DOB: Prosper Marketplace - 2012 Consent Order

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IN THE MATTER OF:
 

PROSPER MARKETPLACE, INC.


  
   

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CONSENT ORDER

No. CO-12-7987-S

I. PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
 
WHEREAS, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking (“Department”), conducted an investigation pursuant to Section 36b-26(a) of the Act into the activities of Prosper Marketplace, Inc. (“PMI”) to determine whether it had violated, was violating or was about to violate any provisions of the Act or Regulations or any order thereunder (“Investigation”);
 
WHEREAS, PMI represented to the Department that it issues notes in series, with each series of notes dependent for payment on payments received on a specific borrower loan described in a listing posted on PMI’s peer-to-peer online credit platform.  All listings on PMI’s platform are posted by individual consumer borrower members of PMI requesting individual consumer loans, which are referred to as “borrower loans”;
 
WHEREAS, on November 8, 2007, PMI filed an application to register securities by coordination pursuant to Section 36b-17 of the Act.  The registration, which was subsequently amended, covered an offering of promissory notes, which was declared effective by the Securities and Exchange Commission (the “SEC”) on July 10, 2009 (SEC File No. 333-147019);
 
WHEREAS, on November 24, 2008, the SEC issued a cease and desist order against PMI after determining that PMI had violated Sections 5(a) and 5(c) of the Securities Act of 1933 by selling unregistered loan notes from approximately January 2006 through October 14, 2008 (Release No. 8984; Administrative Proceeding File No. 3-13296);
 
WHEREAS, on July 27, 2009, the Commissioner entered a Consent Order (No. CO-09-7705-S) with respect to PMI (the “2009 Consent Order”) pursuant to Section 36b-31 of the Act and Section 4-177(c) of the General Statutes of Connecticut.  The 2009 Consent Order was based in part on findings made by the Commission[er] that: “Between 2006 and October 2008, Prosper [PMI] violated Section 36b-16 of the Act by offering and selling unregistered securities in the form of loan notes . . . . ”  PMI’s registration of notes was declared effective by the Commissioner on July 27, 2009 contemporaneously with the Commissioner’s entry of the 2009 Consent Order;
 
WHEREAS, Section 36b-19(i) of the Act provides, in pertinent part, that “[e]very registration statement is effective for one year from its effective date, except during the time a stop order is in effect under section 36b-20”;
 
WHEREAS, on October 13, 2010, the Commissioner entered a Consent Order (No. CO-10-7859-S) with respect to PMI (the “2010 Consent Order”) pursuant to Section 36b-31 of the Act and Section 4-177(c) of the General Statutes of Connecticut, which incorporated by reference the 2009 Consent Order.  The 2010 Consent Order was based in part upon disclosures made by PMI to the Division “that between July 28, 2010 and August 5, 2010, inclusive, PMI had sold notes to Connecticut residents.”  The sales occurred during a time when no registration was effective under the Act for the securities in question;
 
WHEREAS, PMI through its execution of the 2010 Consent Order represented and specifically assured the Commissioner that none of the violations alleged in the 2009 Consent Order or the 2010 Consent Order would occur in the future;
 
WHEREAS, PMI’s 2010 registration of PMI notes by coordination pursuant to Section 36b-17 of the Act was declared effective by the Commissioner on October 13, 2010, contemporaneously with the Commissioner’s entry of the 2010 Consent Order;
 
WHEREAS, PMI represents that on November 9, 2011, PMI discovered that it had again missed its filing deadline to renew the registration of the notes offering in Connecticut.  The filing deadline was October 13, 2011;
 
WHEREAS, PMI represents that, upon such discovery, it immediately notified the Division, immediately suspended its note offering in Connecticut, and filed its renewal application in Connecticut;
 
WHEREAS, PMI represents that, on December 30, 2011, it paid to each of its Connecticut investors a rebate equal to 1% of the account balance of such investor’s account with PMI for a total payment of $16,238.52 because of its failure to timely renew its securities registration application in Connecticut;
 
WHEREAS, the Investigation revealed that, following its failure to renew the registration of its notes in Connecticut, PMI misrepresented to Connecticut note holders that the Department had “asked [PMI] to pause [PMI’s] activity until renewal.”  PMI made that statement to Connecticut note holders without input from the Department and on its own initiative;

WHEREAS, the 2010 Consent Order provided that:

       In the event that PMI fails to abide by the terms and conditions of this Consent Order, PMI consents to the immediate entry of a stop order and/or the imposition of a One Hundred Thousand Dollar ($100,000) fine, knowingly, willfully and voluntarily waiving its right to notice and an administrative hearing in conjunction therewith; provided that, prior to invoking this paragraph, the Commissioner shall provide PMI with an informal opportunity to demonstrate its compliance with this Consent Order.

