Court Tosses Suit Over Self-Reported Exec Misconduct at LendingClub

(CN) – A derivative action against online loan platform LendingClub Corp. alleging that the company’s board of directors breached its fiduciary duties was dismissed in Delaware Chancery Court after investors failed to prove that the board acted in bad faith after self-reporting misconduct to the Securities and Exchange Commission.

According to the ruling, San Francisco-based LendingClub facilitates loans issued by third parties, purchases the loans, and sells them based on the investors’ preferred loan characteristics.

An internal investigation into $22 million in loans issued in 2016 to an institutional investor prompted by whistleblowers coming forward to the company’s board found other problems within the company. The investigation revealed that two board members failed to disclose personal investments into a company called Cirrix Capital before they invested $10 million into the company. Meanwhile, valuation adjustments made by one of LendingClub’s subsidiaries were not in compliance with generally accepted accounting principles.

LendingClub “promptly” self-reported the misconduct to the SEC, which issued a cease-and-desist order but lauded the company for self-reporting and cooperating with its investigation. LendingClub also took remedial action by firing the employees involved, increasing accountability in the roles of CEO and chairman, ratifying the Cirrix investment, and publicly revealed the problems that spawned the internal investigation.

Despite this, a group of investors filed a derivative complaint claiming that “the LendingClub board made no good faith effort to put in place a system of controls or, in the alternative, that it consciously failed to monitor company operations and thus disabled itself from being informed of problems requiring its attention.” LendingClub moved to dismiss the complaint under Chancery Rule 23.1 which evaluates whether the plaintiffs allege particular facts sufficient to create a reasonable doubt that the directors could have impartially considered a pre-suit demand.

In the ruling, Vice Chancellor Kathleen S. McCormick determined that the group of investors failed to show “a single fact” that would demonstrate bad faith on the part of LendingClub’s directors, pointing out that the company was praised for self-reporting and taking quick remedial action.

“In sum, plaintiffs have failed to allege that a majority of the demand board members were unable to impartially consider pre-suit demand with regard to any of plaintiffs’ claims,” the opinon states.

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