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.
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. 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.