Veal v. LendingClub Corp.

MATTHEW VEAL, et al., Plaintiffs, v. LENDINGCLUB CORPORATION, et al., Defendants.

Case No. 18-cv-02599-BLF

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

June 12, 2020

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS WITH LEAVE TO AMEND IN PART AND WITHOUT LEAVE TO AMEND IN PART

[Re: ECF 96]

This is a putative class action for securities fraud brought against LendingClub Corporation ("LendingClub" or "Company") and its officers Scott Sanborn, Bradley Coleman, and Thomas W. Casey ("Individual Defendants"), (collectively with LendingClub, "Defendants"). On November 4, 2019, the Court granted Defendants' first motion to dismiss the Consolidated Amended Class Action Complaint ("CAC", ECF 63) with leave to amend. Prior Order, ECF 92. Plaintiffs filed a timely Second Amended Complaint ("SAC") 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. ECF 93. Plaintiffs also assert that 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. Defendants now move to dismiss the SAC for failure to state a claim. Motion, ECF 96. The Court heard oral arguments on April 30, 2020 (the "Hearing"). For the foregoing reasons, Defendants' Motion to Dismiss is GRANTED WITH LEAVE TO AMEND IN PART and WITHOUT LEAVE TO AMEND IN PART.

I. BACKGROUND

Defendant LendingClub is a Delaware corporation that operates an online marketplace platform that connects borrowers and investors in the United States. SAC ¶ 17. Defendant Scott Sanborn ("Sanborn") was LendingClub's Acting Chief Executive Officer ("CEO") from May 6, 2016 until June 28, 2016 and has been LendingClub's CEO since June 28, 2016. Id. ¶ 18. In his tenure prior to becoming CEO, Sanborn acted as President, Chief Operating Officer, and Chief Marketing Officer. Id. Defendant Bradley Coleman ("Coleman") served as LendingClub's Principal Accounting Officer and Interim-Chief Financial Officer ("CFO") from August 2016 to September 2016. Id. ¶ 19. Defendant Thomas W. Casey ("Casey") has been the Company's CFO since September 19, 2016. Id. ¶ 20.

Lead Plaintiffs, XiangHong Ding and Zhenbin Chen, bring 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"). See SAC ¶ 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. ¶¶ 15, 16.

A. Lending Club's Lending and Borrowing Platform

LendingClub operates as an online lending marketplace that "matches" borrowers and investors. SAC ¶ 24. LendingClub's borrowers apply for loans through the Company's website. Id. ¶ 26. 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 records the majority of its revenue from origination fees. Id. ¶ 29.

B. LendingClub's Pre-Class Period Internal Control Weaknesses

In May 2016, LendingClub disclosed that some of its senior executives and managers had engaged in deceptive conduct by knowingly misleading investors as to the characteristics of certainloans. SAC ¶ 37. The Company stated that "material weaknesses in internal control over financial reporting" had manifested in undisclosed self-dealing, sales of non-conforming loans, backdated loan applications. Id. In response, the Company terminated those senior executives and Renaud Laplanche (LendingClub's founder, Chairman, and CEO). Id. On May 17, 2016, the Company disclosed the circumstances related to the internal control weaknesses and summarized a "board review" of those circumstances, including certain findings (the "Board Review"). Id. ¶ 41. The Company also disclosed that "[a]n independent sub-committee of the board supervised a review 'with the assistance of independent counsel and other advisors.'" Id. In addition, the Company stated that on May 9, 2019, following the announcement of the Board Review the Company received a grand jury subpoena from the U.S. Department of Justice (DOJ) and was contacted by the SEC. Id.

On August 9, 2016, LendingClub disclosed detailed discussion of the Board Review and the resulting changes in internal controls over financial reporting. SAC ¶ 42. On February 14, 2017, the Company announced that it had completed its planned remediation steps related to the material weaknesses. Id. ¶¶ 114-15.

C. The FTC Investigation

In May 2016, the Federal Trade Commission ("FTC") contacted LendingClub and began an investigation into the Company's allegedly deceptive conduct impacting borrowers on LendingClub's platform. SAC ¶ 4. On November 9, 2016, LendingClub disclosed for the first time that the FTC was investigating the Company. Id. ¶ 46. Specifically, LendingClub stated:

On May 9, 2016, following the announcement of the board review described elsewhere in this filing, the Company received a grand jury subpoena from the U.S. Department of Justice (DOJ). The Company was also contacted by the SEC and Federal Trade Commission ("FTC").

Id. The statement went on to disclose that "[t]he Company continues cooperating with the DOJ, SEC, FTC and any other governmental or regulatory authorities or agencies," and concluded that "[n]o assurance can be given as to the timing or outcome of these matters." Id.

In December 2017, the FTC transmitted a draft consent order to LendingClub, proposing injunctive relief that would bring LendingClub into compliance with the FTC Act Section 5. SAC¶ 49. On February 22, 2018, LendingClub disclosed the following in its SEC annual report (Form 10-K) for the year ended December 31, 2017, disclosing information on the target of the FTC Investigation:

On May 9, 2016, following the announcement of the Board Review, the Company received a grand jury subpoena from the U.S. Department of Justice (DOJ). The Company also received formal requests for information from the SEC and Federal Trade Commission (FTC). The FTC Staff is investigating questions concerning certain of the Company's policies and practices and related legal compliance. We have worked and continue to work to respond to the FTC's information requests, and have cooperated closely with FTC Staff as they evaluate potential claims of deception or unfairness under the FTC Act and other consumer protection laws enforced by the FTC. While we are not able to predict with certainty the timing, outcome, or consequence of this investigation, we believe that we are in compliance with all applicable federal and state laws related to this matter.

The Company continues cooperating with the DOJ, SEC, FTC, and other governmental or regulatory authorities or agencies. No assurance can be given as to the timing or outcome of these matters. However, to the extent that the Company continues to incur expenses to defend or respond to these investigations, insurance policy coverage limits have been met, as described above, so that the Company will not have insurance available to offset any costs.

Id. ¶ 153.

On April 25, 2018, the FTC issued a press release, disclosing that it had filed a complaint against LendingClub. SAC at 1; see also Federal Trade Comm'n v. LendingClub Corp., Case 3:18-cv-02454-JSC (N.D. Cal.) ("FTC Action"). See Exh. A to SAC, ECF 93-1. The complaint in the FTC Action (attached to and incorporated by reference in the SAC), 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. FTC Amended Complaint ¶¶ 56-61, ECF 93-2. 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.

On the day of FTC's announcement, shares of LendingClub fell $0.49 per share, or over15% from its previous closing price to close at $2.77 per share on April 25, 2018. SAC ¶ 161. By May 5, 2018, the price of LendingClub common stock was at $2.65 per share. Id. ¶ 164. Less than two weeks after the FTC Action was filed, Plaintiffs filed this lawsuit. See ECF 1. As of the date of this Order, the FTC Action remains pending.

On May 5, 2018, the Company dedicated a standalone section to the disclosure of the FTC Investigation and Action. SAC ¶ 50. Specifically, LendingClub stated:

FTC Lawsuit

In 2016, the Company received a formal request for information from the Federal Trade Commission (the FTC). The FTC commenced an investigation concerning certain of the Company's policies and practices and related legal compliance.

On April 25, 2018, the FTC filed a lawsuit in the Northern District of California (FTC v. LendingClub Corporation, No. 3:18-cv-02454) alleging causes of action for violations of the FTC Act, including deception in connection with disclosures related to the Company's origination fees and certainty of loan

...