Mack the knife

28 June 2016 By Richard Beales

Naivete can be an asset in Silicon Valley. Founders with purity of vision, like Facebook’s Mark Zuckerberg, move fast and break things. The approach can upset established industries, run afoul of regulations, or both. Lending Club, like other fintech upstarts, aimed to disrupt bank lending. It’s now clear that its innovations didn’t extend to building a new kind of pure financial-sector culture.

The company’s founder, Renaud Laplanche, was forced out as chief executive in May after various irregularities were discovered, including related holdings he hadn’t disclosed. As it tries to draw a line under the episode, Lending Club now alleges Laplanche and family members also took out loans in late 2009 to boost volume, repaying them early the following year.

The $1.6 billion company on Tuesday convened shareholders after anointing interim CEO Scott Sanborn as the permanent boss. It also said it was cutting staff in response to a slump in volume. The new leader will work “to rebuild confidence,” he said. That’s needed for a few reasons.

First, the cultural tone is set at the top, as Bill Dudley, president of the New York Federal Reserve, noted in a speech around the time Lending Club went public in 2014. If Laplanche was okay with a bit of self-dealing, then maybe others were too. The presence of ex-Morgan Stanley boss John Mack and former Treasury Secretary Larry Summers on the board doesn’t seem to have guaranteed pristine behavior.

The new CEO also needs to get back in the good books of customers and investors in its loans to get business going again. Then there are U.S. watchdogs, which have been eyeing the new world of financial technology and trying to figure out how they should get involved. The whole industry could struggle if problems like Lending Club’s provoke a heavy-handed regulatory response.

Last but not least, there are Lending Club’s shareholders. The company priced its initial public offering at $15 a share and the stock soared above $20 in the early days of trading, but it has been essentially downhill in the 18 months since. The shares fell below $10 early this year and even after Tuesday’s announcements were greeted with a pop, they’re now below $5. That’s not the kind of disruption owners had in mind.

 

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