LendingClub’s Legal Woes Mount With New Class Suit

SAN MATEO, Calif. (CN) — Peer-to-peer lender LendingClub is facing another securities class action by shareholders peeved that its stock price has dropped 75 percent since its 2014 initial public offering.

The case is Courthouse News' top download for Tuesday.

Alton Consulting filed a securities class action against LendingClub and numerous other defendants this past Friday on behalf of individuals who purchased securities during LendingClub's December 2014 IPO through the open marking period up to May 2016, claiming multiple violations of the Securities Act.

LendingClub raised $870 million during its IPO after selling 58 million shares of stock for $15 per share, making it the biggest technology IPO of that year. The share price ultimately closed at $23.43 per share.

By May 19, 2016, however, the stock had dropped to a low of $3.70 per share — 75 percent less than its IPO — after investors learned that the defendants had concealed material information regarding LendingClub's seriously deficient internal controls when evaluating, underwriting and extending loans, according to the class action.

Founded in 2006, LendingClub touted that it was "transforming the banking system to make credit more affordable and investing more rewarding" by operating at lower cost that traditional banks so it could pass the savings on to borrowers through lower rates and provide investors with "solid returns," the complaint says.

The lending company also marketed itself as being independent of Wall Street even though Silicon Valley venture capitalists and prominent members of Wall Street increasingly controlled and financed its activities. The company's business model also lacked any internal controls, the shareholders say.

According to the complaint, LendingClub did not disclose that it issued loans at usurious interest rates that were unsustainable, and that without the usurious rates the company would not be attractive to investors. Furthermore, company investors could not enforce the rates since they violated states' usury laws, the shareholders say.

The truth finally began to emerge on May 9, 2016, when LendingClub publicly disclosed that company chairman and CEO Renaud Laplanche was being forced to resign after an internal review found evidence that he had not disclosed his own interests in Cirrix Capital, a third-party fund the company had been contemplating investing in.

The company also reported that it needed to take steps to fix other identified internal-control weaknesses after it found its director John Mack also had interests in Cirrix Capital, and that three other senior managers were being fired or asked to resign due to sketchy financial reporting uncovered in the first quarter of 2016, the complaint continues.

"LendingClub confirmed that it had identified material weaknesses in its internal controls over financial reporting and 'lack of transparent communication and appropriate oversight' of dealing with investors," the complaint says. "LendingClub said that it was contemplating a dramatic shift in its business model and that 'it had been contacted by regulatory authorities requesting information related to the events surrounding the resignation of Mr. Laplanche."

Numerous media outlets reported on allegations of fraudulent concealment by LendingClub, which included reports that the Justice Department had launched a criminal probe, that a criminal grand jury had issued a subpoena the week Laplanche announced his forced resignation and that the Securities and Exchange Commission had been in contact with the company, the shareholders say.

Alton Consulting seeks damages for violations of the Securities Act for itself and other class member investors, and costs and expenses associated with the litigation.

The class is represented by Alexandra P. Summer of Cotchett, Pitre & McCarthy of Burlingame, California. Summer did not return a request for comment by press time.

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