Matthew Fisher v. Scott Sanborn

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MATTHEW FISHER, Derivatively on
)
Behalf of LENDINGCLUB )
CORPORATION, )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0631-AGB
)
SCOTT SANBORN, THOMAS W. )
CASEY, BRADLEY COLEMAN, )
SAMEER GULATI, JOHN C. )
MORRIS, DANIEL T. CIPORIN, )
SIMON WILLIAMS, TIMOTHY J. )
MAYOPOULOS, KENNETH )
DENMAN, PATRICIA MCCORD, )
LAWRENCE SUMMERS, JEFFREY )
CROWE, JOHN J. MACK, and MARY )
MEEKER, )
)
Defendants, )
)
and )
)
LENDINGCLUB CORPORATION, a )
Delaware corporation, )
)
Nominal Defendant. )

MEMORANDUM OPINION

Date Submitted: September 2, 2020
Date Decided: March 30, 2021

Blake A. Bennett, COOCH AND TAYLOR, P.A., Wilmington, Delaware; Brian J.
Robbins, Stephen J. Oddo, Emily R. Bishop, ROBBINS LLP, San Diego, California;
Attorneys for Plaintiff Matthew Fisher.
A. Thompson Bayliss, Joseph A. Sparco, ABRAMS & BAYLISS LLP, Wilmington,
Delaware; James N. Kramer, Alexander K. Talarides, ORRICK HERRINGTON &
SUTCLIFFE LLP, San Francisco, California; Attorneys for Defendants Scott
Sanborn, Thomas W. Casey, Bradley Coleman, Sameer Gulati, John C. Morris,
Daniel T. Ciporin, Simon Williams, Timothy J. Mayopoulos, Kenneth Denman,
Patricia McCord, Lawrence Summers, Jeffrey Crowe, John J. Mack, Mary Meeker,
and Nominal Defendant LendingClub Corporation.

BOUCHARD, Chancellor
 A stockholder of LendingClub Corporation asserts in this derivative action

that the company’s directors breached their fiduciary duty of loyalty and unjustly

enriched themselves by utterly failing to implement a board-level monitoring system

and consciously disregarding their duty to oversee LendingClub’s compliance with

consumer protection laws. The impetus behind this claim was a lawsuit the Federal

Trade Commission (“FTC”) filed against LendingClub in April 2018, alleging it had

engaged in unfair and deceptive practices with consumers.

Plaintiff also asserts that the directors breached their fiduciary duty of loyalty

by making false and misleading statements about the subject matter of the FTC’s

investigation, which the company learned about in May 2016, almost two years

before the FTC filed suit. In particular, plaintiff alleges that certain of the company’s

disclosures created the false and misleading impression that the FTC was

investigating weaknesses in the company’s internal controls, which the company

publicly disclosed (coincidentally) in May 2016 after conducting an internal board

review and which prompted separate investigations by the United States Department

of Justice and the Securities and Exchange Commission.

Defendants have moved to dismiss the complaint under Court of Chancery

Rule 23.1 for failure to make a demand on the LendingClub board of directors before

filing suit and under Court of Chancery Rule 12(b)(6) for failure to state a claim for

relief. As to the former issue, plaintiff primarily contends that demand would have

1
been futile because seven of the eight members of LendingClub’s board when the

complaint was filed face a substantial likelihood of personal liability for the

underlying claims.

The standard under Delaware law for imposing liability on a director

exculpated from breaches of the duty of care in a case such as this is an exacting one

that requires evidence of bad faith. For the reasons explained below, the court

concludes after carefully reviewing the allegations in the complaint and the

documents incorporated therein that plaintiff has failed to allege particularized facts

from which it reasonably may be inferred that a majority of the directors on

LendingClub’s board when this action was filed utterly failed to implement a board-

level monitoring system, consciously allowed LendingClub to violate consumer

protection laws, or knowingly made false and misleading statements. Plaintiff thus

has failed to demonstrate that the directors face a substantial likelihood of liability

for acting in bad faith so as to excuse his failure to make a demand before filing suit.

Accordingly, the complaint will be dismissed with prejudice under Court of

Chancery Rule 23.1.

2
I. BACKGROUND

Unless otherwise noted, the facts recited in this opinion come from the

Verified Second Amended Stockholder Derivative Complaint for Breach of

Fiduciary Duty and Unjust Enrichment (the “Complaint”) and documents

incorporated therein, including documents produced to plaintiff in response to an

inspection demand under 8 Del. C. § 220.1

A. The Parties

Nominal defendant LendingClub Corporation (“LendingClub” or the

“Company”) is a Delaware corporation with its principal place of business in San

Francisco, California.2 LendingClub operates an online lending marketplace

platform that connects borrowers with investors willing to fund entire loans, portions

of individual loans, or portions of loan pools.3 LendingClub uses “issuing bank

partners” to originate the loans that it purchases and then services.4 The Company

1
Plaintiff agreed that the Complaint “shall be deemed to incorporate by reference the
entirety of the books and records” that were produced to him in response to his Section 220
demand. Transmittal Aff. of Joseph A. Sparco, Esq. (“Sparco Aff.”) Ex. A § 1.11 (Dkt.
43). “In the end, the only effect” of this condition is “to ensure that the plaintiff cannot
seize on a document, take it out of context, and insist on an unreasonable inference that the
court could not draw if it considered related documents.” Amalgamated Bank v. Yahoo!
Inc., 132 A.3d 752, 798 (Del. Ch. 2016), abrogated on other grounds, 214 A.3d 933 (Del.
2019).
2
Ver. Second Am. S’holder Deriv. Compl. (“Compl.”) ¶ 18 (Dkt. 26).
3
Id. ¶ 59.
4
Id.
3
receives an initial origination fee and subsequent servicing fees from the borrower

for its role in facilitating each loan.5 In 2016 and 2017, origination fees made up

“the overwhelming majority” of LendingClub’s revenue.6 Plaintiff Matthew Fisher

alleges he has been a LendingClub stockholder continuously since “the time of the

wrongdoing complained of” in this action.7

The Complaint names as defendants fourteen individuals consisting of eleven

current or former members of the Company’s board of directors (the “Board”) and

three current or former officers.8

The Board consisted of eight members when this action was filed on August

19, 2019: defendants Scott Sanborn, Daniel T. Ciporin, John C. Morris, Kenneth

Denman, Patricia McCord, Simon Williams, and Timothy J. Mayopoulos, and non-

party Susan Athey (the “Demand Board”).9 Sanborn, who has been LendingClub’s

CEO since 2016, is the only employee-director on the Demand Board.10 Ciporin,

Morris, Williams, and Mayopoulos currently serve or previously served on the

5
Id.
6
Id. ¶ 63.
7
Id. ¶ 17.
8
The Complaint also named LendingClub’s former CFO Carrie L. Dolan as a defendant.
She has since been voluntarily dismissed from the case. Dkt. 38.
9
Compl. ¶ 191.
10
See id. ¶ 19.
4
Board’s Risk Committee.11 These four directors, along with Denman, also currently

serve or previously served on the Board’s Audit Committee.12

The remaining seven defendants are former LendingClub directors and

current or former LendingClub officers. Defendants Lawrence Summers, Jeffrey

Crowe, John Mack, and Mary Meeker left the Board before the Complaint was

filed.13 Defendant Thomas W. Casey is LendingClub’s CFO.14 Defendants Sameer

Gulati and Bradley Coleman are former officers of the Company.15

B. LendingClub Discloses Material Weaknesses in its Internal
Controls Over Financial Reporting

On May 9, 2016, LendingClub disclosed that its then-CEO and Chairman,

Renaud Laplanche, had resigned after the Board conducted an internal review that

identified “material weaknesses in [its] internal control over financial reporting.”16

11
Morris and Williams have served on the Risk Committee since at least April 2015. Id.
¶¶ 24, 26. Ciporin served on the Risk Committee from at least April 2015 to at least April
2017. Id. ¶ 25. Mayopoulos served on the Risk Committee from at least April 2018 to
June 2019. Id. ¶ 27.
12
Id. ¶¶ 24-28.
13
Summers, who served on the Risk Committee from at least April 2016 to May 2018, left
the Board in May 2018. Id. ¶ 30. Crowe, who served on the Audit Committee from at
least April 2016 to at least April 2017, left the Board in October 2017. Id. ¶ 31. Mack and
Meeker both left the Board in June 2019. Id. ¶¶ 32-33.
14
Id. ¶ 20.
15
Gulati served as LendingClub’s Chief Operations Officer from May 2016 to December
2018. Id. ¶ 23. Coleman served as Corporate Controller, Principal Accounting Officer,
and Interim CFO at various times between December 2013 and August 2017. Id. ¶ 22.
16
Id. ¶¶ 71, 73, 76 (alteration in original).
5
The Board review related to “undisclosed self-dealing, sales of nonconforming

loans, and backdated loan applications.”17

The Company’s stock price fell 35% in one day on the news.18 Analysts

downgraded LendingClub’s stock, citing the Company’s “control failures” and need

to improve “oversight and compliance related to internal control issues.”19 The

United States Department of Justice (DOJ) and the Securities and Exchange

Commission (SEC) opened investigations into the Company’s business practices.20

Investors filed lawsuits against the Company, including a derivative action in the

Delaware Court of Chancery that later was dismissed under Court of Chancery Rule

23.1.21

On May 16, 2016, the Company disclosed the DOJ and SEC investigations in

its Form 10-Q for the first quarter of 2016.22 On August 9, 2016, the Company

disclosed additional details concerning its internal control weaknesses in its Form

10-Q for the second quarter of 2016, as follows:

17
Id. ¶ 71.
18
Id. ¶ 72.
19
Id.
20
Id.
21
See In re LendingClub Corp. Deriv. Litig., 2019 WL 5678578 (Del. Ch. Oct. 31, 2019).
22
Compl. ¶ 75.
6
Changes in Internal Control Over Financial Reporting

During the second quarter of 2016, and in connection with a board
review, with the assistance of independent outside counsel and other
advisors, regarding specific near-prime loan sales and other compliance
matters described elsewhere herein, we identified a material weakness
in our internal control over financial reporting. As a result, the
Company has concluded that, as of June 30, 2016, the Company’s
internal control over financial reporting was ineffective.

