LendingClub and Renaud Laplanche Put Their Legal Troubles Behind Them

Last week there were significant developments in the legal troubles that have dogged both LendingClub and former CEO Renaud Laplanche since May, 2016. When Renaud was forced to resign as CEO back then, that triggered dual investigations from the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). Both investigations wrapped up on Friday.

These investigations have been hanging over the industry for more than two years and we have been waiting for their conclusion. So, let’s dig in to each of these settlements in turn to see what they found and what the consequences will be for those involved. For the record, I spoke with both a representative from LendingClub and with Renaud to get background for this story.

LendingClub Advisors, Renaud Laplanche and Carrie Dolan Agreed to Pay a Fine

We will start with the SEC action. In their press release the SEC made the following claims about LendingClub Advisors (LCA), now called LendingClub Asset Management, former CEO Renaud Laplanche and former CFO Carrie Dolan:

LCA and Laplanche caused one of the private funds it managed to purchase interests in certain loans that were at risk of going unfunded, to benefit LendingClub, not the fund, in breach of LCA’s fiduciary duty.  The order also finds that LCA, Laplanche, and Dolan improperly adjusted monthly returns for this fund and other LCA-managed funds to improve the returns they reported to fund investors.

What is most interesting to me is that these are both issues we have known about for some time. In a Form 8-K LendingClub filed with the SEC on June 22, 2016 these two issues were disclosed based on LendingClub’s own internal investigation.

They found that one of the LCA Funds invested in too many 60-month loans, funding loans that were about to go unfunded on the platform, in the first quarter of 2016. The SEC claimed this benefited LendingClub but not LCA investors, although these investors were informed about the balance between 36 and 60-month loans anyway since on LCA’s monthly statement they break down all loan holdings by loan grade and term. Also 60-month loans have so far performed better than 36-month loans so it doesn’t look like LCA investors were hurt anyway (and accordingly no “restitution” was ordered by the SEC).

The second issue involved the valuation of LCA Funds. Adjustments to valuations were made that were not consistent with generally accepted accounting principles. Investors who were impacted by these adjustments were reimbursed around $800,000. At the time the total assets held in the funds combined was around $1.1 billion, so the total impact on the funds’ performance over 5 years was less than 8 basis points.

While I do not intend to minimize what happened, clearly these transgressions should not have occurred, it is interesting to me is that the SEC spent well over two years investigating LendingClub and basically came up with nothing that LendingClub’s own internal review had not already disclosed. That says a lot.

The SEC also praised LendingClub for their “extraordinary cooperation with the agency’s investigation” and there were no charges levied against LendingClub specifically.

To settle these claims with the SEC, LCA, Renaud and Carrie Dolan paid $4 million, $200,000 and $65,000 respectively. No party admitted any wrongdoing. Along with these penalties Renaud has agreed to be barred from the specific securities intermediation activities like investment advisory or broker-dealer, although he can re-apply after three years.

When I asked Renaud about this specific clause he said that this will not affect Upgrade at all. He had not intended to setup an LCA-type operation at Upgrade anyway, and this agreement does not impact Upgrade’s ability to do securities issuance or implement a traditional securitization program.

LendingClub Agrees to Pay a $2 Million Penalty to the DOJ

The DOJ settlement involves LendingClub paying a $2 million settlement to resolve allegations that it violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Here is the relevant piece from the DOJ press release from Friday:

The United States alleged that from January 2009 to September 2010, LendingClub made misrepresentations to its FDIC-insured loan originator, WebBank.  Further, the United States alleged that due to Lending Club’s misrepresentations, WebBank originated over 200 loans to borrowers who did not satisfy WebBank’s credit requirements.  The government alleged that LendingClub made these misrepresentations fraudulently to increase the volume of loans available for investment on its platform and to meet its monthly loan origination goals.

This happened just before I started covering LendingClub, so I can’t recall from my personal experience what went on here. In my conversations it was made clear to me that these issues were identified and remedied eight years ago.

