Northern District Of California Dismisses Purported Class Action Against Peer-To-Peer Lending Company For Failure To Adequately Allege Falsity And Scienter
On June 12, 2020, Judge Beth Labson Freeman of the United States District Court for the Northern District of California dismissed a purported securities class action against a peer-to-peer lending company (the “Company”) and certain of its officers under Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Veal v. LendingClub Corporation, et. al., No. 5:18-cv-02599 (N.D. Cal. June 12, 2020). Plaintiffs alleged that defendants made misstatements and omissions regarding an investigation by the Federal Trade Commission (“FTC”) into the Company’s allegedly deceptive conduct related to certain consumer practices. The Court dismissed plaintiffs’ claims (mostly without prejudice), because plaintiffs failed to adequately allege falsity or scienter.
In May 2016, the Company disclosed that some of its senior executives and managers had engaged in deceptive conduct by knowingly misleading investors as to the characteristics of certain loans, and that the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) were conducting investigations into the disclosed misconduct. That same month, the FTC began a separate investigation into certain of the Company’s consumer practices, including its disclosures related to origination fees and certainty of loan approval. The Company publicly disclosed the FTC investigation for the first time in November 2016. In April 2018, the FTC announced that it had filed a complaint against the Company for engaging in “deceptive acts” by charging up-front “hidden fees” and representing to borrowers that they would receive loans before making final approval decisions.
The Court previously granted a motion to dismiss plaintiffs’ first amended complaint, which alleged that defendants misled investors by failing to disclose the deceptive consumer-facing practices investigated by the FTC. In the second amended complaint that was the subject of this decision, plaintiffs asserted a new theory based on allegations that defendants failed to timely disclose the FTC investigation and that, when they did, they misled investors by “lumping together all regulatory investigations” and “omitting that the FTC [i]nvestigation involved wholly distinct conduct” covered by the DOJ and SEC investigations. The Court again dismissed the claims (most without prejudice), because it found that plaintiffs’ allegations of falsity and scienter were inadequate.
The Court first held that the Company “was not required to ‘make an immediate disclosure of the [FTC] investigation.’” The Court held that there was no independent duty to make such a disclosure and that plaintiffs failed to allege that the omission of the FTC investigation “create[d] an impression of a state of affairs that differ[ed] in a material way from the one that actually exist[ed]”—i.e., that the Company was not under FTC scrutiny.
The Court also rejected plaintiffs’ claim that the disclosure that the Company was under investigation by the DOJ, SEC and FTC misleadingly created the impression that the FTC investigation related to the same subject matter as the DOJ and SEC investigations when it did not. The Court explained that the factual allegations and the actual disclosures did not support plaintiffs’ claims that defendants knew what the FTC was looking into, including whether the FTC was looking into the same issues under scrutiny by the DOJ and the SEC. Because plaintiffs failed to allege facts showing when defendants learned about what the FTC was investigating, the Court found that the complaint failed to allege adequately that the Company’s statement that it was under investigation by the SEC, DOJ and FTC was false (or misrepresented what the Company knew about the FTC investigation) when it was made. For similar reasons, the Court held that plaintiffs failed to allege scienter, concluding it could not infer from allegations that defendants were aware of underlying issues with the Company’s lending practices that defendants also knew those same practices were under FTC investigation.
Finally, the Court found that plaintiffs’ allegations on the whole failed to “evince fraudulent intent or deliberate recklessness as to make the inference of scienter cogent.” In particular, the Court noted that there were no allegations that any individual defendants sold Company stock during the relevant period. To the contrary, certain of the individual defendants purchased Company stock, which according to the Court was “‘significant for the holistic assessment’ and ‘weigh[ed] against an inference of scienter.’”
Because the second amended complaint asserted an entirely different theory from the first amended complaint, the Court’s dismissal was without prejudice (except as to certain claims against one individual defendant that was held to have been inadequately alleged).