*****

The material weakness relates to the aggregation of control deficiencies
in the Company's “tone at the top” and manifested in three primary
areas described further below.

*****

• Sales of near-prime loans: During March and April of 2016, the
Company effected sales of $22.3 million of near-prime loans in private
transactions with an institutional investor that certain senior managers
of the Company apparently were aware were not compliant with a
specific non-credit, non-pricing requirement of the investor.

*****

• Review of related party transactions: The Board did not have the
information required to review and approve or disapprove investments
made by its former CEO in 2015 and 2016, and a member of its board
of directors in 2015, in a holding company for a family of funds (Cirrix
Capital, L.P.) that purchases loans and interests in loans from the
Company in accordance with Company policies, including the Code of
Conduct and Ethics.

*****

• Lack of transparent communication and appropriate oversight of
investor contract amendments: In 2015 and more extensively during
the first quarter of 2016, the Company entered into contract
amendments with platform investors, related to existing business
7
 arrangements. The Company failed in a number of cases to
appropriately document or obtain authorizations of these amendments,
assess the impact such amendments could have on pre-existing
agreements and to communicate these amendments to the appropriate
departments.23

Over two years later, in September 2018, the Company paid $4 million in a

settlement with the SEC.24 Around the same time, the Company paid $125 million

to settle a securities class action lawsuit filed in the United States District Court for

the Northern District of California relating to the Company’s internal control

weaknesses.25

C. The FTC Investigation

Also in May 2016, the same month the Company disclosed material

weaknesses in its internal controls, LendingClub received a Civil Investigative

Demand (“CID”) from the FTC.26 “A CID is a kind of subpoena . . . that seeks

documents or other information related to an FTC investigation.”27 This decision

refers to the CID the Company received in May 2016 as the “May 2016 CID.”

23
Id. ¶ 76 (quoting Form 10-Q for Q2 2016).
24
Id. ¶ 78.
25
Id.
26
Id. ¶ 111.
27
Transmittal Aff. of Blake A. Bennett (“Bennett Aff.”) Ex. A at 2 (Dkt. 47).
8
 By at least September 22, 2016, the Board’s Risk Committee was made aware

of the May 2016 CID.28 A presentation to the Risk Committee on that date included

the following slide:

▪ FTC Civil Investigative Demand (CID)
▪ Data and information request from Federal Trade Commission
▪ Driven by May 9th events and FTC looking at on-line lending and
data security; particularly complaints received by FTC regarding LC
[LendingClub]
▪ LC was working with FTC on advance fee scammers using our name
▪ FTC departments did not communicate that complaints were not
actually about LC
▪ Nearly done with production29

On November 9, 2016, the Company disclosed that it had been contacted by

the FTC in its Form 10-Q for the third quarter of 2016, as follows:

On May 9, 2016, following the announcement of the board review
described elsewhere in this filing, the Company received a grand jury
subpoena from the U.S. Department of Justice (DOJ). The Company
was also contacted by the SEC and the Federal Trade Commission
(“FTC”). The Company continues cooperating with the DOJ, SEC,
FTC and any other governmental or regulatory or agencies. No
assurance can be given as to the timing or outcome of these matters.30

28
Compl. ¶ 107.
29
Sparco Aff. Ex. B at LC-Fisher_000802.
30
LendingClub Corp. Quarterly Report at 36 (Form 10-Q) (Nov. 9, 2016) (quoted at
Compl. ¶ 123).
9
Over the next year, the Company made similar disclosures in its public filings every

quarter and in its Form 10-K.31 During the same period, the FTC investigation was

included as a topic in quarterly presentations to the Board’s Risk Committee.32

On December 5, 2017, the FTC sent LendingClub a “proposed complaint.”33

A subsequent presentation to the Audit Committee indicated that the filing of the

complaint came as a surprise: “FTC unexpectedly sent [a] proposed complaint on

12/5/17 with 5 alleged violations.”34 On December 13, 2017, the Risk Committee

was informed that “[a]fter several months with no contact, FTC’s enforcement

division reached out to discuss a number of issues, including disclosure of

origination fees and concerns about [LendingClub’s] privacy policy.”35

On February 22, 2018, the Company disclosed in its 2017 annual report on

Form 10-K that “[t]he FTC Staff [was] investigating questions concerning certain of

the Company’s policies and practices and related legal compliance” and that the

Company had cooperated with “FTC Staff as they evaluate potential claims of

31
Compl. ¶¶ 133 (Form 10-K for 2016), 141 (Form 10-Q for Q1 2017), 149 (Form 10-Q
for Q2 2017), 155 (Form 10-Q for Q3 2017).
32
Sparco Aff. Ex. B at LC-Fisher_000802 (Sept. 22, 2016 Risk Committee presentation),
000849 (Dec. 14, 2016 Risk Committee presentation), 000888 (Mar. 15, 2017 Risk
Committee presentation), 000905 (June 28, 2017 Risk Committee presentation), 000922
(Sept. 26, 2017 Risk Committee presentation); see also Compl. ¶¶ 107-08.
33
Compl. ¶ 109.
34
Sparco Aff. Ex. B at LC-Fisher_001038 (Feb. 7, 2018 Audit Committee presentation)
(emphasis added); see also Compl. ¶ 109.
35
Sparco Aff. Ex. B at LC-Fisher_001006; see also Compl. ¶¶ 166-67.
10
deception or unfairness under the FTC Act and other consumer protection laws

enforced by the FTC.”36

D. The FTC Action

On April 25, 2018, the FTC filed a complaint against LendingClub in the

United States District Court for the Northern District of California alleging that the

Company had engaged in deceptive and unfair practices in violation of the Federal

Trade Commission Act (“FTC Act”) and had violated the Gramm-Leach-Bliley Act

(the “GLB Act”).37 On the day the FTC action was filed, LendingClub’s stock fell

by approximately 15%.38

On October 22, 2018, the FTC filed an amended complaint asserting four

claims.39 Counts I and II of the amended complaint in the FTC action allege that

LendingClub engaged in deceptive practices by (i) promising consumers there would

be “no hidden fees” on their loans but then charging origination fees that were

deducted from the specified loan amount40 and (ii) misleading consumers about

whether their loan applications have been approved when LendingClub knew many

36
Compl. ¶ 163 (quoting 2017 Form 10-K).
37
Id. ¶¶ 169-171.
38
Id. ¶¶ 12, 173.
39
Id. ¶ 8 n.2; Sparco Aff. Ex. C ¶¶ 56-67.
40
Sparco Aff. Ex. C ¶¶ 10, 56-58.
11
such consumers would never receive a loan.41 Count III alleges that LendingClub

engaged in unfair practices by withdrawing double payments from some consumers’

accounts and continuing to charge customers who cancelled automatic payments or

paid off their loans.42 Count IV alleges that LendingClub failed to provide

consumers with clear and conspicuous privacy notices in violation of the Privacy

Rule and Reg. P of the GLB Act.43

LendingClub disputes and has defended itself vigorously against all of the

claims in the FTC action.44 On June 1, 2020, in a lengthy decision addressing several

motions, the district court in the FTC action (i) denied the FTC’s motion for

summary judgment on Counts I and IV; (ii) granted in part (as to certain

representations) the FTC’s motion for summary judgment on Count II; (iii) denied

the parties’ cross-motions for summary judgment on Count III; and (iv) granted the

Company’s cross-motion for summary judgment on Count IV as to the relief sought

and dismissed Count IV as moot for lack of an available remedy.45

41
Id. ¶¶ 10, 59-61.
42
Id. ¶¶ 10, 62-64.
43
Id. ¶¶ 51, 65-67.
44
See generally Sparco Aff. Ex. D.
45
Federal Trade Comm’n v. LendingClub Corp., 2020 WL 2838827, at *17, *21, *22, *24,
*37 (N.D. Cal. June 1, 2020).
12
 On August 20, 2020, the district court stayed all proceedings in the FTC action

pending a decision on a case presently before the United States Supreme Court.46 In

that case, the Supreme Court is asked to decide whether Section 13(b) of the FTC

Act permits the FTC to seek monetary relief for past violations. In granting the stay,

the district court explained that “LendingClub has ceased virtually all of the conduct

at issue in [the FTC action]” and “the only issue remaining is the FTC’s recovery of

restitution” under Section 13(b).47 The district court reasoned that “[g]oing forward

with trial would needlessly burden LendingClub to put on a trial defense only to

possibly have the entire enterprise mooted by the FTC’s inability to seek any

monetary relief under Section 13(b)” and that “exposing LendingClub to the risk of

a monetary judgment when the ability of the FTC to collect such a judgment at all is

pending review—and could be rendered moot by the Supreme Court—is

fundamentally inequitable.”48 The stay remains in place.

