LendingClub Corp (LC) Still Can’t Get Any Credit

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The case of LendingClub Corp (LC) — a pioneer of online lending to consumers and small businesses — shows how quickly a Wall Street darling can turn into a pariah.

LendingClub Corp (LC) Still Can’t Get Any Credit

After the sudden departure last week of the company’s CEO, Renaud Laplanche, there has been an avalanche of terrible news. And of course, investors have been dumping shares. During the past two weeks, LC stock has seen about half its market cap evaporate.

Keep in mind that the details have been kind of sketchy. But after an SEC disclosure yesterday, there is much more clarity now.

Unfortunately, it’s the kind of news investors in LC stock really do not want to hear.

The Bad News for LC Stock

Granted, since securities attorneys write SEC disclosures, it should not be surprising that the focus tends to be highly conservative. So yes, things could sound much worse than they are!

But I still think there are some important takeaways. First of all, the internal controls of LC are “not effective,” according to the company’s senior management, independent auditor and outside counsel.

In fact, a key part was the culture at the firm – or the “tone at the top” by certain managers. For example, about $3 million in loans involved a date change, which was an “attempt to appear to meet the investor’s requirement, and the balance of the loans was sold in direct contravention of the investor’s direction.”

Then there was the issue of conflicts of interest. To this end, the former CEO as well as board member John Mack had a financial interest in a fund (called Cirrix Capital) that provided funding for the loans of LC. Just in Q1 of this year, the fund purchased $114.5 million worth.

Oh, and LC provided some of the capital to Cirrix. So in an indirect way, the company has loan exposure.

This is critical since LC has indicated to Wall Street that it is a marketplace, not a financial institution. According to the IPO filing: “We generate revenue from transaction fees from our marketplace’s role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees for investment funds and other managed accounts. We do not assume credit risk or use our own capital to invest in loans facilitated by our marketplace [my emphasis added], except in limited circumstances and in amounts that are not material. Our technology platform significantly reduces the need for physical infrastructure and lowers our costs, which provides us with significant operating leverage.”

Something else: LendingClub has received a grand jury subpoena from the U.S. Department of Justice and there have been inquiries from the Securities and Exchange Commission.

While such actions are normal whenever there are questions about disclosures, it seems likely that this will be yet another distraction for management. And it will be expensive and a hit to the credibility of LendingClub. which has already been greatly damaged.

Bottom Line On LC Stock

Although, there was some good news. Consider that the internal review showed that 99.9% of the loans processed through LC — from the middle of 2014 — were in compliance.

But this is not enough to provide much support for LC stock. Let’s face it, the financial industry is based on trust, which can certainly be fragile. If anything, the financial crisis demonstrated this, indicating that even the world’s largest financial institutions, like Bank of America Corp (BAC), Goldman Sachs Group Inc (GS) and American International Group Inc (AIG), can easily crumble.

Now this does not mean that LC stock is headed to zero. The company appears to be taking swift actions, as seen with the departure of the CEO. LC is also pushing aggressively to improve the internal controls. It also helps that there is about $583 million in the bank.

Yet the process will be a slog. It also seems inevitable that growth will slow down as it will be more difficult to find investors for loans. Actually, LC has indicated it may even offer equity to attract backers! No doubt, this could lead to dilution of the stock.

So in light of all the negative factors — which are difficult to quantify — there is really no rush to move into LC stock right now.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/lendingclub-lc-still-cant-get-credit/.

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