In September 2017, LendingClub Corp. requested the U.S. District Court
for the Northern District of California deny certification for a class
of investors that filed a suit alleging the company concealed inadequate
internal controls. LendingClub claimed that the named plaintiff announced
by Judge William Alsup — Water and Power Employees’ Retirement,
Disability and Death Plan of the City of Los Angeles (WPERP) — had
a questionable investment record that made it unsuitable to represent
the class in court.
LendingClub asserted that the pension fund was both an irregular and insufficient
representative entity for an investment class that had filed suit following
the dramatic fall of the company’s stock over the past year. According
to court documents, LendingClub, its current and former executives, and
its staff, credit the stock crash to disclosures of former CEO Renaud
Laplanche’s resignation after an internal probe discovered several
internal controls errors.
The company countered that the pension fund was unable to present adequate
evidence tying its trading activity to the revelations concerning Mr.
Laplanche’s resignation because it was a serial trader that frequently
acquired and sold LendingClub stocks before incurring a loss. Those regular
market transactions, LendingClub Corp claimed, generated unique defense
tactics that were uncommon to the class. The company also advocated that
during deposition testimony, the lead plaintiff indicated that it knew
nothing regarding its own acquisitions and only learned it had owned LendingClub
shares when one of its lawyers informed it about the litigation. This
revelation made the suit lawyer-driven litigation that violates the Private
Securities Litigation Reform Act.
The first claims against LendingClub by its investors started in May 2016.
They claimed that both prior to and following its $1 billion initial public
offering, the company misled investors concerning its compliance protocol,
specifically the sufficiency of its internal controls to guarantee loans
met its customer’s criterion.
The first suit was filed a week following LendingClub’s disclosure
that the company’s board of directors had granted Mr. Laplanche’s
resignation in light of an investigation into wrongfully modified loan
documents. An internal audit revealed that the company had sold to a sole
investor $22 million in loans offered to individuals with low credit scores.
Investors claim that the news led to LendingClub’s stock plummeting
to $4.10 per share only a day after the disclosure—a decline of
86 percent from the stock’s trading value after its IPO. The plaintiff
class, consisting of investors who bought LendingClub common stock either
following the registration statement released in conjunction with its
IPO or between December 11, 2014 and May 6, 2016, has been led by WPERP
after Judge Alsup confirmed it as the lead plaintiff last year.
WPERP filed for class certification in early September 2017, informing
the court its suit was a typical class action case and certification was
the only rational approach to adjudicating the claims of the proposed
class of investors. LendingClub subsequently responded that there were
several issues with the class definition, stating it encompassed shareholders
with a personal insight of LendingClub’s practices. These well-informed
investors would not have been fooled by what the plaintiff’s suit
claims were misleading statements. They also claimed that the plaintiffs
had failed to propose a methodology for calculating damages.
LendingClub also contested the class period. In 2014, the company filed
a 10-K that included its financials through the close of 2015. Therefore,
the company argues that shareholders who bought stock following that cut-off,
but before the class period’s ending date, would have to establish
on an individual basis that they relied on the public filing for their
Section 11 claims to be validated. The company also stated that the suit’s
Section 11 claims were simply duplicated from lawsuits initially filed
in state court.
LendingClub closed its filing with a recommendation that if the judge ruled
to grant certification to the investor class, he should create separate
classes for the Section 10(b) and Section 11 suits and adjust the class
period for the latter group. The company also recommended that both short-sellers
and anyone who sold LendingClub stock before the May 2016 revelation that
resulted in the stock decline should be excluded from both classes.