46
See AMG Capital Mgmt., LLC v. Federal Trade Comm’n, 141 S. Ct. 194 (2020) (granting
certiorari).
47
Federal Trade Comm’n v. LendingClub Corp., 2020 WL 4898136, at *2 (N.D. Cal. Aug.
20, 2020).
48
Id. at *3.
13
 E. The Securities Action

On May 2, 2018, one week after the filing of the FTC action, stockholders of

LendingClub filed a securities class action in the United States District Court for the

Northern District of California on behalf of purchasers of LendingClub stock

between May 9, 2016 and April 25, 2018 (the “Securities Action”).49 The crux of

the Securities Action, as pleaded in a consolidated amended complaint, “was that

LendingClub misled investors by failing to disclose the alleged deceptive consumer-

facing practices charged in the FTC Complaint.”50 On November 4, 2019, the

district court dismissed the consolidated amended complaint but granted plaintiffs

leave to amend.51

On December 12, 2019, plaintiffs filed a second amended complaint against

LendingClub and three of its officers (Sanborn, Coleman, and Casey), alleging they

violated Sections 10(b) of the Securities Exchange Act and Rule 10b-5 and that the

individual defendants violated Section 20(a) of the Securities Exchange Act as

“controlling persons” of LendingClub.52 The second amended complaint alleged a

“completely different theory of liability” than the prior complaint, namely that:

49
Veal v. LendingClub Corp., 2020 WL 3128909, at *1 (N.D. Cal. June 12, 2020).
50
Id. at *3.
51
Veal v. LendingClub Corp., 423 F. Supp. 3d 785, 819 (N.D. Cal. 2019).
52
LendingClub Corp., 2020 WL 3128909, at *1, *3, *16.
14
 Defendants made false or misleading statements because (1)
Defendants first failed to disclose the FTC Investigation that started in
May 2016 and (2) when, in November 2016, Defendants finally
disclosed that the FTC was investigating the Company, they misled the
investors by lumping together all regulatory investigations, and
omitting that the FTC Investigation involved wholly distinct conduct
from the Board Review.53

On June 12, 2020, the district court granted defendants’ motion to dismiss the

second amended complaint in its entirety, holding, among other things, that the

complaint failed to plead a false or misleading statement or that defendants acted

with scienter.54 This decision is on appeal in the United States Court of Appeals for

the Ninth Circuit.

II. PROCEDURAL HISTORY

On August 12, 2019, plaintiff filed his initial complaint in this action, which

he amended twice in the face of dismissal motions. The operative Complaint

contains two counts.

Count I asserts essentially three different claims for breach of fiduciary: (i) an

oversight claim under Caremark55 and its progeny against all defendants, (ii) a

53
Id. at *3. The term “Board Review” refers to the Company’s May 2016 disclosure of
“the circumstances related to the internal control weaknesses” and its summary of “a ‘board
review’ of those circumstances.” Id. at *2.
54
Id. at *6-17. On August 11, 2020, plaintiffs in federal derivative actions asserting state
law and federal disclosure claims “based on substantially the same alleged misstatements
at issue” in the Securities Action stipulated to a voluntary dismissal of their cases “in light
of the dismissal of the Securities Action.” Dkt. 57 Ex. A at 2.
55
In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
15
disclosure claim against all defendants, which plaintiff “cut and paste some” from

the second amended complaint in the Securities Action,56 and (iii) an insider trading

claim under Brophy57 and its progeny against six of the defendants—Sanborn,

Casey, Dolan, Coleman, Gulati, and Williams—for selling LendingClub shares at

various times between June 2016 and November 2017.58

Count II asserts a claim for unjust enrichment against all defendants on the

theory that they “were unjustly enriched as a result of the compensation and director

remuneration they received while breaching their fiduciary duties owed to

LendingClub.”59 Count II also asserts that the targets of the Brophy claim “were

unjustly enriched through their exploitation of material and adverse inside

information.”60

On March 30, 2020, defendants moved to dismiss both claims under Court of

Chancery Rule 23.1 for failure to make a demand on the Board before filing suit and

under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. The

matter was fully submitted on September 2, after the receipt of supplemental filings.

56
Oral Arg. Tr. at 31 (Feb. 26, 2020) (Dkt. 42).
57
Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).
58
Compl. ¶¶ 177-83, 205.
59
Id. ¶ 209.
60
Id. ¶ 210.
16
III. ANALYSIS

During oral argument, plaintiff’s counsel appropriately made two

concessions: (i) that demand was not excused under Court of Chancery Rule 23.1

for the Brophy claim in Count I, which is asserted against only two of the eight

directors on the Demand Board, and (ii) that the viability of the unjust enrichment

claim in Count II would rise or fall on whether the oversight and disclosure claims

in Count I survive.61 For the reasons explained below, the court concludes that

demand was not excused under Rule 23.1 for either the oversight claim or the

disclosure claim, which thus must be dismissed. Accordingly, the Complaint will

be dismissed in its entirety under Rule 23.1 and the court does not need to reach

defendants’ 12(b)(6) arguments.

A. Legal Standard Governing Demand Futility

“A cardinal precept of [Delaware law] is that directors, rather than

shareholders, manage the business and affairs of the corporation.”62 Because

61
Mot. to Dismiss Hr’g Tr. at 80-81 (July 2, 2020) (Dkt. 56). The transcript contains an
obvious typographical error on page 81 where the word “not” inadvertently was omitted
from the first concession. See id. (“So moving on to the Brophy claim, after further analysis
of the recent GoPro decision and the realization that our facts are very similar to what was
alleged in GoPro and where the Brophy claim was disallowed, plaintiff is willing to
concede that demand would [not] be futile on that claim.”).
62
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled
on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
17
derivative litigation “impinges on the managerial freedom of directors,”63 it is the

responsibility of the board of directors to decide whether to bring derivative claims

in the first instance.64 This approach “is designed to give a corporation, on whose

behalf a derivative suit is brought, the opportunity to rectify the alleged wrong

without suit or to control any litigation brought for its benefit.”65

Court of Chancery Rule 23.1 embodies these principles. It requires that a

stockholder plaintiff wishing to pursue derivative claims on behalf of the corporation

“allege with particularity the efforts, if any, made by the plaintiff to obtain the action

the plaintiff desires from the directors . . . and the reasons for the plaintiff’s failure

to obtain the action or for not making the effort.”66 In other words, the plaintiff must

either make demand on the board or allege that making demand on the board would

have been futile.

Rule 23.1 carries heightened pleading requirements. Stockholders choosing

to forego making a demand “must comply with stringent requirements of factual

particularity.”67 “Rule 23.1 is not satisfied by conclusory statements or mere notice

63
Id.
64
Spiegel v. Buntrock, 571 A.2d 767, 772-73 (Del. 1990).
65
Lewis v. Aronson, 466 A.2d 375, 380 (Del. Ch. 1983), rev’d on other grounds, 473 A.2d
805 (Del. 1984).
66
Ct. Ch. R. 23.1.
67
Brehm, 746 A.2d at 254.
18
pleading.”68 Instead, the plaintiff “must set forth . . . particularized factual

statements that are essential to the claim.”69

“Demand futility under Rule 23.1 must be determined pursuant to either the

standards articulated in Aronson v. Lewis or those set forth in Rales v. Blasband.”70

The court applies the Aronson test when “a decision of the board of directors is being

challenged in the derivative suit.”71 The court applies the Rales test when “the board

that would be considering the demand did not make a business decision which is

being challenged in the derivative suit,” such as “where directors are sued

derivatively because they have failed to do something.”72 Under either test, a

plaintiff “must impugn the ability of at least half the directors in office when

[plaintiff] initiated [its] action . . . to have considered a demand impartially.”73

68
Id.
69
Id.
70
Braddock v. Zimmerman, 906 A.2d 776, 784-85 (Del. 2006) (citing Aronson, 473 A.2d
805 and Rales v. Blasband, 634 A.2d 927 (Del. 1993)).
71
Rales, 634 A.2d at 933.
72
Id. at 933-34 & n.9. The Rales test also applies “where a business decision was made
by the board of a company, but a majority of the directors making the decision have been
replaced” and where “the decision being challenged was made by the board of a different
corporation.” Id. at 934.
73
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 57 (Del. Ch.
2015).
19
 “Demand futility analysis is conducted on a claim-by-claim basis.”74 The

Rales test applies to “alleged violations of the board’s oversight duties.”75 The court

also will apply the Rales test to the disclosure claim because it implicates the Board’s

oversight over statements made in the Company’s public filings and during an

investor call.76 Thus, the court will apply the Rales test to both to oversight and

disclosure claims in Count I.77

Under Rales, a plaintiff successfully pleads demand futility only if “the

particularized factual allegations . . . create a reasonable doubt that, as of the time

the complaint [was] filed, the board of directors could have properly exercised its

independent and disinterested business judgment in responding to a demand.”78 “A

74
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 977 n.48
(Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004).
75
City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017).
76
See Steinberg v. Bearden, 2018 WL 2434558, at *5, *8 (Del. Ch. May 30, 2018)
(applying Rales test to claim that directors and officers breached their fiduciary duties “by
making, allowing, or failing to correct [certain] materially false and misleading
misrepresentations and omissions”); Sandys v. Pincus, 2016 WL 769999, at *14-15 (Del.
Ch. Feb. 16, 2016) (citing Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) and In re Dow
Chem. Co. Derivative Litig., 2010 WL 66769, at *6 n.25 (Del. Ch. Jan. 11, 2010)) (applying
Rales test to claim that director defendants “failed to disclose material information to the
public”), rev’d on other grounds, 152 A.3d 124 (Del. 2016).
77
As many members of this court have commented, it ultimately is inconsequential whether
the Aronson or Rales test applies since both tests functionally take into account the same
considerations. For this reason, our law would be well-served to use Rales as the general
test. See United Food & Commercial Workers Union v. Zuckerberg, 2020 WL 6266162,
at *9-18 (Del. Ch. Oct. 26, 2020).
78
Rales, 634 A.2d at 934.
20
director cannot exercise . . . independent and disinterested business judgment where

[the] director is either interested in the alleged wrongdoing or not independent of

someone who is.”79

The Demand Board consists of eight directors. Plaintiff does not challenge

the impartiality of non-party director Athey. Thus, the question before the court is

whether plaintiff has plead with particularity sufficient facts to create a reasonable

doubt about the disinterestedness or independence of four of the other seven

members of the Demand Board.