WHEREAS, PMI, through its General Counsel, Chief Compliance Officer and Secretary, and its Connecticut counsel, met with members of the Division to demonstrate PMI’s compliance with the 2010 Consent Order and to provide the Division with additional information requested by the Division;
 
WHEREAS, PMI represents that it has experienced no gain, economic or otherwise, from its failure to file its renewal registration in a timely fashion; that, at all times during the period when such registration was not effective in Connecticut, PMI’s SEC registration was effective, and that Connecticut investors, had, at all times, access to all disclosures provided to investors in all other states where PMI’s notes were registered; that the failure to file has been brought to the attention of, and reviewed with, senior management and the Board of Directors of PMI; that, as a consequence, PMI has adopted enhanced compliance procedures to prevent such a failure from occurring in the future; and that PMI has discussed with Connecticut counsel the implications of its failure to file and reviewed with Connecticut counsel its enhanced compliance procedures;
 
WHEREAS, in addition to the terms of the 2010 Consent Order, Section 36b-20(a) of the Act authorizes the Commissioner to enter a stop order denying effectiveness to any registration statement if he finds that the order is in the public interest and that any provision of sections 36b-2 to 36b-34, inclusive, or any regulation, order or condition lawfully imposed under said sections has been willfully violated, in connection with the offering, by the issuer;
 
WHEREAS, Section 36b-27(a) of the Act authorizes the Commissioner to order any person who has violated, is violating or is about to violate any provision of the Act or any regulation, rule or order adopted or issued under the Act to cease and desist from such violation;
 
WHEREAS, in addition to the terms of the 2010 Consent Order, Section 36b-27(d) of the Act authorizes the Commissioner to impose a fine not exceeding One Hundred Thousand Dollars ($100,000) per violation against any person who has violated any provision of the Act or any regulation, rule or order adopted or issued under the Act;
 
WHEREAS, Section 36b-31(a) of the Act, as amended by Public Act 10-141, provides, in pertinent part, that “[t]he commissioner may from time to time make. . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-34, inclusive”;
 
WHEREAS, Section 36b-31(b) of the Act, as amended by Public Act 10-141, provides, in pertinent part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive”;
 
WHEREAS, an administrative proceeding initiated under Sections 36b-20 and Section 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the General Statutes of Connecticut;
 
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;
 
WHEREAS, PMI now desires to resolve the matters alleged herein;
 
WHEREAS, the Commissioner finds that the entry of this Consent Order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;
 
AND WHEREAS, PMI agrees to the language in this Consent Order.   

II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, PMI, through its execution of this Consent Order, voluntarily waives the following rights, to the extent they have not been previously waived pursuant to the terms of the 2009 Consent Order and the 2010 Consent Order, whose terms PMI agrees remain in effect:

1. To be afforded notice and an opportunity for a hearing within the meaning of Section 36b-20(c) of the Act, Section 36b-27(a) of the Act, Section 36b-27(d)(2) of the Act, and Section 4-177(a) of the General Statutes of Connecticut;
2. To present evidence and argument and to otherwise avail itself of Section 36b-20(c) of the Act, Section 36b-27(a) of the Act, Section 36b-27(d)(2) of the Act, and. Section 4-177c(a) of the General Statutes of Connecticut;
3. To present its position in a hearing in which it is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order.

III. ACKNOWLEDGEMENT OF THE COMMISSIONER'S ALLEGATIONS

WHEREAS, PMI, through its execution of this Consent Order, acknowledges and admits the following allegation of the Commissioner:  From at least October 13, 2011 to November 17, 2011, PMI sold unregistered securities in violation of Section 36b-16 of the Act and the 2010 Consent Order, which forms a basis for the entry of a stop order denying effectiveness to PMI’s securities registration pursuant to Section 36b-20(a) of the Act, an order to cease and desist against PMI pursuant to Section 36b-27(a) of the Act and the imposition of a fine against PMI pursuant to Section 36b-27(d) of the Act;

WHEREAS, PMI, through its execution of this Consent Order, acknowledges the following allegations of the Commissioner, without admitting or denying them:

1. In notifying Connecticut investors of its inability to continue to offer the notes, PMI misrepresented to Connecticut note holders that the Department had “asked [PMI] to pause [PMI’s] activity until renewal.”  PMI made that statement to Connecticut note holders without input from the Department and on its own initiative;
2. PMI misrepresented to the public, through a press release issued by PMI on or about January 25, 2012, that the services provided by Ashland Partners & Company LLP (“Ashland”) confirmed that the rate of return received on the PMI notes was the best within the P2P industry when, in fact, the services provided by Ashland confirmed the rate of return on the PMI notes, but did not confirm rates of return on the notes of any other issuer in the P2P industry.  PMI admitted that it relied solely on the publicly-disclosed return information of other known industry participants rather than on Ashland’s services in making its assertions about its returns being the best in the industry; and
3. The conduct described in paragraphs 1 and 2 above violated Section 36b-4 of the Act which forms a basis for the entry of a stop order denying effectiveness to PMI’s securities registration pursuant to Section 36b-20(a) of the Act, an order to cease and desist against PMI pursuant to Section 36b-27(a) of the Act and the imposition of a fine against PMI pursuant to Section 36b-27(d) of the Act.

