United States District Court, N.D. California, San Jose Division
ORDER GRANTING MOTIONS TO DISMISS WITH LEAVE TO AMEND
[RE: ECF 67; 69]
LABSON FREEMAN United States District Judge
a putative class action for securities fraud brought against
LendingClub Corporation (“LendingClub” or
“Company”) and its officers Scott Sanborn, Carrie
L. Dolan, Bradley Coleman, and Thomas W. Casey
(“Individual Defendants”), (collectively with
LendingClub, “Defendants”). Plaintiffs have filed
a Consolidated Amended Class Action Complaint alleging that
Defendants violated Section 10(b) of the Securities Exchange
Act of 1934 (“Exchange Act”) and Rule 10b-5, 17
C.F.R. § 240.10b-5. See ECF 63
(“CAC”). Plaintiffs also assert that the
Individual Defendants are liable for violations of federal
securities laws as “control persons” of
LendingClub, pursuant to Section 20(a) of the Exchange Act,
15 U.S.C. § 78t(a). Id.
the Court is defendants LendingClub, Thomas W. Casey, Bradley
Coleman, and Scott Sanborn's motion to dismiss. Mot., ECF
67. Defendant Carrie L. Dolan has filed a separate motion to
dismiss. Dolan Mot., ECF 69. The Court heard oral arguments
on September 26, 2019. For the reasons set forth herein, both
motions to dismiss are GRANTED WITH LEAVE TO AMEND.
LendingClub is a Delaware corporation that operates an online
marketplace platform that connects borrowers and investors in
the United States. CAC ¶ 20. Defendant Scott Sanborn
(“Sanborn”) was LendingClub's Acting Chief
Operating Officer (“CEO”) from May 6, 2016 until
June 28, 2016 and has been LendingClub's CEO since June
28, 2016. Id. ¶ 21. In his tenure prior to
becoming CEO, Sanborn acted as President, Chief Operating
Officer, and Chief Marketing Officer. Id. Defendant
Carrie L. Dolan (“Dolan”) served as the
Company's Chief Financial Officer (“CFO”)
from August 16, 2010 to August 8, 2016. Id. ¶
22. Defendant Bradley Coleman (“Coleman”) served
as LendingClub's Principal Accounting Officer and
Interim-CFO from August 2016 to September 2016. Id.
¶ 23. Defendant Thomas W. Casey (“Casey”)
has been the Company's CFO since September 19, 2016.
Id. ¶ 24.
Plaintiffs, XiangHong Ding and Zhenbin Chen, have brought
this federal securities class action on behalf of themselves
and all persons and entities other than Defendants, who
purchased or otherwise acquired the publicly traded
securities of Lending Club Corporation between May 9, 2016
and April 25, 2018 (“Class Period”). Id.
¶ 1. Lead Plaintiffs allege that they purchased
LendingClub securities during the Class Period at
“inflated prices” and were “damaged upon
the revelation of the alleged corrective disclosures and/or
materialization of the undisclosed risks.” Id.
Lending Club's Lending and Borrowing Platform
borrowers apply for loans through the Company's website.
CAC ¶ 36. LendingClub reviews the applicants'
creditworthiness and matches the borrower with a lender or
lenders to fund entire loans, portions of individual loans,
and/or portions of pools of loans. Id.
LendingClub's primary issuing bank partner, WebBank,
simultaneously originates each loan and sells it to
LendingClub-at a price that includes fees and interest.
Id. LendingClub buys these loans with the money from
its “matched” lenders, and services the loans.
Id. LendingClub receives an initial origination fee
and subsequent servicing fees on each payment throughout the
term of the loan. Id.
LendingClub's Pre-Class Period Internal Control
2016, LendingClub disclosed that some of its senior officers
had deceived an institutional investor by manipulating
application dates to create the false appearance that loans
conformed to the investor's express direction. CAC ¶
2. In response, the Company terminated those senior
executives, announced the resignation of its founder and CEO
(Renaud Laplanche), and disclosed Department of Justice
(“DOJ”) and Securities and Exchange Commission
(“SEC”) investigations into the allegations
regarding its lending practices. Id. Moreover,
LendingClub disclosed “material weaknesses in internal
control over financial reporting.” Id. ¶
30. According to LendingClub's SEC filings, those
“material weaknesses” related to: (1) inadequate
system to detect and prevent sales of loans in direct
contravention of a loan agreement, (2) failure to identify
related party transactions so as to ensure proper review and
approval or disapproval by the Company's audit committee
or its board, and (3) failure to appropriately document,
authorize, communicate, and monitor amendments to investor
contracts. ECF 68-3 at 32; see also Mot. at 4.