Plaintiff primarily argues that a majority of the Demand Board members are

interested because they face a substantial likelihood of liability with respect to the

oversight and disclosure claims asserted in the Complaint.80 It is black-letter law

that “the mere threat of personal liability . . . is insufficient to challenge either the

79
Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *15 (Del.
Ch. Aug. 24, 2020) (internal quotation marks omitted).
80
Plaintiff also asserts that Sanborn lacks independence from the other directors on the
Demand Board because they control the substantial amount of compensation he receives
as the Company’s CEO. See Pl.’s Answering Br. at 55-57 (Dkt. 47). It is not necessary to
reach this issue because Sanborn is just one of eight Demand Board directors and thus the
issue of demand futility will turn on whether four of them face a substantial likelihood of
personal liability.
21
independence or disinterestedness of directors.”81 Rather, “a majority of the board

must face a ‘substantial likelihood’ of personal liability for demand to be excused.”82

LendingClub’s certificate of incorporation contains a provision exculpating

its directors for breaches of the duty of care, as permitted under Section 102(b)(7) of

the Delaware General Corporation Law.83 Thus, to demonstrate demand futility,

Plaintiff must allege with particularity facts demonstrating that at least half of the

directors on the Demand Board face a substantial likelihood of liability with respect

to a claim for breach of the duty of loyalty. With the foregoing principles in mind,

the court considers the sufficiency of the Complaint’s allegations with respect to the

oversight and disclosure claims, in turn, below.

B. The Complaint Fails to Allege Facts Sufficient to Show that a
Majority of the Demand Board Faces a Substantial Likelihood of
Liability under Caremark

Oversight liability under Caremark “is possibly the most difficult theory in

corporation law upon which a plaintiff might hope to win a judgment.”84 To plead

a substantial likelihood of liability under Caremark, a stockholder must allege

81
Aronson, 473 A.2d at 815.
82
Melbourne Mun. Firefighters’ Pension Tr. Fund v. Jacobs, 2016 WL 4076369, at *6
(Del. Ch. Aug. 1, 2016) (quoting Aronson, 473 A.2d at 815).
83
Sparco Aff. Ex. H art. VII § 1. Certificates of incorporation are judicially noticeable. In
re Wheelabrator Techs. Inc. S’holder Litig., 1992 WL 212595, at *11-12 (Del. Ch. Sept. 1,
1992).
84
Caremark, 698 A.2d at 967.
22
particularized facts sufficient to show that (1) “the directors utterly failed to

implement any reporting or information system or controls,” or (2) “having

implemented such a system or controls, [the directors] consciously failed to monitor

or oversee its operations thus disabling themselves from being informed of the risks

or problems requiring their attention.”85 Either prong of Caremark “requires a

showing that the directors knew that they were not discharging their fiduciary

obligations.”86 This scienter requirement follows not only from Caremark itself, but

from the existence of exculpatory provisions such as the one in LendingClub’s

certificate of incorporation.87

Plaintiff argues that a majority of the Demand Board faces a substantial

likelihood of liability with respect to both prongs of Caremark. The court considers

next the Complaint’s allegations relevant to each category.

1. The First Caremark Prong

In discussing the first prong of Caremark, the Delaware Supreme Court

explained in Marchand v. Barnhill that “directors have great discretion to design

context- and industry-specific approaches tailored to their companies’ businesses

and resources. But Caremark does have a bottom-line requirement that is important:

85
Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
86
Id.
87
Reiter v. Fairbank, 2016 WL 6081823, at *7 (Del. Ch. Oct. 18, 2016).
23
the board must make a good faith effort—i.e., try—to put in place a reasonable

board-level system of monitoring and reporting.”88 The high court further observed

that, “[i]n decisions dismissing Caremark claims, the plaintiffs usually lose because

they must concede the existence of board-level systems of monitoring and oversight

such as a relevant committee, a regular protocol requiring board-level reports about

the relevant risks, or the board’s use of third-party monitors, auditors, or

consultants.”89 That is the case here.

Plaintiff argues that a majority of the Demand Board faces a substantial

likelihood of personal liability because “there were no procedures to detect issues

critical to the Company’s functioning.”90 But the Complaint tells a different story.

The Complaint acknowledges, as it must, that LendingClub had board-level

reporting systems in place. In addition to having an Audit Committee,91 the Board

88
212 A.3d 805, 821 (Del. 2019) (Strine, C.J.) (citations omitted).
89
Id. at 823.
90
Pl.’s Answering Br. at 37. In the same paragraph, plaintiff’s brief asserts that a June
2015 presentation to the Risk Committee “warned” that “‘[a]ctions likely to cause
significant reputational risk do not get proper Management and/or Board review and
approval.’” Id. at 37-38 (quoting Sparco Aff. Ex. B at LC-Fisher_001443). This is a gross
mischaracterization. The quote from the presentation on which plaintiff relies was not a
factual finding about the Board’s oversight performance, but rather an explanatory
statement used to define one of the risks (i.e., “reputational risk”) that the Risk Committee
was monitoring. See Sparco Aff. Ex. B at LC-Fisher_001443. Indeed, the presentation
indicates that this risk, as measured by the “Number of Type I and II Complaints per 1,000
issued loans,” was a “low risk” that had decreased between March and April 2015. Id.
91
Compl. ¶¶ 42-44.
24
established a separate Risk Committee to, among other things, (i) “oversee the

Company’s risk management structure,” (ii) “oversee the Company’s risk

management and risk assessment guidelines and policies regarding[] credit,

operational, technology, security, legal, and compliance risk,” (iii) “monitor the

Company’s enterprise risk management plan,” and (iv) “monitor and evaluate the

performance of the Company’s risk management function.”92

The Risk Committee was tasked to “review at least quarterly the major risk

exposures of the Company and its business units,” including compliance risk, and to

receive reports from the Company’s Chief Risk Officer “at least quarterly”

concerning the “results of risk management reviews and assessments.”93 It also was

required to receive “reports and recommendations from management and the

Company’s internal Management Risk Committee on risk tolerance.”94

Contrary to the notion that the Company lacked a board-level reporting

system, the Complaint specifically alleges that the Risk Committee was “routinely

apprised of mounting complaints from consumers.”95 On March 22, 2016, for

example, a slide deck covering “Complaints Monitoring and Trending” was

92
Id. ¶ 45 (internal quotation marks omitted).
93
Id.
94
Id. ¶ 46.
95
Id. ¶ 99.
25
presented to the Risk Committee.96 That presentation contained a break-down of

consumer complaints by category, summarized complaint trends, and noted on a

slide titled “Actively managing key drivers of complaint volume” that the Company

had implemented or was in the process of implementing systems to address issues

giving rise to consumer complaints.97 The Complaint alleges the Risk Committee

received similar presentations concerning consumer complaint volume in

June 2017,98 September 2017,99 and December 2017.100

The Complaint further alleges that “[t]he Risk Committee was routinely

updated on the FTC’s investigation.”101 On September 22, 2016, for example, the

Risk Committee received a “Legal Risk Updates” presentation discussing the

Company’s receipt of the May 2016 CID from the FTC.102 The presentation

explained that the CID was “[d]riven by [the] May 9th events”—referring to the

disclosure of a Board review that identified material weaknesses in the Company’s

96
Id.; Sparco Aff. Ex. B at LC-Fisher_000791-92.
97
Sparco Aff. Ex. B at LC-Fisher_000793-95.
98
Compl. ¶ 103; Sparco Aff. Ex. B at LC-Fisher_000904-11 (presentation covering
“Consumer Complaint Activity” from March 1, 2017 to April 30, 2017).
99
Compl. ¶¶ 104-05; Sparco Aff. Ex. B at LC-Fisher_000921-29 (presentation covering
“Consumer Complaint Activity” from May 1, 2017 to August 31, 2017).
100
Compl. ¶ 106; Sparco Aff. Ex. B at LC-Fisher_001002-12 (presentation covering
“Consumer Complaint Activity” from September 1, 2017 to October 31, 2017).
101
Compl. ¶ 108.
102
Compl. ¶ 107; Sparco Aff. Ex. B at LC-Fisher_000802 (Sept. 22, 2016 Risk Committee
presentation).
26
internal controls—and that the FTC was “looking at on-line lending and data

security; particularly complaints received by [the] FTC regarding

[LendingClub].”103 The May 2016 CID was referenced in quarterly Risk Committee

presentations over the next five quarters.104 Plaintiff’s own brief concedes that the

“Demand Board was well aware of the [FTC] investigation, received detailed reports

on the investigation, and routinely discussed the investigation.”105

As this court has explained, our Supreme Court was quite deliberate in its use

of the adverb “utterly”—a “linguistically extreme formulation”—to set a high bar

when articulating the standard to hold directors personally liable for a failure of

oversight under the first Caremark prong.106 Given the factual allegations from the

Complaint just recited, it reasonably cannot be said that the LendingClub’s directors

“utterly failed to implement any reporting or information system or controls”107

relevant to monitoring compliance with consumer protection laws or, in the words

103
Compl. ¶ 107; Sparco Aff. Ex. B at LC-Fisher_000802.
104
Compl. ¶¶ 108, 166; Sparco Aff. Ex. B at LC-Fisher_000849 (Dec. 14, 2016 meeting);
000888 (Mar. 15, 2017 meeting); 000905 (June 28, 2017 meeting); 000922 (Sept. 26, 2017
meeting); 001006 (Dec. 13, 2017 meeting).
105
Pl.’s Answering Br. at 43; see also id. at 13 (“In 2017, the Director Defendants discussed
the FTC’s investigation on several occasions.”).
106
Horman v. Abney, 2017 WL 242571, at *8 n.46 (Del. Ch. Jan. 19, 2017) (“‘Utterly
failed’ is a linguistically extreme formulation.”) (quoting Bradley R. Aronstam & David
E. Ross, Retracing Delaware’s Corporate Roots Through Recent Decisions: Corporate
Foundations Remain Stable While Judicial Standards of Review Continue to Evolve, 12
Del. L. Rev. 1, 13 n.73 (2010)).
107
Stone, 911 A.2d at 370.
27
of Marchand, that they made no good faith effort to “try.”108 Accordingly, plaintiff

has failed to allege facts to support a reasonable inference that any members of the