AND WHEREAS, the Commissioner would have the authority to enter findings of fact and conclusions of law after granting PMI an opportunity for a hearing.

IV. CONSENT TO ENTRY OF SANCTIONS

WHEREAS, PMI, through its execution of this Consent Order, consents to the Commissioner’s entry of a Consent Order imposing on it the following sanctions:

1. PMI shall cease and desist from engaging in conduct constituting or which would constitute a violation of the Act or any regulation, rule or order adopted or issued under the Act, including but not limited to, offering and selling securities in violation of Section 36b-16 of the Act, and the 2009 and 2010 Consent Orders and engaging in conduct that would violate the antifraud provisions in Section 36b-4 of the Act;
2. No later than the date this Consent Order is entered by the Commissioner, PMI shall remit to the Department, by cashier’s check, certified check or money order made payable to “Treasurer, State of Connecticut”, the sum of forty thousand dollars ($40,000) as an administrative fine;
3. PMI its affiliates and successors in interest shall retain Connecticut legal counsel sufficiently experienced in state and federal securities law compliance and not unacceptable to the Division Director to evaluate PMI’s compliance with the Act or any regulation, rule or order adopted or issued under the Act.  The scope of legal review contemplated by this paragraph shall include, without limitation, securities registration and disclosure obligations as well as registration requirements for any individual or entity, regardless of title or designation, performing securities-related services on behalf of PMI, its affiliates or successors in interest.  PMI shall identify such Connecticut legal counsel in writing to the Division Director prior to the Commissioner’s entry of this Consent Order;
4. For three years from the date this Consent Order is entered by the Commissioner, PMI, its affiliates and successors in interest shall consult with such Connecticut legal counsel at least once each calendar year, provided nothing herein shall preclude more frequent consultations should the need arise. PMI shall record and maintain written minutes of each meeting held with its Connecticut legal counsel, which shall be open to review by the Division;
5. By December 31st of each year to which the obligations described in paragraphs 3 and 4 of Section IV of this Consent Order extend, PMI shall file with the Division Director an annual sworn affidavit verifying that it has fully discussed its Connecticut compliance responsibilities with Connecticut legal counsel and that, in connection therewith, PMI, its affiliates and successors in interest are complying with the Act, the Regulations, this Consent Order and with the advice of counsel.  The first affidavit shall be filed no later than December 31, 2012, the second affidavit shall be filed no later than December 31, 2013, and the final affidavit shall be filed no later than December 31, 2014; and
6. Should PMI, its affiliates or successors in interest sever their relationship with the Connecticut legal counsel identified to the Division Director, PMI, its affiliates or successors in interest shall apprise the Division Director in writing of the reasons for such severance within thirty (30) days following such severance, and shall identify the successor attorney engaged to perform the services described in paragraphs 3 and 4 of Section IV of this Consent Order.

V. CONSENT ORDER

NOW THEREFORE, the Commissioner enters the following:

1. The Sanctions set forth above be and are hereby entered;
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against PMI based upon a violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by PMI and reflected herein are subsequently discovered to be untrue;
3. Contemporaneously with the Commissioner’s entry of this Consent Order, the securities registration of PMI shall be made effective under the Act; and
4. This Consent Order shall become final when entered.


 
So ordered at Hartford, Connecticut,      _______/s/_________
this 10th day of April, 2012.      Howard F. Pitkin 
    Banking Commissioner 


CONSENT TO ENTRY OF ORDER

I, Sachin Adarkar, state on behalf of Prosper Marketplace, Inc., that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Prosper Marketplace, Inc.; that Prosper Marketplace, Inc., agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Prosper Marketplace, Inc. consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.     

 
  Prosper Marketplace, Inc. 
   
              
By: __________/s/__________________
Sachin Adarkar
  General Counsel and Secretary


State of: California

County of: San Francisco


On this the 6 day of April 2012 before me, Michelle Donnelly, the undersigned officer, personally appeared Sachin Adarkar, who acknowledged himself to be the General Counsel and Secretary of Prosper Marketplace, Inc., a corporation, and that he, as such General Counsel and Secretary, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as General Counsel and Secretary.
 
In witness whereof I hereunto set my hand.


_____/s/_________________________
Notary Public
Date Commission Expires: Feb. 6, 2016


  

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