A federal judge on Thursday rejected efforts by LendingClub and former CEO Renaud Laplanche to dismiss shareholder litigation accusing them of concealing material weaknesses in the online lender’s ability to monitor its operations.
The decision by U.S. District Judge William Alsup in San Francisco lets shareholders pursue most of their claims over the contents of LendingClub’s registration statement for its December 2014 initial public offering.
Shareholders said LendingClub misled them into thinking its internal controls were strong enough to stop questionable practices, and that the company’s market value plunged several billion dollars as the truth became known.
A spokeswoman for the San Francisco-based company declined to comment. Lawyers for Laplanche did not immediately respond to requests for comment.
Laplanche left LendingClub last May after an internal probe found that employees had falsified documentation when selling $22 million of loans to an investor.
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The next month, LendingClub said Laplanche and family members had taken out loans from the company in December 2009, enabling it to boost loan volumes, one measure of its value, not long before a major capital raise.
LendingClub specializes in matching borrowers with institutional lenders, and has since Laplanche’s departure made large investments to improve technology and underwriting, as well as to regain investors’ trust.
But Alsup said it was “difficult” for Laplanche to avoid the “strong inference” that he intended, before his departure, to mislead investors about LendingClub’s controls.
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“He had engaged in self-dealing to inflate loan-origination numbers and he had inflated the assets of subsidiaries of LendingClub before the IPO–both issues involving financial reporting,” Alsup wrote.
“No competing inference is more reasonable than concluding that CEO Laplanche knew that some material weaknesses in internal controls over financial reporting persisted,” he added.
The lead plaintiff in the litigation is the Water and Power Employees’ Retirement, Disability and Death Plan of the City of Los Angeles. Its lawyers did not immediately respond to requests for comment.
Laplanche’s new online lending company, Upgrade, has raised $60 million in equity and convertible notes from a large group of U.S. Investors, the startup said last month.
