Veal v. Lendingclub Corp., Case No. 18-cv-02599-BLF

423 F.Supp.3d 785

Matthew VEAL, et al., Plaintiffs,

v.LENDINGCLUB CORPORATION, et al., Defendants.

Case No. 18-cv-02599-BLF

United States District Court, N.D. California, San Jose Division.

Signed November 4, 2019

Laurence Matthew Rosen, The Rosen Law Firm, P.A., Avraham Noam Wagner, The Wagner Firm, Jennifer Pafiti, Pomerantz LLP, Los Angeles, CA, Fredman B. Peter, Law Office of Peter Fredman PC, Berkeley, CA, for Plaintiffs.

Alexander K. Talarides, James Neil Kramer, Orrick Herrington and Sutcliffe LLP, Charlene Sachi Shimada, Lucy Han Wang, Morgan, Lewis & Bockius LLP, San Francisco, CA, for Defendants.

ORDER GRANTING MOTIONS TO DISMISS WITH LEAVE TO AMEND

[Re: ECF 67; 69]

BETH LABSON FREEMAN, United States District Judge

This is 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.

Before 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.

I. BACKGROUND

Defendant 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.

Lead 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. ¶¶ 18-19.

A. Lending Club's Lending and Borrowing Platform

LendingClub's 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.

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

In May 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.

C. FTC Allegations

On 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.

On the 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.

D. 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.

First, 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. ¶ 49.

Second, 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.

Third, 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...