Demand Board are exposed to a substantial likelihood of liability under the first

Caremark prong so as to excuse plaintiff’s failure to make a demand.109

2. The Second Caremark Prong

To establish liability under the second Caremark prong, “a complaint must

allege (1) that the directors knew or should have known that the corporation was

violating the law, (2) that the directors acted in bad faith by failing to prevent or

remedy those violations, and (3) that such failure resulted in damage to the

corporation.”110 To meet this pleading burden, plaintiffs typically allege facts

demonstrating that the directors were alerted to “evidence of illegality—the

108
Marchand, 212 A.3d at 821.
109
The facts here do not come close to the allegations indicating a lack of board-level
systems or controls in the two cases on which plaintiff relies. In Marchand, where food
safety was “essential and mission critical” to the company, the complaint alleged, among
other things, that “no board committee that addressed food safety existed,” “no regular
process or protocols that required management to keep the board apprised of food safety
compliance practices, risks, or reports existed” and “the board meetings [were] devoid of
any suggestion that there was any regular discussion of food safety issues.” 212 A.3d at
822-24. In Inter-Marketing Group USA, Inc. v. Plains All American Pipeline, L.P., which
involved an oil spill caused by corrosion in the company’s pipelines, the complaint
included testimony from the company’s CEO in a parallel criminal proceeding that the
board did not establish a subcommittee responsible for overseeing pipeline integrity and
“did not discuss pipeline integrity policy or procedure” generally, and that “decisions
regarding pipeline integrity were made at lower levels of the company” rather than at the
board level. 2020 WL 756965, at *12-13 (Del. Ch. Jan. 31, 2020).
110
In re Qualcomm Inc. FCPA S’holder Deriv. Litig., 2017 WL 2608723, at *2 (Del. Ch.
June 16, 2017) (internal quotation marks and citation omitted).
28
proverbial ‘red flag,’” yet acted in bad faith by consciously disregarding their duty

to address that misconduct.111 “Under Delaware law, red flags ‘are only useful when

they are either waved in one’s face or displayed so that they are visible to the careful

observer.’”112

Plaintiff argues that the Demand Board faces a substantial likelihood of

liability under the second prong of Caremark because the Board was “presented with

evidence LendingClub was deceiving borrowers and violating the law, and the Board

did nothing in response.”113 For support, plaintiff points to two purported red flags:

(i) that “the FTC initiated an investigation” of LendingClub in May 2016, which the

Board “routinely discussed,” and (ii) that the Demand Board “received presentations

showing an increasing number of Origination Complaints from customers.”114

111
South v. Baker, 62 A.3d 1, 15 (Del. Ch. 2012).
112
Wood, 953 A.2d at 143 (quoting In re Citigroup Inc. S’holders Litig., 2003 WL
21384599, at *2 (Del. Ch. June 5, 2003)).
113
Pl.’s Answering Br. at 43.
114
Id. The Complaint alleges that internal memoranda from LendingClub’s compliance
team and an email from a LendingClub investor’s counsel warned of potential problems
with the Company’s consumer practices. See, e.g., Compl. ¶¶ 82, 83, 84, 97. Plaintiff’s
brief does not assert that these communications were brought to the Board’s attention so
as to constitute red flags, thus waiving the issue. Emerald P’rs v. Berlin, 726 A.2d 1215,
1224 (Del. 1999) (“Issues not briefed are deemed waived.”) (citations omitted). In any
event, the Complaint contains no factual allegations indicating that any member of the
Demand Board received or was made aware of these communications—a necessary
predicate to pleading the existence of red flag. Okla. Firefighters Pension & Ret. Sys. v.
Corbat, 2017 WL 6452240, at *21 (Del. Ch. Dec. 8, 2017) (finding that “the Complaint
does not say whether these issues were brought to the defendants’ attention,” which
“prevents them from serving as red flags”).
29
 Although the FTC “sometimes sends CIDs to obtain information from others

who are not the subjects of investigation,”115 it is reasonable to infer the Risk

Committee understood that LendingClub was the target of an FTC investigation at

least by September 2016. That is when the Risk Committee received a presentation

indicating the FTC had received “complaints . . . regarding [LendingClub]” and “did

not communicate that [the] complaints were not actually about [LendingClub].”116

The issuance of a subpoena or the launch of a regulatory investigation does

not “necessarily demonstrate that a corporation’s directors knew or should have

known that the corporation was violating the law.”117 “When such events become a

115
Bennett Aff. Ex. A at 2.
116
Sparco Aff. Ex. B at LC-Fisher_000802.
117
Rojas, 2019 WL 3408812, at *11; see also In re Universal Health Servs., Inc. Deriv.
Litig., 2019 WL 3886838, at *37 (E.D. Pa. Aug. 19, 2019) (holding that “the fact that the
government opened an investigation into UHS for potential violations of the False Claims
Act does not mean that the company actually violated the False Claims Act or that the
Board knew that any violations occurred”); Kococinski v. Collins, 935 F. Supp. 2d 909,
924 (D. Minn. 2013) (ruling that “the fact that the Board may have known that [a
government] investigation was underway does not support an inference that the Board
actually knew that illegal conduct was occurring”); In re Chemed Corp., S’holder Deriv.
Litig., 2015 WL 9460118, at *18 (D. Del. Dec. 23, 2015) (finding that subpoenas “alleging”
wrongdoing are “certainly something to be taken into consideration along with a plaintiff’s
other red flag allegations” but receipt of subpoenas “do not on their own suggest that a
board was aware of corporate misconduct—they suggest only that the board was aware
that the company was under investigation”) (alterations and internal quotation marks
omitted). In re Intel Corp. Deriv. Litig., 621 F. Supp. 2d 165, 175 (D. Del. 2009)
(explaining that “the Court does not place great weight on a ‘preliminary’ finding of [a
government investigation] and therefore cannot conclude that the directors now face a
‘substantial likelihood’ of liability for having allegedly ignored the [] investigation”).
30
‘red flag’ depends on the circumstances.”118 If a plaintiff is able to “present[] strong

factual allegations of board knowledge of ongoing legal violations in the wake of

federal government enforcement proceedings,” for example, then the mere fact of a

regulatory investigation would take on more significance at the pleading stage.119

Plaintiff suggests the May 2016 CID constituted a red flag that LendingClub

was violating the law in the manner alleged in the complaint the FTC filed against

the Company almost two years later, in April 2018.120 For whatever reason, plaintiff

did not obtain a copy of the May 2016 CID before filing this action as part of his

books and records inspection,121 and thus the Complaint does not describe the

specific subject matter for which the FTC sought documents from the Company or

any other contents of the May 2016 CID that may have shed light on the nature of

the FTC’s investigation at that point. As such, plaintiff has failed to plead with

particularity that, even if the Demand Board had reviewed the May 2016 CID, the

118
Rojas, 2019 WL 3408812, at *11.
119
Id. (collecting cases).
120
See Pl.’s Answering Br. at 8, 26, 43.
121
Mot. to Dismiss Hr’g Tr. at 91 (July 2, 2020) (Dkt. 56).
31
Demand Board would or should have known at the time that the Company was

violating the law.122

Working from what the Complaint does allege, there are no particularized

factual allegations indicating that the FTC warned LendingClub it was violating the

law before December 5, 2017. That is when, as stated in a February 7, 2018

presentation to the Audit Committee, the “FTC unexpectedly sent [a] proposed

complaint on 12/5/17 with 5 alleged violations.”123 Previous presentations made to

122
On August 24, 2020, after oral argument in this case, Vice Chancellor Glasscock found
it reasonable to infer that the directors of AmerisourceBergen Corporation were aware of
allegations in a quit tam action filed by its former COO and the contents of a Department
of Justice subpoena based on the directors having signed annual reports on Form 10-K
disclosing the quit tam action and the subpoena. Chou, 2020 WL 5028065, at *21, *24.
Importantly, the specific contents of the qui tam complaint, which alleged that the company
was engaged in illegal activity, and of the subpoena were detailed in the complaint. See
id. at *8, *13.
In a supplemental submission, plaintiff cites Chou as “relevant to Plaintiff’s argument that
the board of directors . . . was aware of the allegations underlying the Federal Trade
Commission’s investigation.” Dkt. 59 at 2. The implication of the submission is that the
court should infer that the directors on the Demand Board who signed a Form 10-K
disclosing the May 2016 CID were aware of the contents of that document. Even if the
court were to draw such an inference, however, it would not aid plaintiff because in this
case, unlike in Chou, the contents of the May 2016 CID are not alleged in the Complaint.
Indeed, contrary to plaintiff’s suggestion that the May 2016 CID would show that the FTC
believed LendingClub was violating consumer protection laws, documents cited in the
Complaint indicate that the Company believed the May 2016 CID was “[d]riven by [the]
May 9th events” that related to the Board review that identified material weaknesses in the
Company’s internal controls. See, e.g., Sparco Aff. Ex. B at LC-Fisher_000802 (Sept. 22,
2016 Risk Committee presentation), 000849 (Dec. 14, 2016 Risk Committee presentation),
000888 (Mar. 15, 2017 Risk Committee presentation) (cited at Compl. ¶¶ 107-08).
123
Sparco Aff. Ex. B at LC-Fisher_001038 (Feb. 7, 2018 Audit Committee presentation)
(emphasis added); see Compl. ¶ 109.
32
the Risk Committee on a quarterly basis, quoted below, referenced the FTC

investigation but without providing any specific indication the FTC believed the

Company was violating the law:

• In September 2016, December 2016, and March 2017, the Risk
Committee was informed that the May 2016 CID was “[d]riven by
May 9th events and [the] FTC looking at on-line lending and data
security; particularly complaints received by FTC regarding
[LendingClub].”124

• In June 2017 and September 2017, the Risk Committee was
informed that the Company was “continuing to cooperate” with the
FTC and that there were “no significant developments since [the]
last update.”125

On December 13, 2017, shortly after the FTC sent LendingClub the proposed

complaint, the Risk Committee was informed that “[a]fter several months with no

contact, FTC’s enforcement division reached out to discuss a number of issues,

including disclosure of origination fees and concerns about our privacy policy” and

that Company representatives “will be meeting with representatives [of the FTC] to

discuss in detail.”126 Several months later, in April 2018, the FTC formally filed suit

against LendingClub alleging that it had engaged in deceptive and unfair

124
Sparco Aff. Ex. B at LC-Fisher_000802 (Sept. 22, 2016 Risk Committee presentation);
000849 (Dec. 14, 2016 Risk Committee presentation); 000888 (Mar. 15, 2017 Risk
Committee presentation); see Compl. ¶¶ 107-08.
125
Sparco Aff. Ex. B at LC-Fisher_00905 (June 28, 2017 Risk Committee presentation),
000922 (Sept. 26, 2017 Risk Committee presentation); see Compl. ¶ 108.
126
Sparco Aff. Ex. B at LC-Fisher_001006 (Dec. 13, 2017 Risk Committee presentation);
see Compl. ¶¶ 109, 166.
33
practices.127 As discussed in Part I.D, LendingClub denies any wrongdoing in the

FTC action and has defended itself against the FTC’s claims vigorously since the

action was filed.