My Take: Great News for LendingClub, Renaud and the Marketplace Lending Industry

This is great news for not just LendingClub and Renaud Laplanche but for the entire marketplace lending industry. A dark cloud has been lifted and we can now move on from this difficult chapter in our history. Like many of us, I have been wondering what, if anything, these investigations would find. The reality is, despite more than two years of looking, they found very little.

What is also interesting to me is that none of the things that came to light on May 9, the reasons given for Renaud’s ouster, were issues that concerned the SEC or DOJ. Having said that, clearly mistakes were made and there were some serious compliance lapses that have been addressed and hopefully will not happen again.

LendingClub issued a statement this morning on this matter with this quote from Chairman Hans Morris:

We are pleased to have resolution and closure. Following an internal review in 2016, LendingClub’s Board of Directors accepted the resignation of Renaud Laplanche as Chairman and CEO of the Company. The Board’s decision was not made lightly but the violation of the Company’s business practices, along with a lack of full disclosure by Mr. Laplanche during the review, was unacceptable. The allegations made by the DOJ and the findings of the SEC further support the Board’s decision to take swift and decisive action. We have full confidence in our new management team and we are a better company today.

Renaud Laplanche issued this statement earlier today:

I am pleased to have worked out a settlement with the SEC to put to rest any issues related to compliance lapses that might have occurred under my watch at Lending Club. Consistent with SEC policy, I have agreed not to admit nor deny the specific narrative of the events contained in the settlement order.

I am glad that we can now put these issues behind us and focus on the important goals of making credit more affordable to consumers and delivering attractive returns to investors through disciplined underwriting and exciting product innovation.  With the benefit of my prior experience, I feel better equipped to establish a strong culture of compliance and effective internal controls under the supervision of capable professionals.

Now, we move on. Our industry had already recovered from its black eye, for the most part, but there are no longer dark clouds hanging over our heads. I like to think we have learned our lesson here. We are a different and more mature industry today and one that realizes compliance must be the central part of the culture of each of our organizations.

As Renaud says, now we can all get back to work focusing on making life better for borrowers and investors. I am as excited as ever about the future of our industry and the impact it will have on the world.

Disclosure: Peter Renton, the founder of Lend Academy and the author of this article, owns less than one thousand shares of LendingClub.

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Mike Franklin
Mike Franklin
Oct. 2, 2018 6:16 pm

Very different view here Peter — this shows Renaud intentionally and willingly breached fiduciary duties and really didn’t care — he claims it was a compliance lapse — more like an ethics lapse if you are not overly enamored with him – same with the DOJ matter fraudulent loans pushed on the bank — like the 38 reported by LC in 2016 for his 3 family members and him — how does he still have a job and partners — or the trust of the folks like you?

DB
DB
Oct. 3, 2018 3:41 am

Have to agree with Mike’s sentiment. Shockingly biased post and blase post. Leplanche misled investors, was fined a lot of money and has now been banned from the securities industry for three years. Not only that, but the outcome of the case finds senior executive Carrie Dolan guilty of misleading investors too – so it wasn’t one bad apple but a serious problem on a company-wide level.

Given Lending Club is the largest platform in the world, outside China, and has been held up as the poster boy of the sector, this isn’t a positive development. Instead it’s a damning indictment that even the biggest and “best” platform was corrupt and built upon lies. Anyone with any sense would think hard about the integrity of the rest of the platforms out there – it’s unlikely this is going to be a one-off.

Even worse, Laplanche has now gone on to co-found another platform (called Upgrade for anyone interested). Presumably he did this as soon as he could, before being tarnished by the verdict of the latest investigation. I feel sorry for the people that have already invested in this platform, as I’m not sure they’d be very happy if they knew the full story of the founder – also not sure how or why he was allowed to set up another platform with the investigation pending. Certainly don’t think he should be allowed further involvement or to profit it from it now.

