Paragraph four, which answers questions 2 and 4 in your list and suggests that the answer to 1 and 3 is "No":

"In the interest of complete transparency we want to clarify that the use of this information is limited to improving the quality of friend suggestions when you use the ‘Add Friends’ feature and to notify you when one of your contacts joins Path––nothing else. We always transmit this and any other information you share on Path to our servers over an encrypted connection. It is also stored securely on our servers using industry standard firewall technology."

The actual problem was number 5, and they tell you exactly how they are fixing this: by deleting all existing data and letting people opt in to sharing it.