Hard LendingClub: Fallout From P2P Scandal Results In Another Resignation; John Mack Is Dragged In

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by Tyler Durden
Monday, May 09, 2016 - 17:46

The bad news for Hard LendingClub (or perhaps it is LendingClubbed) just keeps on coming.

As we reported earlier today, following the surprising "resignation" of the company's CEO and Chairman, Renaud Laplanche as a result of an "internal board review of sales of $22 million in near-prime loans to a single investor", which resulted in the stock losing a quarter of its market cap in minutes, subsequent revelations have seen the spotlight shining brightly on none other than former Morgan Stanley CEO and current Lending Club board member, John Mack, who according to Bloomberg invested in the same venture that led to the termination resignation of the CEO.

The reason why Mack was not shown the door, at least not yet, is that he allegedly did not know the company was weighing an investment in Cirrix Capital, and so wasn’t expected to disclose his holding. On the other hand, Laplanche presented the idea of having LendingClub invest in the venture to the board’s risk committee, while failing to disclose his personal stake. Indicatively, as of December 31, Mack had a 10% limited-partnership stake in Cirrix Capital while Laplanche held 2%.

To get a sense of just how circuitous the fund flows involved are, Cirrix is an entity managed by Andrew Hallowell’s Arcadia Funds LLC, which invests in online marketplace loans, including those from San Francisco-based LendingClub. In other words, aside from potential "related party" breaches, the conflicts of interest between the various equity and debt channels were striking, and sufficient grounds for the board to demand the CEO's resignation for non-disclosure among other transgressions. 

And then LendingClub bought a 15% interest in Cirrix earlier this year for $10 million, Bloomberg adds citing regulatory filings. That decision was approved by the risk committee and without the full board’s involvement, one of the people said. Laplanche resigned Friday after an internal review faulted him for not informing the committee of his and Mack’s investment.

So far Mack has escaped unsathed from a scandal that has already cost the CEO his job and shareholders a third of their investment.

It wasn't just John Mack: the investigation also found that LendingClub sold $22 million of loans to Jefferies Group that didn’t meet the investment bank’s criteria for purchase, another person said. As IFR adds, the US$22 million pool of near-prime loans was sold to Jefferies, but repurchased at par, with no loss to the US-based investment bank.

Meanwhile, LendingClub’s four-person risk committee which approved the $10 million investment, is led by former Visa Inc. President John "Hans" Morris, who took over as executive chairman after Laplanche’s departure. The committee also includes ex-U.S. Treasury Secretary Lawrence Summers, Simon Williams, previously an executive at HSBC Holdings Plc, and Daniel Ciporin, a former MasterCard Inc. executive who’s a general partner of venture-capital firm Canaan Partners.

Adding to the highliy conficted picture, according to Bloomberg funds with backing from Laplanche and Mack had acquired $139.6 million of whole loans and $34.9 million of interests in whole loans, LendingClub said in its annual proxy filing last month, without identifying the funds. The company paid $7.4 million in interest to the family of funds, while earning $636,000 in servicing fees and $357,000 in management fees from the funds, according to the proxy.

The terms "were not more favorable than those obtained by other third-party investors,” according to the filing. As of April 1, the company, Laplanche and Mack owned about 31 percent of Cirrix.

In other words, while the underlying troubles that we first laid out in February involving LendingClub's rapidly deteriorating business model remain a major issue, the reason why the CEO was sacked is because of what is emerging as a very conflicted, and cozy, use of the company - and its direct investment - as a slush fund, while potentially engaging in a transaction that was meant to cover up the deteriorating fundamentals.

And then, moments ago, the "Hard LendingClub" scandal du jour took a twist for the even worse, when Bloomberg reported that a senior LendingClub executive in charge of boosting sales of loans to investors left the company. 

Jeff Bogan, as head of the firm’s investor group, oversaw efforts to sell more loans to institutional and retail investors, as well as financial firms. LendingClub told some investors Monday that he had resigned, according to the person, who asked not to be identified because the situation isn’t public.

He is the first proverbial cockroach. There will be many more as the $1.8 billion company suddenly fights to avoid comparisons to such subprime blow up harbingers as New Century Financial.

* * *

For those curious, here is LC's Board of Directors that at first blush had zero internal controls over loan creation, even if these involved tremendous conflicts of interest. Not surprisingly it is made up of some of the so-called "best and brightest" in the world of finance, and especially former Morgan Stanley employees. What is curious, is that according to the latest proxy statement, Morgan Stanley Investment Management is also the fifth largest investor in the company, owning 6.8% of the common stock. One wonders just how deep the rabbit hole goes in this one.

  • John Mack: John J. Mack is a Senior Advisor of both Morgan Stanley and KKR. He retired as Chairman of the Board of Morgan Stanley at the end of 2011 and also served as Chief Executive Officer of Morgan Stanley from June 2005 until December 2009.
  • Mary Meeker, Kleiner Perkins Caufield & Byers:  Mary Meeker joined Kleiner Perkins Caufield & Byers as a partner in 2010, and leads KPCB's $1 billion US Digital Growth Fund (DGF), which targets high-growth Internet companies that have achieved rapid adoption and scale. From 1991 to 2010 Mary worked at Morgan Stanley as managing director and research analyst, where she focused on discovering and understanding emerging technologies and supported category-defining companies during their critical phases.
  • Lawrence H. Summers, Harvard University: Lawrence H. Summers is the Charles W. Eliot University Professor & President Emeritus of Harvard University and the Weil Director of the Mossavar-Rahmani Center for Business & Government at Harvard’s Kennedy School.
  • Hans Morris, General Atlantic: Hans Morris served as president of Visa Inc. from 2007 to 2009, where his primary responsibilities included managing all markets in which Visa did business. Hans tenure coincided with the global payments technology company’s initial public offering and a reorganization that merged several separate businesses into a new company.
  • Simon Williams, Former Group General Manager, Wealth Management, HSBC: Simon Williams was Group General Manager, Wealth Management at HSBC. He was a member of HSBC’s RBWM Global Executive Committee and was responsible for leading the development and growth of their wealth management business globally.
  • Daniel T. Ciporin, Canaan Partners:Dan Ciporin joined Canaan Partners in 2007 and is currently a General Partner specializing in digital media, financial technology and e-commerce investments.
  • Jeff Crowe, Norwest Venture Partners: With over 20 years of CEO and executive experience in technology companies, Jeff joined Norwest in 2004 and became managing partner in 2013. Jeff focuses on investments in the Internet, consumer, and software arenas. 2015 marked Jeff’s second consecutive appearance on the Forbes Midas List of tech’s top investors

As a result of today's rapidly moving events, as of this moment the value of the Board's LendingClub stock is about a third less than what it was on Friday afternoon. We expect that it will be worth even less in the coming weeks.