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.
