United States District Court, N.D. California
In re LENDINGCLUB SECURITIES LITIGATION This Document Relates to: ALL ACTIONS.
ORDER RE MOTION TO DISMISS CONSOLIDATED
WILLIAM ALSUP UNITED STATES DISTRICT JUDGE.
securities action, defendants move to dismiss in three
separate motions. For the reasons stated below, the motions
are Granted in part and Denied in part.
relevant times, defendant LendingClub Corporation operated an
online peer-to-peer marketplace to match borrowers and
investors for a variety of loans. Defendant Renaud Laplanche
founded the company and served as its chief executive officer
and chairman of the board until May 4, 2016.
did not itself originate loans. Once a borrower and a lender
matched in the marketplace, LendingClub would contact a
partner bank, which would originate the loan, disburse funds
to the borrower, and immediately sell that loan to
LendingClub. LendingClub purchased the loans with funds it
received from the matched lenders. It then serviced the loans
on behalf of its lenders. It generated its revenue from
origination fees and servicing fees (Consolidated Compl.
¶¶ 12, 29-30).
is a diagram illustrating this process between a borrower, B
and a lender, L, as follows: (1) B and L match from the pools
of borrowers and lenders in LendingClub's marketplace,
(2a) LendingClub directs a partner bank to (2b) initiate a
loan to B, which loan the partner bank immediately sells (2c)
to LendingClub, paid for with funds (2d) paid to LendingClub
December 11, 2014, LendingClub completed an initial public
offering of its common stock. Defendants Morgan Stanley &
Co., LLC; Goldman, Sachs & Co.; Citigroup Global Markets
Inc.; Allen & Company LLC; Stiefel, Nicolaus &
Company, Inc.; BMO Capital Markets Corp.; William Blair &
Company LLC; and Wells Fargo Securities, LLC, all served as
underwriters of the IPO (collectively, the “underwriter
defendants”). As part of the IPO, LendingClub issued a
registration statement, which incorporated excerpts from
LendingClub's prospectus, prior quarterly reports, and a
letter from CEO Laplanche. It filed that registration with
the Securities and Exchange Commission.
registration statement and documents incorporated therein
included certain representations about LendingClub's
internal control procedures for financial reporting, which
procedures would have prevented self-dealing, processing of
improper loan applications, misleading investors, and
irresponsible lending practices. Specifically, the
registration statement stated LendingClub had evaluated the
effectiveness of its disclosure controls and procedures, and
concluded they “were effective at a reasonable
assurance level” (id. ¶ 57).
registration statement stated that LendingClub was
“continuing to earn investor confidence every day by
providing equal access and with [sic] a level
playing field with the same tools, data and access for all
investors, small and large, within a fair and efficient
marketplace” (id. ¶ 39). It further
stated that LendingClub employed “Sophisticated Risk
Assessment” with “proprietary algorithms, ”
and that its procedures used “behavioral data,
transactional data and employment information to supplement
traditional risk assessment tools, such as FICO scores to
assess the borrower's risk profile” (id.
¶ 45). LendingClub stated that it verified
borrowers' statements from numerous data sources. Based
on its stated mission of transparency, LendingClub provided
the full credit profile of a borrower to potential investors
and indicated which data was verified (id.
registration statement described LendingClub's
data-security protocols, as follows (id. ¶ 51):
We maintain an effective information security program based
on well-established security standards and best practices,
such as ISO2700x and NIST 800 series. The program establishes
policies and procedures to safeguard the confidentiality,
integrity and availability of borrower and inventor
information. The program also addresses risk assessment,
training, access control, encryption, service provider
oversight, an incident response program and continuous
monitoring and review.
February 11, 2016, LendingClub reported more than eight
billion dollars in loan originations, revenues of more than
four hundred million dollars, and net income of 4.6 million
dollars (Bafus Decl., Exh. B at 4). Its prior years had
operated with similar profit margins (see id., Exh.
A at 11-13).
Form 8-K filing on May 9, 2016, less than eighteen months
after the IPO, LendingClub reported that its board had
accepted the resignation of CEO Laplanche, the founder, chief
executive officer, and chairman of LendingClub, which
resignation “followed an internal review of sales of
$22 million in near-prime loans to a single investor, in
contravention of the investor's express instructions as
to a non-credit and non-pricing element” in the prior
two months. LendingClub also reported that it had discovered
Laplanche's financial stake in a participant in the
market, later revealed to be Cirrix (Bafus Decl., Exh. D at
2-3; Consolidated Compl. ¶¶ 105-06).
week later, LendingClub's quarterly report revealed that
it had “identified material weakness, ” including
a “[l]ack of transparent communication and appropriate
oversight” in dealing with investors. These weaknesses
resulted from “the aggregation of control deficiencies
related to the Company's ‘tone at the top,
'” which deficiencies “also existed at the
end of 2015” (id. ¶ 111).
had previously determined that early in December 2009, CEO
Laplanche had artificially inflated loan origination volume
by taking thirty-two loans for himself and several family
members, in order to “increase reported platform loan
volume” and that LendingClub had reported inflated
asset values for its subsidiaries from 2011 through 2016
(id. ¶ 60).
stated that it needed to correct “material weaknesses
in internal control over financial reporting identified in
the first quarter of 2016, ” which included the
termination or resignation of three senior managers
(id. ¶¶ 115-17). These deficiencies
included an inability to assure compliance with the
company's code of conduct and ethics policy, proper
disclosure of related-party transactions, adherence to
investors' purchase specifications, and communication by
management with risk and financial accounting departments
(id. ¶ 58).
