SEC fines Prosper for overstating annual returns over two years

The Securities and Exchange Commission (SEC) today announced a $3 million penalty against Prosper Funding LLC for “miscalculating and materially overstating annualized net returns to retail and other investors” between 2015 and 2017.

According to the SEC’s order Prosper excluded certain non-performing charged off loans from its calculation of annualized net returns it reported to investors between approximately July 2015 through May 2017.

The process was made even worse by Prosper failing to change its calculation methods once they were made aware their initial process was flawed.

“The order finds that, as a result, Prosper reported overstated annualized net returns to more than 30,000 investors on individual account pages on Prosper’s website and in emails soliciting additional investments from investors,” the SEC said in a release. “Many investors decided to make additional investments based on the overstated annualized net returns. The order also finds that Prosper failed to identify and correct the error despite Prosper’s knowledge that it no longer understood how annualized net returns were calculated and despite investor complaints about the calculation.”

“For almost two years, Prosper told tens of thousands of investors that their returns were higher than they actually were despite warning signs that should have alerted Prosper that it was miscalculating those returns,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “As this case shows, we are committed to holding fintech companies to the same standards applicable to other participants in the securities markets.”

Without admitting or denying the findings, Prosper consented to the entry of an SEC order finding that it violated the antifraud provision contained in Section 17(a)(2) of the Securities Act of 1933. In addition to the penalty, the SEC’s order requires Prosper to cease and desist from future violations of Section 17(a) of the Securities Act.

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