LendingClub claims that these material weaknesses were
remedied by December 31, 2016. Id.
April 25, 2018, Federal Trade Commission (“FTC”)
issued a press release, disclosing that it had filed a
complaint against LendingClub. CAC ¶ 12; see also
Federal Trade Comm'n v. LendingClub Corp., Case
3:18-cv-02454-JSC (N.D. Cal.) (“FTC Action”). The
complaint in the FTC Action (attached to and incorporated by
reference in the CAC), alleges that LendingClub engaged in
“deceptive acts” by (1) charging up-front
“hidden fees” and (2) representing to borrowers
that they would receive loans before making a final approval
decision, resulting in some borrowers not receiving the loans
they believed they were approved for. ECF 64-1 (“FTC
Complaint”) ¶¶ 56-61. FTC further alleges
that LendingClub engaged in “unfair acts” by
withdrawing funds from borrowers' bank accounts without
authorization, or in amounts in excess of borrowers'
authorization. Id. ¶¶ 62-64. Finally, FTC
alleges that LendingClub violated the Gramm-Leach-Bliley Act
(“GLBA”) by failing to deliver initial privacy
notices. Id. ¶¶ 65-67.
day of FTC's announcement, shares of LendingClub fell
$0.49 per share or over 15% from its previous day's
closing price to close on April 25, 2018 at $2.77 per share
on over 18.8 million shares traded. CAC ¶ 12.
LendingClub's Allegedly Deceptive Lending
practices Plaintiffs' allegations in the CAC
mirror to those in the FTC Action. Plaintiffs allege that by
the beginning of the Class Period, in violation of FTC
regulations, “Defendants lured borrowers to the
LendingClub platform through deceptive practices with respect
to loan applications, processing, and approval.” CAC
¶ 5. Plaintiffs allege three deceptive lending
practices: (1) hidden fees, (2) loans promised (and not
delivered), and (3) unauthorized bank account withdrawals.
Id. ¶¶ 40-67.
Plaintiffs allege that Defendants “represented that the
Company charged ‘no hidden fees, '” when in
fact, LendingClub charged borrowers “an up-front fee
that was not clearly and conspicuously disclosed, burying
reference to the fee multiple clicks into the Company's
website.” Id. ¶¶ 40-41. LendingClub
deducted this fee-on average, approximately 5% of the
requested loan amount-from the loan amount before disbursing
the funds to the borrower. Id. ¶¶ 41-42.
Borrowers frequently complained to Defendants throughout the
Class Period that they were not aware of the origination fee
that the Company deducted from the full loan amount.
Id. ¶¶ 46, 47. LendingClub's customer
service representative training materials list as one of the
two most frequent post-loan disbursement complaints as
“I didn't receive the full loan amount.”
Id. ¶ 48. LendingClub's quarterly complaint
reviews proposed “highlighting [the] origination
fee” to address complaint volumes. Id. ¶
Plaintiffs allege that LendinClub “affirmatively
deceived potential borrowers throughout the loan origination
process by various means.” Id. ¶ 56.
LendingClub follows a three-step loan approval process: (1) a
“front-end” review, (2) investor backing, and (3)
a “back-end” review. Id. ¶¶
57-58. At step one, a front-end review is conducted when a
potential borrower completes a personal loan application-at
which point LendingClub notifies the consumer that
“loan is on the way.” Id. ¶ 57. At
step two, once the potential borrower's application
generates investor funding and the borrower receives another
notification. Id. ¶ 58. As an example,
LendingClub sent approximately 196, 000 consumers an email
where subject line read “Hooray! Investors Have Backed
Your Loan.” Id. The body of the email began,
in large, bold print, “Your Loan is 100% Backed,
” and continued: “Great news! Investors have
backed your loan 100%. Your money is almost in your
hands….” Id. At step three, a
comprehensive back-end review is performed, which consists of
substantial inquiries into the borrower's credit history.
Id. ¶ 59. Many potential borrowers who received
the investor backing notification (e.g., 22% of
consumers who received the email mentioned above), were
subsequently rejected as a result of the back-end review (and
sometimes erroneously). Id. ¶¶ 59-60.
LendingClub's training materials list “What does
that mean? I thought I was approved” as a frequently
asked question that customer service representatives should
expect to hear. Id. ¶ 61.
Plaintiffs allege that in numerous instances during the Class
Period, LendingClub withdrew money from borrowers' bank
accounts without authorization, or in amounts in excess of
what borrowers had authorized. Id. ¶ 63.