quarterly statement (dated May 16, 2016) also noted that on
April 1, 2016, LendingClub invested ten million dollars in
Cirrix Capital, L.P., a company formed in 2012 for the sole
purpose of purchasing loans from LendingClub. It also
disclosed that “from inception, LendingClub . . .
provided Cirrix with a credit-support agreement under which
LendingClub assumed millions of dollars of risk for the loans
it sold to Cirrix” (id. ¶ 43). It also
revealed that Laplanche (who had already resigned as CEO) and
an outside board member, together with LendingClub held
limited partnership interests and an aggregate of 31%
ownership in Cirrix as of April 1, 2016 (Bafus Decl., Exh. E
17, 2016, LendingClub acknowledged in a Form 8-K filing that
it had discovered changes to the application dates on more
than three hundred loans sold to one investor, after a review
of a sub-committee of its board of directors found “a
gap in preventative controls related to data
management.” It stated it corrected the problem less
than forty-eight hours later (though there is no indication
of how long it took before detection). LendingClub indicated
it would be implementing certain “enhancements”
to better monitor internal changes to key data and to subject
such changes to review by an internal audit team
(id., Exh. F; Consolidated Compl. ¶¶
loan-approval process contained “large numbers of
discrepancies and inconsistencies” (id. ¶
48(a)). Some borrowers were allowed to apply for multiple
loans; others' lending history and income appeared
implausible in light of their other circumstances; delinquent
borrowers received new loans (to pay off their defaulted
loans) at the same rates as they had before delinquency;
borrowers were allowed to split larger loan requests in part,
when they failed to qualify for the larger loan; and just
before the IPO LendingClub reduced its loan-approval time
from five-to-seven days to same-day approval (id.
of these revelations came to light, LendingClub's share
price tumbled, and various securities rating agencies
August 2016, the chief financial officer of LendingClub,
defendant Carrie Dolan, resigned from her position, after she
had been asked to stay on to manage the crisis following CEO
Laplanche's departure. It was later revealed, however,
that CFO Dolan had sold 135, 000 shares of LendingClub stock
(five percent of her holdings throughout the class period) in
November and December 2015, still six months before the
central issues here came to light (id. ¶ 123).
Her stock holdings increased throughout the class period,
however, because more than eight hundred thousand options
vested (Bafus Decl., Exh. K).
now-consolidated actions were filed in federal court here in
San Francisco in May and June of 2016. The actions were
related to the undersigned judge in July 2016 (Dkt. No. 71).
An order consolidated the actions and appointed the Water and
Power Employees' Retirement, Disability and Death Plan of
the City of Los Angeles (“WPERP”) as lead
plaintiff in August 2016 (Dkt. No. 90). In October 2016, an
order approved lead plaintiff's selection of lead counsel
(Dkt. No. 113).
filed the consolidated complaint in December 2016, alleging
four claims and adding seventeen new defendants, namely, the
outside directors of LendingClub at the time of the IPO and
the underwriters. The four claims now alleged are: (i)
violation of Section 11 of the Securities Act of 1933 against
all defendants; (ii) violation of Section 15 of the
Securities Act against CEO Laplanche, CFO Dolan, and the
director defendants; (iii) violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder against LendingClub, CEO Laplanche, and CFO Dolan;
and (iv) violation of Section 20(a) of the Exchange Act
against LendingClub, Laplanche, and Dolan.
now move to dismiss with three motions. LendingClub, the
director defendants, and CFO Dolan all move to dismiss in one
motion (Dkt. No. 139). CEO Laplanche moves separately but
joins in the LendingClub defendants' motions (Dkt. No.
142). Underwriter defendants also move separately but join in
the other two motions as well (Dkt. No. 149). This order
follows full briefing and oral argument.
consolidated complaint alleges that all defendants violated
Section 11 of the Securities Act of 1933. To recover under
Section 11, a plaintiff who bought stock traceable to the
registration statement must show that “any part of the
registration statement, when such part became effective,
contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
necessary to make the statements therein not
misleading.” 15 U.S.C. 77k(a).
registration statement represented that LendingClub's CEO
and CFO “concluded that [its] disclosure controls and
procedures were effective at a reasonable assurance
level” (Consolidated Compl. ¶ 57). Less than
eighteen months later, LendingClub admitted its internal
controls suffered from various “material
weaknesses” (id. ¶ 58). Lead plaintiff
contends the statement in the registration statement was
untrue or omitted facts regarding (i) the weaknesses in
LendingClub's internal controls, (ii) LendingClub's
relationship with Cirrix, (iii) the adequacy of its
loan-approval process, and (iv) the adequacy of its data
integrity and security protocols.
order first addresses the applicable pleading standard.
Applicable Pleading Standard.
argue that our lead plaintiff's claim under Section 11
must satisfy the heightened pleading standard of Rule 9(b),
which requires a plaintiff “[i]n alleging fraud [to]
state with particularity the circumstances constituting
fraud.” Generally, a plaintiff pursuing a claim under
Section 11 “need not prove . . . that the defendant
acted with any intent to deceive or defraud.”
Omnicare, Inc. v. Laborers Dist. Council Constr. Indus.
Pension Fund, 575 U.S. ___, 135 S.Ct. 1318, 1333 (2015).
A claim under Section 11 that is ...