term with equal monthly payments. In mid-October 2008, Prosper stopped issuing new loans and accepting new investors while it sought registration with the U.S. Securities and Exchange Commission and the states. As of September 29, 2008, Prosper’s Web site reported that it had 810,000 members and $175 million in loans funded.

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The Division of Finance and Corporate Securities (DFCS) helps ensure that a wide range of financial products and services are available to Oregonians and protects consumers from financial fraud and abuse. It does that by licensing financial institutions and service providers, regulating the sale of securities in Oregon, investigating complaints and alleged violations of financial-service laws, and providing education and other resources to consumers.

The Department of Consumer and Business Services is Oregon’s largest business regulatory and consumer protection agency. For more information, visit www.dcbs.oregon.gov.

A piece published at OregonLive.com can be accessed here.

http://www.metnet.mt.gov/newslinks/I02B0B953

State Auditor Reaches Agreement with Prosper Marketplace Inc.

Over Sales of Unregistered Securities

(Helena) State Auditor and Commissioner of Securities and Insurance Monica Lindeen today sanctioned a San Francisco company whose unregistered securities schemes defrauded nearly $400,000 from Montana investors.

Lindeen’s office signed a final Consent Agreement and Order with Prosper Marketplace, Inc., a San Francisco-based online “peer-to peer” lending service, to resolve matters relating to unregistered securities and securities fraud.

“My message is clear,” Lindeen said. “If you prey on Montana investors with unregistered securities schemes, or seek to profit from duping unsuspecting Montanans we will find you and we will punish you.”

Prosper has sold 4,479 notes to Montana residents for an aggregate investment of at least $396,510. Lindeen said the notes issued by Prosper are securities, but they were not properly registered for sale. All securities sold in Montana must be registered with the Montana State Auditor’s Office before they can be sold to the public.

During the investigation of Prosper, it was determined that the firm also failed to provide investors with necessary information, such as its financial statements.   

Under terms of the settlement, Prosper agreed not to offer or sell any securities until it is in compliance with Montana’s securities registration laws. The order also requires Prosper to pay a fine of $2,214, representing Montana’s pro-rata share of a $1 million settlement negotiated by a multistate working group of state regulators formed by the North American Securities Administrators Association (NASAA).

Prosper provides a private online lending “marketplace” that allows prospective borrowers and lenders to find one another. Through its website, Prosper conducts an electronic auction to fund unsecured promissory notes. The website features a list of potential loans and investors bid against each other to finance the loans. Funds from the lowest bidders are pooled together to fund the loans. Prosper issues notes to those lenders funding the loans and services that note.

Several states had been investigating Prosper’s activity last year and were considering or preparing enforcement actions. In mid-October 2008, Prosper stopped issuing new loans and accepting new investors while it sought registration with the U.S. Securities and Exchange Commission.

From February 2006 to mid-October 2008, Prosper had offered and sold promissory notes with fixed annual interest rates ranging from 7 percent to 36 percent, amortized over a three-year term with equal monthly payments. As of September 29, 2008, Prosper’s website reported that it had 810,000 members and $175 million in loans funded.

UPDATE: Minutes from the proceedings are available here.

Investar is also tracking developments in the ongoing proceedings against Prosper Marketplace. He adds some color commentary regarding the events of June 11, 2009.

And there you have it, day one with a sitting judge, a court clerk, and a court reporter, and everything. The great wheels of justice uttered their first small squeak and moved ever so slightly off dead center in matters versus Prosper.

The language posted at Prosper reads a bit differently from what was recently emailed to lenders:

Here is the language as it currently reads on Prosper’s site:

We have been overwhelmed by the outcry from potential investors around the country who want to participate in peer-to-peer lending. Thank you for your support and your letters to us.

After much consideration we have decided to voluntarily shut down our operation in order to complete our SEC approval for a nationwide peer-to-peer lending platform. As a result, due to regulatory concerns, and in the interest of working toward getting our registration statement effective as soon as possible, we are discontinuing our California intrastate offering at this time.

