IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MATTHEW FISHER, Derivatively on 

Behalf of LENDINGCLUB 

CORPORATION,

Plaintiff,

v.

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.

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C.A. No. 2019-0631-AGB

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
1

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 
2

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 boardlevel 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.
3

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.
4

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 nonparty 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.
5

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).
6

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.
7

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 
8

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).
9

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).
10

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.
11

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.
12

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).
13

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.
14

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 consumerfacing 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.
15

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).
16

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.
17

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).
18

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. 
19

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).
20

“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.
21

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. 
22

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. 
23

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).
24

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.
25

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.
26

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).
27

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.
28

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).
29

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”). 
30

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”).
31

‘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).
32

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.
33

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.
34

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).
35

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 LCFisher_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.
36

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 LCFisher_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 DoddFrank Wall Street Reform and Consumer Protection Act. Id. ¶ 9 n.3. 
37

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.
38

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 preapproval 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%).”).
39

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.”). 
40

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.
41

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. 
42

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”).
43

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). 

171 In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 132 (Del. 2009) (quoting 

Malone v. Brincat, 722 A.2d 5, 14 (Del. 1998)).

172 Id. (internal quotation marks and citation omitted).
44

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.
45

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. 
46

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.
47

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.
48

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.
49

“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.
50

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”).
51

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).
52

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.
53

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). 
54

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).