I also have mixed feelings about the suit. On the one hand, there's a "ya pays ya money ya takes ya chances" element to any new venture, and in any business the people who think up the concept aren't always the best people at execution, so there's always risk with investing in a business run by the original concept developers. I think if one thinks of Prosper as an internet business its outcome was pretty much par for the course. Lots of internet start-ups tanked after receiving millions of dollars in investors' money; and lots of times the founders simply hadn't thought through how their product would actually work in the marketplace,and left gaps in their business plans or operations that would look glaringly obvious in hindsight. But often, those gaps just weren't so obvious at the time, or internet entrepreneurs (and their investors) just had too much blind faith the internet would revolutionize everything to take seriously the idea that older business' problems could not only apply to them too but could bring them down.
From the point of view of a financial company, Prosper 1.0 can look pretty negligent. They didn't grasp the legal climate they had to work in. They didn't take fraud seriously enough. They believed in, and hyped, extremely optimistic projections, presenting them as fact. They sometimes treated their more articulate customers as if they were trouble-makers rather than valuable sources of feedback and insight. They clung to rosy scenarios long after it became impossible for more sober observers to take them seriously, and they shut their ears to "trouble-makers" long after more mature businesses would have realized they needed to listen.
For an established and traditionally sober industry like retail finance, this is not so good. But for a dot-com start up, or for that matter a high-flying hedge fund, both their hype and their mistakes are probably pretty normal. One of Prospers' biggest problems, like SEGWAY's, was not understanding the legal climate they had to operate in -- they had to fit into categories the law had already established and make them work; they didn't have the ability to simply come in and sweep those categories away.
It could be argued -- Chris Larsen has argued it plenty of times -- that those categories are archaic. But like laws against motorized vehicles on sidewalks, banking and securities laws are designed to keep pedestrians and on-lookers from getting crashed into if the fast-zipping early adapters turn out to have made mistakes. They are designed, after all, because the Internet and hedge fund industries are hardly the first industries to have attracted arrogant Masters of the Universe types who know better than everyone else and think everyone else will just step aside to let their new toy zip by, and should be grateful for the chance to blindly fork over our cash to pay for it. Nor will they be the last. Sometimes the arrogant folks really do know better than we mortals. Steve Jobs seems to be one of the type. But quite often they don't, or at least they don't know everything. Sometimes we mortals, so stuck in the past that we stupidly think it has lessons applicable to the future, actually do know something that the Masters overlooked.
Prosper 1.0 would seem to be one of those times.