SEC Investigates Founder's Role in LendingClub Buyback Plan

  • SEC examining whether ex-CEO withheld information from board
  • Laplanche was at risk of losing money on loan if shares fell

Wall Street’s top cop is scrutinizing whether the founder of LendingClub Corp. advocated for the company to prop up its shares without telling the board about a possible conflict of interest, according to people with knowledge of the matter.

As part of a broad investigation into the online lending platform, the U.S. Securities and Exchange Commission is reviewing Renaud Laplanche’s role in a $150 million share buyback approved in February, said the people, who asked not to be named because details of the probe aren’t public. Laplanche, who was chairman and chief executive officer at the time, had pledged some of his shares as collateral for a loan and was required to put up more money if the stock slid below a certain price, the people said.

While Laplanche ultimately sorted out his financial issues before the board approved the buyback, the SEC is still examining whether he withheld information that other directors should have known about, according to the people. Laplanche, who left the company in May, hasn’t been accused of any wrongdoing.

If a CEO’s personal business dealings are tied to the share price it’s “clearly the kind of thing” that should be disclosed to the board, said Jill Fisch, a corporate governance expert at University of Pennsylvania Law School. “The board relies on management and that’s why best practice is that any possible interest management has, should be disclosed.”

Spokesmen for the SEC, Laplanche and LendingClub declined to comment.

Regulators Circling

Regulators and prosecutors have been circling LendingClub since it shocked investors in May by announcing that Laplanche had resigned and that employees had falsified information on consumer loans the company arranged. SEC scrutiny of the share buyback adds to the agency’s concerns that during his tenure running LendingClub, Laplanche didn’t always keep the board in the loop on how his personal financial interests were entangled with the company’s.

The SEC initially opened an investigation into San Francisco-based LendingClub to review the company’s disclosures that dates on loans sold to Jefferies Group had been altered and that the board hadn’t been informed of Laplanche’s investment in a firm that posed a potential conflict. The probe has since expanded, the people said.

While LendingClub has disclosed some information on Laplanche’s financial dealings, it has stopped short of providing a detailed chronology in its regulatory filings. Other public records reveal some of his moves as LendingClub’s stock began falling late last year due to concerns that the company was having a harder time persuading investors to fund its loans.

In November, Laplanche purchased a property in Ross, California, through an entity called the Brant Point Trust. On Dec. 9, he transferred 4.47 million of his LendingClub shares to the trust. By Jan. 15, those shares had lost almost half their value and Laplanche was forced to refinance a personal loan, LendingClub later disclosed without specifying the circumstances of the debt.

Mack Loan

To avoid having to sell some of his shares to raise cash, Laplanche borrowed money from fellow director John Mack, the former chief executive officer of Morgan Stanley, according to a person familiar with the matter. The loan from Mack was secured by real estate. On Feb. 19, Laplanche received a $6.51 million mortgage on the Ross property from Morgan Stanley Private Bank as a trustee of the Brant Point Trust, according to public records.

Mack declined to comment on the loan to Laplanche.

The buyback, announced Feb. 11, was a swift reversal in strategy for LendingClub. In late 2014, it had raised $1 billion in an initial public offering, becoming the first in its industry to list shares on the New York Stock Exchange. After the company said it would repurchase shares, the stock price rose 43 percent in the following seven trading days.

As it turns out, the share rally didn’t help Laplanche. That’s because the demand that he put up money to support the shares he had pledged as collateral came in January and the stock price didn’t increase as much as he would have needed, according to a person with direct knowledge of the matter.

In addition, LendingClub was barred at the time from repurchasing shares until its next earnings report, the person said. Regardless, when LendingClub did announce its plans to buy back stock in February, Laplanche had already sorted out his financial situation by borrowing money from Mack, the person said.

Still, the SEC is examining whether he failed to inform the board of a conflict at the time directors were discussing the buyback, a potential violation of securities laws, said the people familiar with the agency’s investigation.

New Policy

In April, LendingClub disclosed a new policy that requires executives to get approval from its general counsel and inform the board’s audit committee before pledging LendingClub securities as collateral for a loan or holding them in a margin account.

The board review that led to Laplanche’s exit also turned up another potential conflict that the former CEO failed to disclose. Earlier this year, he suggested the company invest $10 million with Cirrix Capital, an asset manager that buys LendingClub loans. A board committee approved the idea, but not all of the directors who reviewed it were aware that Laplanche had a personal stake in the fund. The disclosure was included in LendingClub’s proxy statement in April, after the investment had been made. 

LendingClub’s issues began in April when the board began an internal review after it learned that application dates had been changed on $3 million of loans sold to Jefferies. The probe eventually found that $22 million of debts bought by the investment bank didn’t meet its criteria. LendingClub repurchased the loans and sold them to another investor. 

While a relatively small-dollar issue, the episode eroded the board’s trust in Laplanche, according to people familiar with the deliberations. After Laplanche’s resignation in May, the Justice Department sent a grand jury subpoena to LendingClub seeking information.