The SEC has charged LendingClub Asset Management (LCA), and its former president, Renaud Laplanche, with fraud for allegedly improperly using fund money to benefit its parent company, LendingClub Corp.
The two, along with former LendingClub Corp. Chief Financial Officer Carrie Dolan, were also charged with improperly adjusting fund returns. They agreed to settle the agency’s charges against them, and will pay more than $4.2 million in combined penalties, while Laplanche was barred from having any association with the securities industry for at least three years.
The SEC said LCA and Laplanche instructed one of its private funds to purchase interests in loans that were at risk of going unfunded on the LendingClub platform, which would have deprived the company of revenue it could otherwise earn. Because the move was made to benefit LendingClub Corp., and not the fund, the company was in breach of its fiduciary duty, according to the SEC’s order.
The SEC also said LCA, Laplanche, and Dolan improperly adjusted monthly returns for LCA-managed funds to improve the returns they reported to fund investors.
According to the SEC’s order, LCA marketed its services as an investment adviser that would diversify the holdings of the private funds it managed across several LendingClub loans. Each fund had a different risk strategy, but all were created to invest exclusively in LendingClub loans.
However, in late 2015, returns on loans began to decline, which put pressure on the profitability of the funds because they were invested in LendingClub Corp. loans. It also made it more difficult for LCA to attract new investors and retain existing investors, which the SEC said was important for LendingClub because the more assets LCA had to invest, the more interests in loans it could purchase on the LendingClub platform.
“Investment advisers have an obligation to put their clients’ interests ahead of their own,” Daniel Michael, head of the SEC’s Complex Financial Instruments Unit, said in a release. “By using funds managed by LCA to benefit its parent company, LCA and Laplanche failed to do so.”
To settle the SEC’s charges that they violated the antifraud provisions of the Investment Advisers Act of 1940, LCA, Laplanche, and Dolan agreed to pay penalties of $4 million, $200,000, and $65,000, respectively, but did so without admitting or denying the allegations.
The SEC said it did not recommend charges against LendingClub Corp. in recognition of the “extraordinary cooperation” the firm provided the investigation, which it said promptly self-reported the misconduct after a review initiated by its board of directors. The regulator said the “extensive remediation and cooperation” included providing compensation to fund investors, and significantly modifying its management structure to provide greater independence.
The order says that LCA reimbursed approximately $1 million to investors who were adversely impacted by the improperly adjusted monthly returns.