Lending Club Saga Continues as the Company Receives DOJ Grand Jury Subpoena

Department of Justice Seal

Last week, Lending Club shook the marketplace lending industry with the news of Lending Club CEO Renaud Laplanche resigning after issues with a loan sale to an institutional investor and not disclosing a conflict of interest in a fund. Today we learned of more bad news from the company.

In a 10-Q filing it was disclosed that Lending Club had received a subpoena from the Department of Justice surrounding the events of Renaud’s departure. From the filing:

On May 9, 2016, following the announcement of the board review described elsewhere in this filing, the Company received a grand jury subpoena from the U.S. Department of Justice (DOJ). The Company also contacted the SEC. The Company intends to cooperate with the DOJ and the SEC. The DOJ and the SEC may have additional requests, and no assurance can be given as to the timing or outcome of these matters.

Also from the filing:

In addition, the Company may be subject to litigation related to the events surrounding the resignation of Mr. Laplanche. These occurrences could result in adverse publicity and adversely affect the Company’s brand. As a result, we could record goodwill impairment expense upon completion of the annual goodwill impairment test in the second quarter of 2016.

While the subpoena is certainly bad news for Lending Club, restoring investor confidence is a top priority. We already learned that the consortium of 200 community banks had temporarily paused investments as well as that Goldman and Jefferies had put their deals on hold. In the 10-Q Lending Club notes that a number of large investors have paused their investments as they perform audit and validation tests on portfolios or are otherwise reluctant to invest.

Lending Club has also listed ways they may attract investors, but keep in mind these are just ideas at this point. According to the 10-Q:

We are actively exploring ways to restore investor confidence in our platform and obtain additional investment capital for the platform loans. These efforts may take a number of different structures and terms; including equity or debt transactions, alternative fee arrangements or other inducements including equity. These structures may enable us or third-parties to purchase loans through the platform.

So, it is quite possible that Lending Club will use their own balance sheet to fund loans in the future taking them away from a pure marketplace to more of a hybrid lender similar to many other companies in the online lending space.

There is an entire section in the 10-Q titled “Controls and Procedures” which details some of the areas of weakness the company has identified in their own internal investigation. They stated that these weaknesses were “the result of the aggregation of control deficiencies related to the Company’s ‘tone at the top'”. They are certainly not trying to sugar coat their deficiencies any more.

Also released today was a letter from Acting CEO Scott Sanborn to investors providing details on the steps that Lending Club is taking with their data integrity review. They hired a Big Four accounting firm to do this review which included 673,000 loans issued over the past eight months. They found that “99.99% of the remaining loans display either no changes or changes explained by the normal course of business.”

Conclusion

It’s too early to determine how damaging the lower demand from investors is going to be over the coming months, but the news of a subpoena is not going to help restore confidence in the business whatsoever. After having a positive gain for the day, Lending Club stock has taken a hit in after hours trading.

Disclosure: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, Senior Writer at Lend Academy own LC stock.

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sue
sue
May. 17, 2016 11:40 am

Dear Peter and/or Ryan,

I am a small investor in Lending Club (about $10,000). One issue I have yet to see addressed in any of the articles about lending club’s problems is whether small investors are actually at risk. Sure the stock price has plunged, but are the underlying loans actually failing to perform as expected? My return, after about 15 months, remains about 9% when adjusted for expected future defaults.
In short, hey guys should I be worried? Should I stop inventing my paltry sums??
Thanks!

Peter Renton
Admin
Peter Renton(@peter)
May. 17, 2016 11:50 am
Reply to  sue

Hi Sue, Funny you should say that because I am working on a post right now on that very topic. Hope to have it published by the end of the day.

Mark
Mark
May. 17, 2016 7:22 pm
Reply to  Peter Renton

Great. I have similar concerns, I’m sure others do as well. Looking forward to reading it.

Mike
Mike
May. 17, 2016 11:58 am

I am deeply worried because I just put 100k into lending club earlier this year. I worry I may lose all my money if LC goes BK. I look forward to your next post.

LD
LD
May. 17, 2016 1:10 pm

I have been investing in Lending Club and Prosper notes for a long time and have always been very happy with my returns. It seems that recently (even before the recent LC fiasco) there has been talk of institutional investors withdrawing money from the space. Why are institutional investors leaving the space?

I know recently there has been talk that the performance of some loans has not been as strong as anticipated. However, in today’s low interest rate environment, my returns would have to drop significantly for me to not be happy with my performance compared to other alternatives. Is the smart money unhappy with their current returns or are they withdrawing their funds in anticipation of further economic decline and how these loans will perform in such circumstances?

Peter Renton
Admin
Peter Renton(@peter)
May. 18, 2016 11:43 am
Reply to  LD

LD,

I would say some large investors have been withdrawing money because of both reasons you state. Interest rates at the platforms were too low and they were concerned about the macro environment.

David
David
May. 18, 2016 9:42 am

It seems a bit troubling that the experts so far have been unwilling to go on the record with any analysis on how this affects the smaller retail investors. I haven’t been able to find anything, everything is focusing on the stockholders and institutional investors. I just got my first LC investment account funded this week, and it’s sitting there doing nothing until I get a little more clarity on things. Even the folks over at NSRInvest, who I was considering as a management platform, said basically “no comment” when I asked for a little guidance.

Bo Brustkern
May. 18, 2016 10:13 am
Reply to  David

Hey David. We are working on a better response than “no comment” and it should go out in the next 24 hours to readers of our newsletter. (Sign up at the very bottom of this page, where it says “Newsletter” under the “Learn” column: https://www.nsrinvest.com/ ) We’ve been gathering information, like many of you, from the media, from market participants, and from other experts in the p2p industry, so that we can be reasonably satisfied with whatever we put out there as an official comment. The problem is, of course, that this is a dynamic situation, and facts and perceptions are surely going to change rapidly and continuously for many weeks to come. What I say today may not apply to tomorrow’s situation. All the same, we’ll say something… as soon as we can get our brilliant copy through our procrustean editors.

Peter Renton
Admin
Peter Renton(@peter)
May. 18, 2016 11:41 am
Reply to  David

David,

I have just posted an article that talks about retail investors here:
https://www.lendacademy.com/keeping-money-lending-club/

David
David
May. 18, 2016 1:58 pm

Thanks for the reply guys, looking forward to the newsletter too.