As for this line: “As Renaud says, now we can all get back to work focusing on making life better for borrowers and investors.”

Who are you kidding? The industry exists to make the founders of platforms very rich – that’s all. It’s not out there to benefit anyone else.

Mike
Mike
Oct. 3, 2018 7:02 am
Reply to  DB

I agree – shockingly biased “reporting” but Laplanche helped give peter a voice and talks at the lendit events – so maybe a bit of the golden egg issue.

Let’s not forget the LC had said it continues to cooperate with the DOJ on the false loan issue regarding those “not released”.

Lastly – at least 2 sr execs – Jeff Bogan and Matt Weirman were fired from LC for the Laplanche events and helped found Upgrade. Not to mention another co-founder Soul Htite founded Dianyang in China and was originally at LC and has his own questionable behavior.

So Peter and team show some guts here
and stop buying all that Laplanche is selling – he is a con man of mammoth proportions – IMHO

Mf
Mf
Oct. 3, 2018 11:26 pm

Peter

He was told by his gc to stop what he was doing. He blatenly ignored that – that is not passion – that is hubris and arrogence. How do you justify that?

His drum beat of a compliance lapse is a complete farce – it makes it sound like he did nothing wrong but “took the fall as CEO” – a complete fallacy- he falsely created loans and had a complete disregard for his investors and it appears his board dispite being told not to do – and how does this fit with your view of him as a reformed leader? I have heard his attitude and those of the other jr fools is no better at ugrade and he has brought on the same morally bankrupt team who bought his lies at LC.

The platform was not built on lies. I didnt say that – but Laplanche did get desperate and thought he was bigger than it all. That is issue and his words to date have not shown any shred of contrition or remorse – he goes so far on a quote on Musk to imply he settled (like musk) bc fighting to win was to long – not that he acted in the manner described –

Lets see what the doj does next.

Larry
Larry
Oct. 11, 2018 9:39 am

Peter – you are a wonderful promoter of the online lending industry and have done much to contribute to its growth – thank you. I would suggest that you take the comments above to heart, however, and use them to inform your future commentary when major mistakes are made by industry participants. That will do much to support your credibility.

The fact that the Board found the horses that escaped after the barn door was left open in no way diminishes the SEC findings that the barn door was left open. The SEC agreed with the serious lapses of control and perhaps intentionally misleading actions at the Company that the Board discovered after the fact. Had the SEC found additional issues, they easily could have called for replacement of the Board. So, the more accurate way to color the fact that the SEC did not have additional findings is that it saved the Board.

A $2+million fine, involvement of multiple employees and a multi-year ban from the narrowly defined “business” is about as serious as it gets. That’s one step away from jail time. The industry is learning the dangers of relying on federally insured institutions (commercial banks) in its business models. These events were magnified by the FDIC’s involvement.

No good news for the industry other than a lesson for others to learn. We’ve had other, different problems (SOFI, for instance) and will have more. Boards will, hopefully, be better informed and more action oriented as a result of each issue that arises.

Mike
Mike
Oct. 16, 2018 6:57 pm
Reply to  Larry

Fully agree. How Sanborn and others still have jobs is shocking. He was Renaud’s mini-me and had to know about all of this. Board’s overall need to stop buying the bullshit from founders like Renaud and Cagney.

Mike
Mike
Oct. 16, 2018 6:54 pm

Peter thoughts on this

https://platform.mi.spglobal.com/interactive/newlookandfeel/4213397/DOJ_Settlement_Agreement.pdf

Or did Renaud tell you it is all a mistake and a compliance lapse. Just not his fault?

Mike
Mike
Oct. 17, 2018 11:48 am
Reply to  Peter Renton

I think what you fail to see peter is that the doj document is only in regards to LC not Laplanche – his may be coming and while it happened long ago it shows a practice – along with his intentional and fraudulent actions on 2016 – of a man who does not care abode by rules and lacks any real moral compass. The doj is focused on wire and bank FRAUD- that is not a compliance lapse.