Tacitly recognizing that the Risk Committee’s knowledge of the FTC’s

investigation before the Company received a draft complaint from the FTC in

December 2017 is insufficient by itself to serve as a red flag of illegal activity,

plaintiff argues that the Board’s awareness of the investigation “coupled with

consumer complaints” during this period “was sufficient to put the Board on notice

that LendingClub was violating the law.”128 For support, plaintiff identifies four

presentations allegedly “showing an increasing number of Origination Complaints

from customers” that were made to the Risk Committee on March 22, 2016, June

28, 2017, September 26, 2017, and December 13, 2017.129 None of these

presentations, however, allege facts sufficient to support a reasonable inference that

any member of the Risk Committee knew that LendingClub was violating the law.

Plaintiff focuses primarily on the March 22, 2016 presentation, which showed

that “origination complaints” increased from 0.15 per 1,000 applications in the

fourth quarter of 2015 to 0.20 per 1,000 applications in the first quarter of 2016 after

127
Compl. ¶¶ 169-171.
128
Pl.’s Answering Br. at 48.
129
Id. at 43 (citing Compl. ¶¶ 99, 103-06).
34
LendingClub allegedly “increased the prominence of the ‘No hidden fees’

representation and decreased the prominence of the tooltip.”130 Significantly, the

slide presenting these data explains that the “[r]elative increase in complaint volume

[was] driven by internal Operations awareness training.”131 The March 2016

presentation also reported that (i) Level 1132 Personal Loan complaint volume

actually “fell as a percentage of Applications and Originations,”133 (ii) the volume

of externally reported complaints remained “lower or equal relative to

[LendingClub’s] peers,”134 and (iii) management determined there were “no major

trends or issues across channels”135 and was “actively managing key drivers of

complaint volume.”136

The Complaint alleges that the June 28, 2017 presentation “stated that ‘Level

3 complaints increased significantly’” and that “prelisting complaints ‘increase[d] in

130
Id. at 44; Sparco Aff. Ex. B at LC-Fisher_000795.
131
Pl.’s Answering Br. at 43-44 (citing Sparco Aff. Ex. B at LC-Fisher_000795); see also
Sparco Aff. Ex. B at LC-Fisher_000793 (“Personal Loan complaint volume increased
relative to business volume as we conducted internal awareness training”).
132
“Complaints that are externally reported by a regulatory agency or the Better Business
Bureau are categorized as Level 1, as well as internally reported complaints concerning
fair lending or discrimination, fraud, and UDAAP.” Compl. ¶ 10 n.4 (citing LC-
Fisher_000897).
133
Sparco Aff. Ex. B at LC-Fisher_000795.
134
Id. at LC-Fisher_000793.
135
Id. at LC-Fisher_000798.
136
Id. at LC-Fisher_000793.
35
volume in relation to number of applications.’”137 As to the first point, the

presentation actually stated that “Level 3 complaints increased significantly” due to

the fact that “advance fee scammers” had been misrepresenting themselves as

LendingClub.138 In fact, the presentation reported that complaints relating to

advance fee scammers comprised 50% of the Company’s complaint volume.139 As

to the second point, the presentation explained that the Company was “researching

[the] root cause(s)” for the increase in volume of “prelisting complaints” and “any

potential compliance issues with [the] Marketing and Compliance teams.”140

The Complaint alleges that the September 26, 2017 presentation “noted that

the ‘[v]olume of complaints as a percentage of key metrics . . . [is] trending

upwards,’” that “the ‘[a]verage monthly volume of Level 1 complaints has

doubled,’” and “that ‘[a]pproximately 10% of Level 1 complaints [were] deemed

substantiated (all UDAAP related).’”141 The Complaint further alleges that the

137
Compl. ¶ 103. “Level 3” complaints include “failure to follow established procedures,
process deficiency, threat of litigation, threat to file a complaint with a regulatory agency,
and those involving a specific consumer detriment that does not meet the standards for Tier
1 or Tier 2.” Id. ¶ 103 n.6.
138
Sparco Aff. Ex. B at LC-Fisher_000909; see id. at LC-Fisher_000908 (“As of April 1,
Advance Fee Scam (AFS) cases are tracked as complaints.”); see also id. at LC-
Fisher_000802 (“LC was working with FTC on advance fee scammers using our name”).
139
Id. at LC-Fisher_000908.
140
Id. at LC-Fisher_000909.
141
Compl. ¶¶ 104-05 (citing LC-Fisher_000927, 000929). “UDAAP” is an acronym that
describes claims for “Unfair, Deceptive, and Abusive Acts or Practices” under the Dodd-
Frank Wall Street Reform and Consumer Protection Act. Id. ¶ 9 n.3.
36
presentation “lists sales, marketing, and advertising as one of the ‘[t]op 5 reasons for

complaints’” received between May and August 2017 and “that the ‘spike’ in this

category was ‘driven by pre-screen complaints (borrower received pre-approval

marketing material, then denied).’”142

The September 2017 presentation explained, however, that the increase in

Level 1 complaint volume did “not appear to be a systemic breakdown in

[LendingClub] processes” and, rather, was “attributable to the . . . refresher training

provided to [the Company’s consumer advocacy team] by [the compliance team] for

UDAAP and Fair Lending in an ongoing effort to hone classification of

complaints”143 and efforts to “be conservative in [LendingClub’s] assessment.”144

The presentation also explained that, although “[a]pproximately 10% of Level 1

complaints [were] deemed substantiated (all UDAAP related); formal coaching

[was] provided to reinforce [the] importance of following [LendingClub] protocol

and procedures.”145 The presentation further specified that the Company would

implement a “revised marketing model” in the next month that “should result in

improved targeted marketing” and address the “spike” in

“Sales/Marketing/Advertising” complaint volume “driven by pre-screen

142
Id. ¶ 105 (citing LC-Fisher_000928).
143
Sparco Aff. Ex. B at LC-Fisher_000927.
144
Id. at LC-Fisher_000929.
145
Id.
37
complaints.”146 Finally, the presentation noted that “98% of complaints [were]

resolved within 20 business days, as per policy.”147

The Complaint alleges that the December 13, 2017 presentation “noted that

the Company received ‘[a]pproximately 1,300 and 1,400 complaints’ in September

and October, respectively, and explained that the ‘[v]olume of complaints as

percentage of key metrics is trending upwards.’”148 It further alleges that

“LendingClub received 185 ‘Level 1 Complaints’ between September and October,

148 of which were classified as UDAAP related” and that one of the “‘top 5 reasons’

for level 1 complaints” was that the “consumer [was] upset that he/she received pre-

approval marketing, then was denied a loan.”149

Notably, the “Sales/Marketing/Advertising” category the Complaint focused

on as one of the “Top 5” complaint categories the previous quarter150 showed a

decline in complaints (from 34 to 23) and did not appear as one of the “Top 5”

complaint categories in the December 2017 presentation.151 The presentation also

146
Id. at LC-Fisher_000928.
147
Id. at LC-Fisher_000927.
148
Compl. ¶ 106 (alterations in original) (quoting LC-Fisher_001008).
149
Id. (citing LC-Fisher_001012).
150
Id. ¶ 105 (citing LC-Fisher_000928).
151
Sparco Aff. Ex. B at LC-Fisher_001010-11 (listing as the “Top 5 reasons for
complaints” from September to October 2017: “Advanced Fee Scam (47%),” “Credit
Bureau Reporting (12%),” “Credit Determination (8%),” “Application Processing (6%),”
and “Online Account Management (6%).”).
38
pointed out that a “technical bug” had caused higher complaint volume in three of

the “Top 5” complaint categories from September to October, that “[a]ll regulatory

deadlines for complaint responses [had been] met,” and that “98% of complaints

[were] resolved within 20 business days, as per policy.”152 The minutes for the

December 13, 2017 Risk Committee meeting also reflect that management

“summarized the initiatives that [the] Company has taken to address consumer

complaints.”153

To summarize, the four presentations just discussed show that the Risk

Committee was made aware on a regular basis of trends in customer complaint

volume, the driving factors behind those trends, and steps the Company had taken

to address those trends when necessary. But none of these presentations indicate

that the Company had violated consumer protection laws. In other words, the four

Risk Committee presentations on which plaintiff relies did not constitute a “red

flag.”154

152
Id.
153
Id. at LC-Fisher_001016.
154
See Reiter, 2016 WL 6081823, at *13 (“None of these reports . . . states that the
Company’s . . . controls and procedures actually had been found to violate statutory
requirements at any time or that anyone within [the company] had engaged in fraudulent
or criminal conduct. In other words, the core factual allegations of the Complaint do not
amount to red flags of illegal conduct.”).
39
 Plaintiff equates the allegations of the Complaint to those pled in two federal

cases, but those cases are clearly inapposite. In In re Abbott Laboratories Derivative

