Prosper has sued Greenwich Insurance for failing to defend in class action

[Mark12547]

xraider, do you mind if we move the thread to the lobby?

[NewHorizon]

....Most of it is attached as part of the complaint.

I doubt if that's anywhere near 'most' of the policy.  On page 12, there is a long list of forms and endorsments, none of which appears to be present.  I don't even see the E&O Exclusion.

Page 62 of 68 (the way mine downloaded)

@big-al - check the "Download Next 20 pages" link at the top of the Adobe document reader.

[big-al]

....Most of it is attached as part of the complaint.

I doubt if that's anywhere near 'most' of the policy.  On page 12, there is a long list of forms and endorsments, none of which appears to be present.  I don't even see the E&O Exclusion.

Page 62 of 68 (the way mine downloaded)

@big-al - check the "Download Next 20 pages" link at the top of the Adobe document reader.

My bad - totally missed that.

[xraider]

The actual letter from the insurance company to Prosper saying "We won't defend you and here's why" is not attached to the complaint.

The Second Amended Complaint specifically alleges that Prosper violated Section 12(a)(1) of the Securities Act of 1933, and similar state and other federal laws.  

Reviewing the policy, I see the following exclusion:

The Insurer shall not be liable to make payment for any Loss, and shall have no duty to defend or pay Defense Expenses, in any Claim made against an Insured:

* * *

for any actual or alleged violation of the Securities Act of 1933, the Securities Exchange Act of 1934, any state "blue sky" securities law, or any other federal, state or local securities law, including any amendments thereto, or any rule or regulation promulgated thereunder or any similar common law imposing liability in connection with the offering, sale or purchse of securities of the Comjpany.  This EXCLUSION (I) shall not apply to any Claim arising out of the offering, sale or purchase of securities, whether debt or equity in a transaction that is exempt from registration under the Securities Act of 1933 . . ."

(P. 23 of the document.)

Hmmmm.  I wonder why Prosper's counsel didn't quote that exclusion?

If I were defending Greenwich, I'd demur (same pleading challenge that got some of the individual directors out of the class action).

ETA: Citation, and OK for lobby.

[bamalucky]

With no insurance money there won't be anything left for the class action if/when it wins.

[112233]

maybe that's why they want a trial .. so they can apply some of that famous larsen charm on the jurors

[ira01]

The actual letter from the insurance company to Prosper saying "We won't defend you and here's why" is not attached to the complaint.

The Second Amended Complaint specifically alleges that Prosper violated Section 12(a)(1) of the Securities Act of 1933, and similar state and other federal laws.  

Reviewing the policy, I see the following exclusion:

The Insurer shall not be liable to make payment for any Loss, and shall have no duty to defend or pay Defense Expenses, in any Claim made against an Insured:

* * *

for any actual or alleged violation of the Securities Act of 1933, the Securities Exchange Act of 1934, any state "blue sky" securities law, or any other federal, state or local securities law, including any amendments thereto, or any rule or regulation promulgated thereunder or any similar common law imposing liability in connection with the offering, sale or purchse of securities of the Comjpany.  This EXCLUSION (I) shall not apply to any Claim arising out of the offering, sale or purchase of securities, whether debt or equity in a transaction that is exempt from registration under the Securities Act of 1933 . . ."

(P. 23 of the document.)

Hmmmm.  I wonder why Prosper's counsel didn't quote that exclusion?

If I were defending Greenwich, I'd demur (same pleading challenge that got some of the individual directors out of the class action).

ETA: Citation, and OK for lobby.

I imagine that Prosper would say that the exception to the exclusion that I bolded above applies -- that the Prosper Notes were exempt from Registration (which will no doubt be their main liability defense in the class action).  IIRC, isn't a liability insurer's obligation to defend triggered by the possibility of coverage?  Here, should Prosper prevail on its defense that the Notes were exempt from registration, this exclusion by its terms wouldn't apply -- so I don't see how this exclusion would eliminate the insurer's obligation to defend.

[xraider]

Ira, I think that may have been a valid defense and position until Prosper signed the consent decree and started registering the "notes" or "loans" or whatever they're called now.  Oops!

[ira01]

Ira, I think that may have been a valid defense and position until Prosper signed the consent decree and started registering the "notes" or "loans" or whatever they're called now.  Oops!

The consent decree expressly states that Prosper does not admit the factual findings, including that the notes were required to be registered, IIRC, so I don't think that eliminates their defense in the class action (or the applicability of the exception to the exclusion).