Specifically, Plaintiffs allege that LendingClub, in numerous
occasions, (1) withdrew borrowers' monthly payments twice
in one month, (2) automatically withdrew monthly payments
from borrowers' accounts after the loan was paid in full,
and (3) disregarded borrowers' request to stop automatic
withdrawals. Id. ¶ 64. Hundreds of borrowers
contacted LendingClub to complain about its unauthorized
withdrawals. Id. ¶ 65. The Company's
monthly complaint reporting reflected a growing number of
complaints about the payoff process and more generally, about
payment processing. Id. ¶ 67. LendingClub's
payments department self-reported increasing numbers of such
Plaintiffs allege that in violation of the GLBA, LendingClub
failed to provide consumers with clear and conspicuous
privacy notices. Id. ¶ 9.
Alleged False Statements
allege that Defendants made a number of false and misleading
statements related to the allegation in the FTC Action.
Primarily, these statements fall into the following
i. Statements boasting LendingClub's commitment
to compliance, trust, and transparency For example:
• “[a] key principle of the Company is maintaining
the highest levels of trust with borrowers, investors,
regulators, stockholders and employees.” CAC ¶ 68
(May 9, 2016); see also Id. ¶ 71 (same date).
• “[o]ur priority is to reaffirm our commitment to
trust, compliance and risk management that have been so
essential in the success of our online marketplace.”
Id. ¶ 73 (May 9, 2016).
• “Our long-term success is dependent on coupling
our technology and business model advantages with a
relentless focus on compliance, security and risk management.
Since May 9, we have initiated a comprehensive review of our
controls, compliance and governance. As I highlighted at our
annual meeting, we've made a number of improvements.
… And we're retraining employees on both conduct
and FX, and reinforcing the importance of a high compliance
culture.” Id. ¶ 83 (August 8, 2016).
• “[i]t bears repeating that by supporting
bank's demanding diligence and regulatory requirements,
we become a better company.” Id. ¶ 87
(February 14, 2017).
• “Part of continuously delivering value to
investors is maintaining a transparent, proactive and
delivered approach to credit, a driver of long-term value for
LendingClub.” Id. ¶ 89 (February 14,
• “[B]anks returning to the platform has been a
priority for us and acts as an endorsement of our strength in
compliance and controls.” Id. ¶ 91
(February 14, 2017).
allege that these statements' emphasis on
LendingClub's commitment to compliance and its
reassurance that maintaining trust was a “key
principle” was false or misleading because
“Defendants knew or recklessly disregarded” that
the Company was engaging in the practices alleged in the FTC
Action, which consequently, “would subject
LendingClub's business practices to heightened FTC
scrutiny and/or regulatory action.” Id.
¶¶ 69; 72, 74. Plaintiffs also allege that
Defendants' discussion of the Company's
“diligence and regulatory compliance imposed on them a
duty to disclose” that LendingClub was engaged in the
conduct alleged in the FTC Action. Id. ¶¶
88; 84; 92. According to Plaintiffs, “Defendants knew
or recklessly disregarded that LendingClub's loan
processes were not ‘transparent.'”
Id. ¶ 90.
Statements regarding LendingClub's 2016 Internal Control
Weaknesses For example:
• “[a] violation of the company's business
practices … was unacceptable to the board. And this is
not something the board will compromise on in anyway.”
CAC ¶ 71 (May 9, 2016); see also Id. ¶ 68
• “As Scott mentioned, we have all the key banks
back on the platform that purchased between January and April
and added five more last quarter. Just as banks are an
indication of our strong internal processes, I am pleased to
report that during the quarter we are able to complete the
planned remediation steps related to the material
weakness.” Id. ¶ 91 (February 14, 2017).
allege that this statement was false or misleading because
“Defendants' discussion of their compliance and
completion of remediation imposed a duty on them to disclose
adverse facts pertaining to the Company's lack of
compliance and remediation of control issues, which were
known to Defendants or recklessly disregarded by them.”
Id. ¶ 92. Specifically, Plaintiffs allege that
“Defendants made false and/or misleading statements
and/or failed to disclose” the practices alleged in the
FTC Action, subjecting “LendingClub's business
practices to heightened FTC scrutiny and/or regulatory
Statements regarding LendingClub's process and website
improvements For example:
• “We've redesigned our website to make it
easier to find through organic search and easier to navigate,
resulting in better conversion.
We conducted pricing tests to optimize borrower take rate, we
rolled out a new strategy in technology for verifying income
and employment, which streamlines the process for borrowers,
while increasing efficiency for LendingClub. The sum total of
these initiatives result in a better experience for borrowers
and better conversion rates for the business. The proof is in
the positive feedback we get from our customers, including
the ease of use, money saved and the impact to their
financial lives.” CAC ¶ 104 (August 7, 2017).