Shareholders Litigation,155 the United States Court of Appeals for the Seventh

Circuit, applying Delaware law, reversed a Caremark dismissal where it was alleged

that a health care company engaged in “continuing violations of federal regulations

over a period of six years.”156 After “four formal certified Warning Letters” from

the FDA,157 the FDA’s refusal to continue its voluntary compliance plan with the

company “after finding continued deviations from the regulations,”158 an FDA

lawsuit that resulted in “the largest penalty ever imposed for a civil violation of FDA

regulations at that time,”159 and the mandatory destruction of certain non-compliant

testing kits accounting for almost $250 million in annual revenue,160 stockholders

filed suit and claimed that the board had breached its fiduciary duty. Emphasizing

the “extensive paper trail . . . concerning the violations and inferred [board]

awareness of the problems,” the court held that the board’s decision not to address

“the magnitude and duration of the FDA violations” was a failure of oversight.161

155
325 F.3d 795 (7th Cir. 2003).
156
Id. at 808.
157
Id. at 799.
158
Id. at 800.
159
Id. at 801.
160
Id.
161
Id. at 809.
40
 In In re Veeco Instruments, Inc. Securities Litigation,162 the United States

District Court for the Southern District of New York sustained a Caremark claim

where it was alleged that “the Audit Committee abdicated its responsibility to

monitor legal compliance and investigate whistleblower claims relating to the

Company’s allegedly flagrant, systematic, and repeated violations of export control

laws.”163 The complaint in Veeco asserted that, after receiving an employee report

concerning the shipment of restricted items, the company “conducted an audit which

revealed that at least nine other shipments . . . also had violated federal export control

laws.”164 Seven months after the company discovered these violations of law,

moreover, the same employee reported “a second set of export violations.”165

Finding that the complaint sufficiently alleged board knowledge of these repeat

export violations, the Court held that the board members faced a substantial

likelihood of liability with respect to the claims asserted against them.166

The particularized factual allegations in Abbott and Veeco demonstrating

board awareness of violations of law stand in stark contrast to what is alleged here.

In short, the Complaint does not allege any particularized facts from which it

162
434 F. Supp. 2d 267 (S.D.N.Y. 2006).
163
Id. at 277-78.
164
Id. at 278.
165
Id.
166
Id.
41
reasonably can be inferred that any member of the Demand Board was put on notice

that the Company had violated federal consumer protection laws in the manner

alleged in the FTC action—a litigation that remains ongoing and is hotly

disputed167—or otherwise. Given this fatal shortcoming, plaintiff has failed to

demonstrate that a majority of the Demand Board faces a substantial likelihood of

liability so as to excuse his failure to make demand under Rule 23.1 with respect to

plaintiff’s oversight claim under the second Caremark prong.

C. The Complaint Fails to Allege Facts Sufficient to Show that a
Majority of the Demand Board Faces a Substantial Likelihood of
Liability for Allegedly False and Misleading Statements

The second claim for breach of fiduciary duty embedded in Count I is a

disclosure claim. Plaintiff argues that, “[d]espite knowing that the FTC was

investigating LendingClub over deceitful conduct against borrowers, Defendants . .

. falsely represented that the [FTC] investigation related to the board review and

167
See Rojas, 2019 WL 3408812, at *14 (rejecting the theory that the board demonstrated
a conscious disregard for its duties “simply because . . . the Los Angeles City Attorney
initiated coordinated civil proceedings against [the company] and three of its competitors
asserting complex . . . claims that have been disputed vigorously”).
42
previously disclosed internal control failures”168 that was the subject of DOJ and

SEC investigations.169

“[E]ven in the absence of a request for shareholder action, shareholders are

entitled to honest communication from directors, given with complete candor and in

good faith.”170 “When there is no request for shareholder action, a shareholder

plaintiff can demonstrate a breach of fiduciary duty by showing that the directors

‘deliberately misinform[ed] shareholders about the business of the corporation,

either directly or by a public statement.’”171 Where, as here, directors are protected

by an exculpatory charter provision, a plaintiff can demonstrate a substantial

likelihood of liability that would excuse demand only by making “particularized

factual allegations that support the inference that the disclosure violation was made

in bad faith, knowingly, or intentionally.”172

Plaintiff argues that a majority of the Demand Board directors face a

substantial risk of liability for making and/or allowing LendingClub to make “false

168
Pl.’s Answering Br. at 29.
169
See supra Part I.B.
170
In re infoUSA, Inc. S’holders Litig., 953 A.2d 963, 990 (Del. Ch. 2007).
In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 132 (Del. 2009) (quoting
171

Malone v. Brincat, 722 A.2d 5, 14 (Del. 1998)).
172
Id. (internal quotation marks and citation omitted).
43
statements and omissions that misrepresented and concealed the conduct the FTC

was investigating.”173 Plaintiff challenges essentially three different statements.

The first is the statement that appeared in the Company’s public filings from

November 2016 to November 2017 to disclose the Company’s receipt of a grand

jury subpoena from the DOJ on May 9, 2016 and contacts made by the SEC and

FTC.174 Importantly, each of these disclosures was made before the Company

received a draft of the FTC complaint in December 2017. The first disclosure, which

appeared in the Company’s Form 10-Q for the third quarter of 2016, filed on

November 9, 2016, stated the following:

On May 9, 2016, following the announcement of the board review
described elsewhere in this filing, the Company received a grand jury
subpoena from the U.S. Department of Justice (DOJ). The Company
was also contacted by the SEC and Federal Trade Commission
(“FTC”). The Company continues cooperating with the DOJ, SEC,
FTC and any other governmental or regulatory authorities or agencies.
No assurance can be given as to the timing or outcome of these
matters.175

The next four disclosures—which plaintiff admits were “virtually identical”176—

appeared in the Company’s 2016 annual report on Form 10-K and its quarterly

173
Pl.’s Answering Br. at 22-23.
174
Id. at 29 (citing Compl. ¶¶ 123, 141, 149, 154-55).
175
LendingClub Corp. Quarterly Report at 36 (Form 10-Q) (Nov. 9, 2016) (quoted at
Compl. ¶ 123).
176
Pl.’s Answering Br. at 29.
44
reports on Form 10-Q for the first, second, and third quarters of 2017.177 This

opinion refers to these five disclosures collectively as the “Pre-December 2017

Disclosures.”

The second challenged statement consists of the disclosure that appeared in

the Company’s 2017 annual report on Form 10-K filed on February 22, 2018—after

the Company received a draft complaint from the FTC in December 2017 alleging

five violations.178 Unlike the disclosure in the five previous reports, this disclosure

described the nature of the claims the FTC was investigating:

177
Id. (citing Compl. ¶¶ 141 (quoting Form 10-Q for Q1 2017), 149 (quoting Form 10-Q
for Q2 2017), 155 (quoting Form 10-Q for Q3 2017)). The court takes judicial notice that
these reports were filed on May 5, 2017, August 8, 2017, and November 8, 2017,
respectively. Plaintiff’s brief references a similar statement from the Company’s annual
report on Form 10-K for 2016, filed on February 28, 2017, but provides no citation to the
Complaint for such statement. Id. Plaintiff also contends that a disclosure in the
Company’s 2017 Form 10-K is “virtually identical” to these disclosures. Id. (citing Compl.
¶ 163). As discussed above, however, the relevant disclosure in the 2017 Form 10-K is
qualitatively different than these previous disclosures.
178
Compl. ¶¶ 109, 160.
45
 On May 9, 2016, following the announcement of the Board Review, the
Company received a grand jury subpoena from the U.S. Department of
Justice (DOJ). The Company also received formal requests for
information from the SEC and Federal Trade Commission (FTC). The
FTC Staff is investigating questions concerning certain of the
Company’s policies and practices and related legal compliance. We
have worked and continue to work to respond to the FTC's information
requests, and have cooperated closely with FTC Staff as they evaluate
potential claims of deception or unfairness under the FTC Act and
other consumer protection laws enforced by the FTC. While we are
not able to predict with certainty the timing, outcome, or consequence
of this investigation, we believe that we are in compliance with all
applicable federal and state laws related to this matter.

The Company continues cooperating with the DOJ, SEC, FTC, and
other governmental or regulatory authorities or agencies. No assurance
can be given as to the timing or outcome of these matters. However, to
the extent that the Company continues to incur expenses to defend or
respond to these investigations, insurance policy coverage limits have
been met, as described above, so that the Company will not have
insurance available to offset any costs.179

This opinion refers to this disclosure as the “Post-December 2017 Disclosure.”

The third challenged statement comes from comments Sanborn made during

a conference call for stockholders and analysts on February 20, 2018, allegedly “in

the context of having settled a class action lawsuit alleging violations of the

Exchange Act.”180 The Complaint begins by quoting the following comments

Sanborn made:

179
Id. ¶ 163 (quoting Form 10-K for 2017) (emphasis added).
180
Id. ¶ 158.
46
 I do want to remind you that we are still addressing other outstanding
legacy issues that will result in elevated legal costs. They are detailed
in our upcoming 10-K that include litigation, ongoing government
investigations from the SEC, DOJ and FTC and indemnification
obligations for former employees. While it may take a few quarters for
us to get these issues resolved, today’s announcement is a major step
forward in putting the events of 2016 behind us.181

The Complaint next quotes Sanborn’s response to a question about “which cases

have been settled” and “the magnitude of the remaining cases:”182

So, in terms of lawsuits, this is the federal and the state class action
lawsuits, they were arising out of the 2016 disclosures. In terms of the
scale of these, we do believe that these represented our largest financial
exposure.