Here is what was sent via email to lenders:

We have been overwhelmed by the outcry from potential investors around the country who want to participate in peer-to-peer lending. Therefore, after much consideration we have decided to voluntarily shut down our operation in order to complete our SEC approval for a nationwide peer-to-peer lending platform.

What is the difference, you ask? In one, the alleged “outcry” is linked as the cause for the shutdown. In the other, the alleged “outcry” is a separate clause – and reads more like an admission that the SEC intervened.

So, what happened with the glowing endorsement and the legal go-ahead from the California Department of Corporations?

The Prosper Watchers provide an interesting comment today regarding California’s Commissioner of Corporations Preston DuFauchard and his endorseement of Prosper.

Prosper just issued the statement re-produced below.  After you peel away the PR-puffery and mis-direction, it looks like the SEC didn’t look too kindly on Prosper re-opening prior to completing their review.

We have been overwhelmed by the outcry from potential investors around the country who want to participate in peer-to-peer lending. Therefore, after much consideration we have decided to voluntarily shut down our operation in order to complete our SEC approval for a nationwide peer-to-peer lending platform.

Your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.

As a result of this decision, we will not be accepting new lender or borrower registrations or loans, or new commitments from existing lenders effective immediately. Until this process is complete, we are required to be in a quiet period and will be unable to respond to press, blogger or other inquiries related to our SEC registration process, even though we would like to.

We want to assure you that Prosper is looking forward to being able to offer a transparent, durable and participatory lending institution very soon.

We sincerely apologize for this inconvenience or disappointment our decision may have caused. We want to thank you for your continued support and patience. We look forward to serving the needs of the community in the hopefully not too distant future.

UPDATED: PROSPER SHUT DOWN. (May 9, 2009)

As predicted by the Prosper-Watchers at Prospers.org, Prosper “flipped the bird” at the SEC this morning as they re-launched their site, but only available to California-based lenders.

Prosper was under a “cease & desist” order from the SEC for selling unregistered securities and a self-imposed “quiet period.”

Following a flurry of paper flying back and forth, it’s beginning to look like a scheduled May 7 hearing may actually take place.  Plaintiff’s counsel filed new documents with the court late Friday, but the court’s web site is notoriously slow to scan and post.

Stay tuned.

UPDATE: As of 5:30 pm (Pacific) on Monday, April 27. Prosper remains offline.  Prosper has not provided any new information on their site to indicate when they expect to come back online.

After more than 6 months in “exile,” anticipation ran high on Prospers.org this weekend regarding a massively long planned system outage on the Prosper site.

In an effort to better serve you, we are currently working on system updates and configuration changes to our site. We appreciate your patience during this time, and encourage you to return when these changes are complete.

We expect the site to be down both Saturday (4/25/2009) and Sunday (4/26/2009).

While the site is under maintenance, none of your information will be lost or forgotten. Thank you for your patience.

Regards,
Prosper

The user community appeared to believe Prosper was poised to emerge from their “quiet period” and would resume business, assuming the SEC has blessed Prosper’s filing to go legit.

Late Sunday evening, the following note was added to the maintenance page.

NOTE: The system upgrades are taking longer than we expected. We are working to get the site live as soon as possible.

As of Monday, April 27 at 11:30am (Pacific), the site is still down.

Considering Prosper had more than six months to plan for their re-emergence, it appears that Prosper was indeed more concerned about artificially inflating their Google rankings by pumping out meaningless blogs on online dating and prepping for Super Bowl parties.

Prosper’s inability to stage and deploy system upgrades or changes in a competent, professional and timely manner is disturbing, but, sadly, not surprising.

UPDATED: PROSPER SHUT DOWN. (May 9, 2009)

It has now been six months since Prosper’s self-imposed “quiet period” commenced on October 14, 2008.

Since we have not seen any evidence of the “quiet period” being a condition imposed by any regulatory body, cynics would suggest that the “quiet period” is little more than a mechanism to give Prosper a plausible excuse to sanitize their blog/web site, avoid answering difficult questions and attempt to keep from digging their current hole even deeper by information being disseminated by non-lawyers.

As has been the case for years, the most balanced discussion related to peer-to-peer lending on Prosper takes place at Prospers.org.