New York - Renaud Laplanche wanted to reinvent banking as we know it - and Wall Street loved him for it.
Not any more. A decade after Laplanche helped create the business of peer-to-peer lending, his LendingClub Corporation has stumbled by mistreating the people it needs most: the investors who fund its loans.
Laplanche’s decision to step down as chief executive officer of the company he founded sent shock waves through the online lending world, a corner of finance that’s going from hot to not almost overnight. LendingClub’s stock plummeted 35 percent on Monday after the company disclosed internal-control lapses and abuses related to the sale of some of its loans. The US Securities and Exchange Commission is now examining what happened, according to people with knowledge of the matter.
The developments mark the biggest setback yet for the business, as well as an embarrassment for some prominent financial figures who’ve lined up behind the idea of matching investors with borrowers. As Laplanche’s vision of bypassing traditional banks went mainstream, John Mack, Lawrence Summers and Mary Meeker all joined his company’s board.
The question now is whether the startups can rebuild investor trust in their ability to almost instantly price risks on loans made online - or whether they’re more like traditional finance companies who’ve struggled before to streamline lending. Competitors Prosper Marketplace and On Deck Capital had to slow down expansion plans this month as the hedge funds and other buyers that had been snapping up their loans scaled back purchases.
Altered dates
“Investors won’t give the industry the benefit of the doubt,” said Cormac Leech, a senior analyst who specialises in peer-to-peer lending at London-based Liberum Capital. “LendingClub is the leading light in the sector, so if it’s not following best practices to the letter then investors are going to assume that second- and third-tier platforms are doing the same thing.”
Laplanche resigned after the board found LendingClub had altered dates on $3 million of loans, the company said. The debts were part of a $22 million bundle of near-prime loans sold to Jefferies Group, which didn’t take a loss because LendingClub later repurchased them, according to a person familiar with the matter who asked not to be identified discussing a private transaction.
The sale was found to be “in contravention of the investor’s express instructions”, LendingClub said in a statement.
By resigning, Laplanche had to give up unvested stock options worth about $7.83 million, based on Friday’s closing price in New York. Laplanche, 45, who was also chairman, didn’t respond to calls and emails seeking comment.
Industry’s godfather
He founded LendingClub in 2006 and took it public less than two years ago in an $870 million IPO, the first of the new breed of Silicon Valley finance companies to do so. Its valuation briefly climbed to more than $10 billion. A prominent booster before Congress and on television, Laplanche has been the face of an industry that promised to modernise banking.
“We’ll get through this, but there’s no question this is a setback,” said Peter Renton, who runs LendIt, a leading online lending conference. Laplanche was “our biggest personality, the godfather of our industry”.
Laplanche’s fall was stunning and abrupt. Just last month, he delivered a defence of LendingClub and the industry he helped create before an audience of thousands at the LendIt conference in San Francisco.
“At LendingClub, we’ve almost invented prudent growth,” he said. Laplanche said the company grew slower than it could in order to focus “on security, on risk management, on compliance, controls, all the things that could break when one grows too fast”.
The title of his keynote presentation: “From Sapling to Ironwood, Marketplace Lending’s Next Phase of Growth.”
Funding sources
When San Francisco-based LendingClub and its competitors were founded, they called their business peer-to-peer lending. The idea was that they would connect borrowers with people who wanted to make a little extra money by lending out their savings, cutting out the middleman: banks. Investors hoped the concept would transform lending, as large banking rivals faced regulatory pressures after the 2008 financial crisis.
But as the industry has grown, hedge funds and even banks themselves have replaced individuals as the main funders of the loans.
The scandal could make it harder for LendingClub to find the $10 billion to $12 billion in funding it needs to meet its expansion plans, according to Henry Coffey, an analyst at Sterne Agee CRT, who reduced his rating on the company to “underperform” from “neutral”.
Wall Street firms have been buying loans from LendingClub and packaging them into bonds, and Jefferies and Goldman Sachs Group were planning more securitisations as of April, people familiar with the matter said at the time.
Spokesmen for Jefferies and Goldman Sachs declined to comment.
Questioning managers
Laplanche ordered an internal investigation after learning that dates had been altered on loans, according to a person familiar with the situation. The board soon followed with its own inquiry, upsetting the normal routine at the company’s headquarters. Accountants and lawyers have taken over conference rooms in recent weeks to conduct multi-hour interviews with executives, the person said.
The board, which generally had been pleased with Laplanche’s leadership until then, grew wary because it felt he wasn’t being candid, the person said. Pressure on the CEO intensified last week, and he resigned Friday, the person said.
Three senior managers involved in these issues also stepped down or were dismissed, according to the company, which didn’t name them. The firm has told some investors that Jeff Bogan, a senior executive in charge of boosting sales of loans, resigned, according to a person briefed on the matter. Bogan didn’t respond to messages seeking comment.
“While the financial impact of this $22 million in loan sales was minor, a violation of the company’s business practices along with a lack of full disclosure during the review was unacceptable to the board,” Hans Morris, a member of the board, said in the statement. He was appointed executive chairman, a new role.
Losing a ‘champion’
The company said it found another problem: an executive hadn’t disclosed his interests in a fund that LendingClub was considering investing in.
That was also Laplanche, and the fund was Cirrix Capital, according to people familiar with the matter. Mack, the former Morgan Stanley CEO on LendingClub’s board, was also invested in it, they said. LendingClub bought a 15 percent limited-partnership interest in Cirrix this year for $10 million, regulatory filings show.
Laplanche’s downfall is “sad for fintech startups”, said Charles Moldow, general partner at Foundation Capital, an early LendingClub investor. “Renaud was the de facto champion of the fintech movement.”
* With assistance from Felice Maranz
BLOOMBERG