The remaining issues, as I indicated, are derivative lawsuit [sic] from
this which is not against the company and then some ongoing
government investigations with the SEC, DOJ and FTC, so obviously,
difficult to predict the outcome of those with any certainty, but we are
cooperating there and moving quickly to resolve those.183

Plaintiff asserts that all of the challenged statements were “false and

misleading because, by lumping together the FTC investigation with SEC and DOJ

investigations and relating them all to the board review of the investor fraud,

Defendants created the impression that the FTC’s investigation was related to the

sales of non-conforming loans and the reporting of related party transactions which

181
Id.
182
Id. ¶ 159.
183
Id.
47
the market knew the DOJ and SEC were investigating.”184 Defendants counter that

plaintiff has failed to allege particularized facts showing that a majority of the

Demand Board deliberately lied to investors—i.e., did so “in bad faith, knowingly

or intentionally”185—so as to face a substantial likelihood of personal liability. The

court agrees with defendants for several reasons.

First, none of the challenged statements was materially false or misleading.

To begin, the Post-December 2017 Disclosure expressly states that the FTC was

“investigating questions concerning certain of the Company’s policies and practices

and related legal compliance” pertaining to “potential claims of deception or

unfairness under the FTC Act and other consumer protection laws enforced by the

FTC.”186 This statement on its face reasonably cannot be construed to create the

misleading impression that the FTC was investigating the sales of non-conforming

loans or the reporting of related party transactions.

The Pre-December 2017 Disclosures also are not materially false or

misleading because they do not identify the subject matter of any of the DOJ, SEC,

or FTC inquiries.187 They only disclose that the Company received inquiries from

three government agencies—one of which occurred on May 9, 2016, after the

184
Pl.’s Answering Br. at 30.
185
In re Citigroup, 964 A.2d at 132.
186
Compl. ¶ 163.
187
See id. ¶¶ 123, 141, 149, 155.
48
“announcement of the board review”—and that the Company was continuing to

cooperate with each agency.188 Without some explanation concerning the subject

matter of the DOJ and SEC inquiries, a reasonable stockholder would not conclude

that the FTC inquiry must have concerned the same subject matter as the DOJ and

SEC inquiries, particularly given that the Company’s public filings disclosed that

the FTC enforces prohibitions against “unfair and deceptive acts or practices in or

affecting commerce.”189

As for Sanborn’s statements on the February 20, 2018 conference call, they

merely pointed out that, despite settling the securities litigation arising out of the

Company’s disclosure of material weaknesses in its internal controls, LendingClub

was still subject to other litigation and “government investigations” by the SEC,

DOJ, and FTC that would “result in elevated legal costs.”190 Once again, nothing

was said about the subject matter of the DOJ, SEC, or FTC inquiries so as to create

any misimpression about the nature of the FTC investigation. As the district court

reasoned in the Securities Action, Sanborn did not create a false impression about

the FTC investigation because his comments “say nothing about the substance of

any of the investigations – they simply disclose that the Company has and will

188
Id.
189
Id. ¶¶ 118, 134.
190
Id. ¶¶ 158-59.
49
continue to incur costs in connection with government investigations and

lawsuits.”191

Second, the Complaint fails to allege particularized facts demonstrating that

any of the Demand Board directors face a substantial likelihood of personal liability

concerning Sanborn’s comments for two additional reasons. The first reason is that

Complaint fails to allege facts to support a reasonable inference that Sanborn

intended to mislead investors about what the FTC was investigating. To the

contrary, Sanborn expressly qualified his comments by telling investors that the FTC

investigation would be “detailed” in the “upcoming 10-K,” which was issued two

days later and unambiguously explained that the FTC was investigating “claims of

deception or unfairness under the FTC Act and other consumer protection laws

enforced by the FTC.”192 This qualification negates any reasonable inference of an

intention by Sanborn to mislead. The second reason, which relates to the other

members of the Demand Board, is that the Complaint fails to allege that any of the

outside directors played a role in the making of Sanborn’s comments during the

February 20, 2018 conference call.193

191
LendingClub Corp., 2020 WL 3128909, at *10.
192
Compl. ¶¶ 158, 163.
193
See In re Citigroup, 964 A.2d at 134 (holding that “the Complaint does not contain
specific factual allegations that reasonably suggest sufficient board involvement in the
preparation of the disclosures that would allow me to reasonably conclude that the director
defendants face a substantial likelihood of personal liability”).
50
 Third, as to the Pre-December 2017 Disclosures, the Complaint fails to plead

particularized facts creating a reasonable inference that a majority of the Demand

Board directors acted with scienter. The premise of plaintiff’s claim is that “by

September 2016,” the Demand Board “possessed actual knowledge that the FTC’s

investigation did not concern investor fraud, but wholly unrelated conduct.”194 The

Complaint fails, however, to plead particularized facts to support this assertion.

To start, the Complaint does not identify the contents of the May 2016 CID

and does not allege that any member of the Demand Board reviewed the May 2016

CID. Although the pre-December 2017 presentations to the Risk Committee cited

in the Complaint touch on the subject matter of the May 2016 CID, their descriptions

are ambiguous and provide no clarity on what the FTC was investigating. For

example, the September 2016, December 2016, and March 2017 Risk Committee

presentations described the May 2016 CID as: “Driven by [the] May 9th events and

[the] FTC is looking at on-line lending and data security; particularly complaints

received by FTC regarding [LendingClub].”195 On the one hand, the reference to

“[d]riven by [the] May 9th events” suggests that the FTC investigation related to the

internal control weaknesses that the Company announced on May 9, 2016. On the

194
Pl.’s Answering Br. 23.
195
Sparco Aff. Ex. B at LC-Fisher_000802, 000849, 000888 (cited at Compl. ¶¶ 107, 108,
125, 136, 143).
51
other hand, the references to “on-line lending and data security” and “complaints

received by [LendingClub]” suggest that the FTC may have been investigating

conduct unrelated to internal control weaknesses, but those references are simply too

vague to draw any clear conclusions.196

In short, the Complaint fails to plead particularized facts to support plaintiff’s

contention that a majority of the Demand Board directors “possessed actual

knowledge” before December 2017 that the subject matter of the FTC’s

investigation concerned conduct “wholly unrelated” to the investor fraud allegations

arising from the internal control weaknesses the Company identified in May 2016.197

Thus, assuming for the sake of argument that a reasonable stockholder would have

been misled by the Pre-December 2017 Disclosures into believing that the DOJ,

SEC, and FTC each were investigating investor fraud, the Complaint does not

sufficiently plead that the Demand Board directors possessed the information

necessary to have knowingly lied to investors with respect to those disclosures.

196
Plaintiff cites paragraphs 137 and 144 of the Complaint for the assertion that “Board
materials are clear that the Director Defendants discussed the FTC’s investigation as
unrelated to the investigations by the DOJ and SEC.” Pl.’s Answering Br. 23. The cited
paragraphs quote parts of the minutes of Risk Committee meetings held on December 14,
2016 and March 17, 2017. Those excerpts show that the Risk Committee was updated on
the status of a series of regulatory matters and investigations, but they do not describe the
subject matter of the FTC investigation (or any of the other investigations) and thus do not
support plaintiff’s contention that the directors “possessed actual knowledge” that the FTC
investigation was “wholly unrelated” to the investigations relating to investor fraud.
197
Pl.’s Answering Br. 23.
52
 Fourth, even accepting as true plaintiff’s contention that the Demand Board

directors knew before December 2017 that the FTC investigation did not concern

investor fraud, the Complaint still does not sufficiently plead that the Demand Board

directors deliberately lied to investors about the FTC investigation because none of

the Pre-December 2017 Disclosures represented that the FTC was investigating

investor fraud. On this point, the district court’s analysis in the Securities Action

again is instructive:

[E]ven if Defendants knew what practices the FTC was investigating,
Plaintiffs’ allegations fail to establish each Defendant’s state of mind.
Plaintiffs do not argue that any of the statements were false on their
face – only that Defendants omitted at first the existence of an FTC
investigation, and later the specific targets of that investigation. To
sufficiently plead scienter for allegedly misleading omissions,
however, Plaintiffs must allege “a highly unreasonable omission” and
facts to support the inference that Defendants either knew that their
omissions were misleading the investors or that the potential for
misleading the public was so obvious that Defendants must have been
aware of it. . . . None of the facts alleged in the [complaint] establish
the state of mind of any of the Defendants.198

In sum, to plead that LendingClub’s directors face a substantial likelihood of

liability so as to excuse the failure to make a demand with respect to a disclosure

claim, plaintiff must allege particularized facts showing that a majority of the

Demand Board deliberately lied to investors—i.e., did so “in bad faith, knowingly

198
LendingClub Corp., 2020 WL 3128909, at *15 (internal citation omitted).
53
or intentionally.”199 Because the Complaint fails to do so for the reasons explained,

the disclosure claim within Count I must be dismissed.

*****

For the reasons explained in Parts III.B-C, the oversight and disclosure claims

embedded in Count I must be dismissed for failure to make a demand. Plaintiff has

conceded, furthermore, that demand was not excused as to Brophy claim within

Count I. Thus, Count I must be dismissed in its entirety under Rule 23.1.

D. Demand is Not Excused for the Unjust Enrichment Claim

Count II of the Complaint asserts that defendants were “unjustly enriched as

a result of the compensation and director remuneration they received while

breaching fiduciary duties owed to LendingClub.”200 Given plaintiff’s concession

that this claim rises or falls with the viability of the breach of fiduciary duty claim

in Count I, Count II also must be dismissed for failure to make a demand.201

IV. CONCLUSION

For the foregoing reasons, defendants’ motion to dismiss the Complaint in its

entirety is GRANTED.

199
In re Citigroup, 964 A.2d at 132.
200
Compl. ¶ 209.
201
Mot. to Dismiss Hr’g Tr. at 81 (July 2, 2020) (Dkt. 56).
54