Veal v. LendingClub Corporation

Background

This proposed securities-fraud class action was brought by Matthew Veal and others against LendingClub Corporation and officers Scott Sanborn, Bradley Coleman, and Thomas W. Casey. The lead plaintiffs, XiangHong Ding and Zhenbin Chen, alleged that they purchased LendingClub securities during the stated class period and paid inflated prices because of misleading statements.

The second amended complaint asserted two claims. Claim 1 alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. Claim 2 alleged that the individual defendants were liable as controlling persons under Section 20(a) of the Exchange Act.

The plaintiffs’ revised theory focused on LendingClub’s Federal Trade Commission investigation. They alleged that LendingClub failed to disclose the investigation when it began and later misleadingly grouped it with investigations by the Department of Justice and the Securities and Exchange Commission. According to the plaintiffs, this presentation concealed that the FTC investigation concerned separate consumer practices, including alleged hidden fees, loan-approval representations, unauthorized withdrawals, and privacy-notice issues.

Legal standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Because the complaint alleged securities fraud, it also had to satisfy the heightened requirements of Rule 9(b) and the Private Securities Litigation Reform Act. Those requirements demanded particular facts identifying the allegedly misleading statements, explaining why they were misleading when made, and creating a strong inference that each defendant acted with intent to deceive or deliberate recklessness. That mental state is called scienter.

Court’s analysis

The court held that the allegations concerning disclosures of government investigations did not adequately show that LendingClub had a duty to disclose the FTC investigation earlier. The complaint also did not provide facts showing that each defendant knew the investigation’s specific subject and target when the challenged statements were made.

The court rejected the plaintiffs’ allegations concerning risk factors because the complaint did not show that the consequences of noncompliance warned about in those risk factors had already occurred. It likewise rejected the claims concerning forward-looking safe-harbor statements, finding that the statements referred to pending government investigations and did not create a materially different impression from reality.

The court found that statements about legal expenses were not shown to be false or misleading because they discussed costs associated with investigations and lawsuits, not the substance of those investigations. The court also rejected claims based on statements about LendingClub’s transparency and fairness. It had previously treated those statements as non-actionable corporate puffery, and it found that the plaintiffs’ FTC-investigation theory was unrelated to those statements.

The court found the privacy-policy allegations deficient because the complaint did not show that LendingClub’s privacy policy was noncompliant with the Gramm-Leach-Bliley Act, or that defendants believed it was noncompliant, when the challenged statements were made in 2017 and 2018.

The court declined to dismiss an entire statement by Sanborn as puffery because part of it was factual. However, it dismissed without leave to amend Sanborn’s statement about LendingClub’s “relentless focus on compliance, security and risk management.” It also dismissed without leave to amend the first sentence of Casey’s statement describing banks as an endorsement of LendingClub’s compliance and controls, because the court had determined that sentence was non-actionable puffery.

The court also dismissed without leave to amend allegations concerning statements about LendingClub’s redesigned website, its remediation of internal-control weaknesses, and its Sarbanes-Oxley certifications. The court found those statements unrelated to the FTC investigation and the consumer practices underlying the plaintiffs’ theory.

The court separately concluded that the second amended complaint did not plead scienter. The allegations did not show what each defendant knew about the specific subjects of the FTC investigation, when each defendant learned those facts, or that any defendant intentionally or deliberately recklessly omitted information in a misleading way. The court also found that the plaintiffs improperly grouped the defendants together and that their “core operations” allegations did not establish that the defendants must have known the investigation’s specific targets.

Leave to amend and disposition

Although the plaintiffs had previously amended their complaint, the court found that the second amended complaint presented a new theory of liability. It therefore found that leave to amend was warranted for claims that remained amendable. The court stated that any amendment was limited to curing the deficiencies identified in this order and the prior order; the plaintiffs could not assert a new or revised theory of liability.

The order granted the defendants’ motion to dismiss without leave to amend as to the specified allegations in the second amended complaint, including the listed allegations concerning Sanborn’s compliance statement, website and remediation statements, and Sarbanes-Oxley certifications. It also granted the motion to dismiss without leave to amend as to Bradley Coleman.

The order granted the motion to dismiss with leave to amend as to LendingClub, Sanborn, and Casey. It also granted the motion to dismiss the Section 20(a) controlling-person claims with leave to amend because the plaintiffs had not adequately stated a primary Exchange Act violation. The court directed that any amended securities-fraud allegations be presented in a statement-by-statement chart addressing the speaker, date and medium, challenged statements, reasons for falsity or misleadingness, and facts supporting scienter.