LendingClub resolves two federal probes involving its former CEO

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LendingClub and one of its subsidiaries have agreed to pay a total of $6 million to resolve two federal probes that involved former CEO Renaud Laplanche.

In a pair of announcements on Friday, the Department of Justice and the Securities and Exchange Commission agreed to settle separate allegations of misconduct. Both settlement deals involve Laplanche — in one of them he agreed to pay a fine to resolve an allegation of fraud — and stem from events that occurred prior to his departure from the San Francisco-based online lender in May 2016.

“We are pleased to have resolution and closure,” LendingClub Chairman Hans Morris said in a press release Friday.

“Following an internal review in 2016, LendingClub’s board of directors accepted the resignation of Renaud Laplanche as chairman and CEO of the company. The board’s decision was not made lightly but the violation of the company’s business practices along with a lack of full disclosure by Mr. Laplanche during the review was unacceptable,” the statement continued.

“We have full confidence in our new management team and we are a better company today.”

In the Justice Department case, LendingClub will pay $2 million to resolve allegations that the company made misrepresentations about some of its loans back in 2009 and 2010.

Prosecutors charged that LendingClub fraudulently increased the volume of loans available for purchase through its online marketplace in order to meet its monthly loan origination goals.

For example, LendingClub allegedly made 32 loans in December 2009 to Laplanche and three family members, which violated the company’s credit policy, and then took steps to conceal the fact that the loans went to the same four borrowers. Those loans, most of which were quickly repaid, were publicly disclosed by LendingClub in June 2016.

Throughout 2009, LendingClub also allegedly made other loans that were approved by Laplanche even though they did not meet income requirements in the firm’s credit policy.

Alex Tse, U.S. Attorney in the Northern District of California, used the LendingClub settlement as an opportunity to send a message to other fintech firms. “We will vigorously investigate wrongful conduct in this industry,” he said in a press release.

Federal authorities began digging into LendingClub’s operations after the company’s board launched an investigation around the time of Laplanche’s departure. His exit under a cloud of scandal led to a sell-off in Lending Club shares, and the firm’s stock price has yet to recover from that setback. Shares in the company closed at $3.88 on Friday.

Earlier in the day, the SEC charged a LendingClub subsidiary and Laplanche with fraud, while also announcing a settlement deal that resolved its investigation.

The SEC alleged that LendingClub Asset Management and Laplanche improperly used investor money to benefit the publicly traded company.

Under the settlement agreement, Laplanche is barred from the securities industry, though he can apply for reinstatement in three years. He agreed to pay a $200,000 penalty.

The settlement is not expected to affect Laplanche’s ability to run Upgrade, a rival online consumer lender that he founded after leaving LendingClub.

LendingClub Asset Management, which is a subsidiary of the parent company, will pay a $4 million penalty. The SEC did not bring charges against LendingClub Corp., which self-reported the violations and provided extraordinary cooperation, according to the agency.

The SEC brought additional charges of improperly adjusting fund returns against Laplanche, LendingClub Asset Management and former LendingClub Chief Financial Officer Carrie Dolan.

Dolan agreed to pay a $65,000 penalty to resolve the charge. None of the defendants admitted or denied the SEC’s findings.

“Investors depend on fund advisers to give them the straight scoop on performance so they can make informed investment decisions," Jina Choi, director of the SEC’s office in San Francisco, said in a press release. “Advisers who adjust their valuation processes to boost results are in breach of their duties to investors.”

LendingClub operates an online marketplace that matches consumers who want an installment loan — often to refinance existing credit card debt — with individual and institutional investors.

Private funds that want to purchase interests in those loans can do so through LendingClub Asset Management, a registered investment adviser that was formerly known as LendingClub Advisors.

The SEC found that the LendingClub subsidiary and Laplanche breached their fiduciary duty to investors by purchasing interests in certain loans that were at risk of going unfunded, in order to benefit LendingClub.

The agency also found that the three defendants took improper steps designed to improve the returns that were reported to fund investors.

For his part, Laplanche said in a statement that he is pleased to have worked out a settlement with the SEC.

He also defended some of the specific actions taken by the LendingClub subsidiary while he was at the helm of the company, noting certain monthly disclosures that were made to investors and saying that he believes any manual adjustments to valuations were made in good faith.

Regarding the DOJ settlement, Laplanche said that the company's understanding back in 2009 and 2010 was that exceptions to the firm's credit policy were permitted. He said that any exception program today would benefit from a much more robust control environment.

“With the benefit of my prior experience, I feel better equipped to establish a strong culture of compliance and effective internal controls under the supervision of capable professionals,” Laplanche added in reference to his current job as CEO of Upgrade.

Dolan, who is now the chief financial officer at the car insurance startup Metromile, cooperated fully with the SEC, according to her spokesperson.

“Throughout her career she has acted in accordance with high ethical standards,” the spokesperson said in an email, “and she is happy to put this matter behind her.”

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