The SEC hit Silicon Valley lender Prosper with a $3 million fine for inflating its returns to 'tens of thousands of investors'

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst  To match Special Report SEC/INVESTIGATIONSThomson Reuters

  • The Securities and Exchange Commission on Friday said the online lender Prosper would pay a $3 million penalty for inflating returns to investors.
  • Prosper told more than 30,000 investors that its returns were higher than they actually were, the SEC said in a release.
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The Securities and Exchange Commission said on Friday that the online lender Prosper Funding LLC will pay a $3 million penalty for "miscalculating and materially overstating annualized net returns to retail and other investors."

Prosper's actions, according to the SEC's findings, came despite investor complaints and Prosper's knowledge the company "no longer understood how annualized net returns were calculated."

Without admitting or denying the findings, Prosper consented to the entry of an SEC order finding that it violated the antifraud provision of the Securities Act of 1933.

"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," Daniel Michael, chief of the SEC Enforcement Division's Complex Financial Instruments Unit, said in a release.

Prosper, based in San Francisco, "excluded certain non-performing charged off loans from its calculation of annualized net returns" that it communicated to investors from around July 2015 through May 2017, the SEC said.

As a result, the SEC found that Prosper reported "overstated annualized net returns" to more than 30,000 investors, many of whom then decided to make additional investments based on those overstated figures.

"We're pleased to have the SEC inquiry resolved and appreciate the SEC's recognition of our cooperation as the agency looked into this matter," Prosper said in a statement to Markets Insider. "Since discovering and fixing this issue two years ago, we have put additional controls in place designed to detect and prevent similar errors in the future, and we are committed to providing transparent information on returns to our retail investors."

Prosper, which is privately held, fell under pressure in 2017 after a Bloomberg report found online lenders don't always check borrowers' data like income and employment.

At the time, Prosper defended its practices, telling Bloomberg it verifies identities and bank accounts for all of its loans, and that it has "developed some of the industry's leading risk-mitigation controls."

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