• “The efforts we have of making our process
easier for our consumers and borrowers, as well as the number
of tests that we've put in place to optimize the
conversion rate. So we feel that those are competitive
advantage. We think the data that we have, the insight we
have from the many, many points of light we touch with our
borrowers that we can actually continue to be very, very
competitive despite the environment.” Id.
¶ 105 (August 7, 2017).
allege that these statements were materially false or
misleading because Defendants knew or recklessly disregarded
that LendingClub was engaging in the practices alleged to be
deceptive or unfair in the FTC Action and that such conduct
“would subject LendingClub's business practices to
heightened FTC scrutiny and/or regulatory action.”
Id. ¶ 106.
Certifications pursuant to the Sarbanes-Oxley Act of 2002
• “[t]he information contained in the Report
fairly presents, in all material respects, the financial
condition and results of operations of the Company.”
CAC ¶¶ 80 (May 16, 2016); 93 (February 28, 2017);
102 (May 5, 2017); 107 (February 22, 2018).
allege that these certifications were materially false or
misleading because Defendants “knew or recklessly
disregarded” that LendingClub engaged in the practices
alleged in the FTC Action, contrary to Defendants' claims
that “maintaining trust with potential borrowers and
borrowers was a ‘key principle, '” and that
such conduct “would subject LendingClub's business
practices to heightened FTC scrutiny and/or regulatory
action.” Id. ¶¶ 82; 94; 103; 108.
Statements regarding LendingClub's privacy
policy For example:
complies with GLBA and is accessible from every page of our
website.” CAC ¶¶ 98 (February 28, 2017); 111
(February 22, 2018).
allege that this statement was false and misleading because
“Defendants knew or recklessly disregarded that
Gramm-Leach-Bliley Act, and this conduct would subject
LendingClub's business practices to heightened regulatory
scrutiny and/or regulatory action by the FTC.”
Id. ¶¶ 99; 112.
Statements disclosing regulatory risks For example:
• “The collection, processing, storage, use and
disclosure of personal data could give rise to liabilities as
a result of governmental regulation, conflicting legal
requirements or differing views of personal privacy
rights…. Any inability to adequately address privacy
concerns, even if unfounded, or to comply with applicable
privacy or data protection laws, regulations and privacy
standards, could result in additional cost and liability for
us, damage our reputation, inhibit use of our marketplace and
harm our business.” CAC ¶ 76 (incorporated by
reference in SEC filings on May 16, 2016, August 9, 2016, and
November 9, 2016).
• “We and our issuing bank partners are subject to
borrower protection laws and federal and state consumer
protection laws…. In particular, through our
marketplace, we may be subject to laws, such as:
Section 5 of the Federal Trade Commission Act, which
prohibits unfair and deceptive acts or practices in or
affecting commerce, …
the Gramm-Leach-Bliley Act, which includes limitations on
financial institutions' disclosure of nonpublic personal
information about a consumer to nonaffiliated third parties
… We may not always have been, and may not always be,
in compliance with these laws. Compliance with these laws is
also costly, time-consuming and limits our operational
flexibility….” Id. ¶78
(incorporated by reference in SEC filings on May 16, 2016,
August 9, 2016, and November 9, 2016); see also
¶ 100 (February 28, 2017).
• “While we have developed policies and procedures
designed to assist in compliance with these laws and
regulations, no assurance can be given that these policies
and procedures will be effective in preventing violations of
these laws and regulations. … Failure to comply with
these laws and regulatory requirements applicable to our
business may, among other things, limit our or a collection
agency's ability to collect all or part of the principal
of or interest on loans. As a result, we may not be able to
collect our servicing fee with respect to the uncollected
principal or interest, and investors may be discouraged from
investing in loans. In addition, non-compliance could subject
us to damages, revocation of required licenses, class action
lawsuits, administrative enforcement actions, rescission
rights held by investors in securities offerings and civil
and criminal liability, which may harm our business and our
ability to maintain our lending marketplace and may result in
borrowers rescinding their loans.” Id. ¶
113 (February 22, 2018).
allege that these statements were false and misleading
because Defendants “failed to disclose that
Gramm-Leach-Bliley Act and, therefore, that the risks
discussed with respect to its failure to comply with such
regulations had already materialized.” Id.
¶ 77. Plaintiffs also allege that Defendants “were
duty bound to disclose, but failed to disclose” that
LendingClub engaged in the conduct alleged in FTC's
Complaint, which “subject LendingClub's business
practices to heightened FTC scrutiny and/or regulatory
action; and therefore, the risks warned of in the
[statements] with respect to the Company's compliance
with borrower protection and federal and state consumer
protection laws had already materialized.” Id.
¶¶ 79; 101; 114.
Statements regarding “hidden ...