[xraider]

Ira, the second part of it is that they're now registering the notes.....  I think that's pretty compelling evidence that I would consider as an insurer!  Please note I'm NOT a third-party specialist, but I'd take a REALLY hard look at Prosper's post-consent decree conduct.

Obviously, I haven't studied the policy, and particularly haven't studied the one exclusion Farella, Braun  Martel cited to in the complaint.  However, I would be stunned if Greenwich didn't cite the exclusion I quoted.

[ira01]

Ira, the second part of it is that they're now registering the notes.....  I think that's pretty compelling evidence that I would consider as an insurer!  Please note I'm NOT a third-party specialist, but I'd take a REALLY hard look at Prosper's post-consent decree conduct.

I would say two things to that -- first, Prosper would say that they registered to avoid a lengthy and expensive fight with the SEC, not because they agreed they needed to.  And second, Prosper would say that they registered to facilitate the secondary market.  Thus, the argument would go, the registration isn't evidence that the original notes needed to be registered, but simply an expansion into a new market that does require registration.

[xraider]

Oh, Ira, I forgot to mention (my duh) that if you're SUED for securities issues -- whether or not there's any merit to it -- there's no coverage.  (I had a day today....)  It's the same as if you're sued for an auto accident under your homeowner's policy -- if there's an exclusion for auto accidents, it doesn't matter if you were at fault or not.  There's simply no coverage.  So, whether or not there's any merit to the allegation, since that's what Prosper was sued for, there's no coverage.

[ira01]

Oh, Ira, I forgot to mention (my duh) that if you're SUED for securities issues -- whether or not there's any merit to it -- there's no coverage.  (I had a day today....)  It's the same as if you're sued for an auto accident under your homeowner's policy -- if there's an exclusion for auto accidents, it doesn't matter if you were at fault or not.  There's simply no coverage.  So, whether or not there's any merit to the allegation, since that's what Prosper was sued for, there's no coverage.

I don't know anything about this area, but apparently Prosper's coverage counsel believes there is coverage.  I doubt they filed a frivolous lawsuit.  And I do wonder what the purpose is of the exception to the exclusion if there is no coverage at all for any suits brought under the securities laws.  Using your example, it would be kind of like if a homeowners policy excluded coverage for auto accidents, but there was an exception to the exclusion for accidents occurring on private roads.  If there is an issue about whether the road on which an accident occurred was private or public, then I would think there would be coverage (at least for purposes of defense).  Obviously, one would need to review the entire policy, however, which I have no desire to do. 

[xraider]

Oh, Ira, I forgot to mention (my duh) that if you're SUED for securities issues -- whether or not there's any merit to it -- there's no coverage.  (I had a day today....)  It's the same as if you're sued for an auto accident under your homeowner's policy -- if there's an exclusion for auto accidents, it doesn't matter if you were at fault or not.  There's simply no coverage.  So, whether or not there's any merit to the allegation, since that's what Prosper was sued for, there's no coverage.

I don't know anything about this area, but apparently Prosper's coverage counsel believes there is coverage.  I doubt they filed a frivolous lawsuit.  And I do wonder what the purpose is of the exception to the exclusion if there is no coverage at all for any suits brought under the securities laws.  Using your example, it would be kind of like if a homeowners policy excluded coverage for auto accidents, but there was an exception to the exclusion for accidents occurring on private roads.  If there is an issue about whether the road on which an accident occurred was private or public, then I would think there would be coverage (at least for purposes of defense).  Obviously, one would need to review the entire policy, however, which I have no desire to do. 

You serious???  How many Rule 11 motions did you see while clerking?  You're right, though; if there's a COLORABLE argument that the securities didn't need to be registered there MAY be a duty to defend.  I didn't go back and reread the exclusion when I got home and posted about the duty to defend rules.   

In any event, if there's an ARGUMENT, perhaps some money can be extorted from the insurance company.  It looks to me like that is what may be going on here. 

In any event, it's kinda nice that Prosper is suddenly in the business of litigation it HAS to address, instead of the NAT loans.

[regeneration]

So...

Prosper believes and insists that they are not (or at least were not) dealing with securities.

The SEC and Greenwhich Insurance (and the class action participants) say otherwise.  This triggers an exclusion in their insurance policy (at least according to GI).  

Prosper sues and alleges the exclusion does not apply because (again) they claim they were not dealing in securities.  


Am I warm?