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In re Lendingclub Corp. Derivative Litigation

Court of Chancery of Delaware

October 31, 2019

IN RE LENDINGCLUB CORP. DERIVATIVE LITIGATION

          Date Submitted: July 17, 2019

          Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, RIGRODSKY & LONG, P.A., Wilmington, Delaware; Robert I. Harwood, Matthew M. Houston, HARWOOD FEFFER LLP, New York, New York; Brett D. Stecker, James M. Ficaro, THE WEISER LAW FIRM, P.C., Berwyn, Pennsylvania; Counsel for Lead Plaintiffs Chaile Steinberg, William A. Blazek, and William Rhangos.

          Raymond J. DiCamillo, Eliezer Y. Feinstein, RICHARDS, LAYTON & FINGER, P.A., Wilmington Delaware; Adam S. Paris, Natalie Muscatello, SULLIVAN & CROMWELL LLP, Los Angeles, California; Counsel for Defendants John C. Morris, Daniel T. Ciporin, Jeffrey Crowe, Mary Meeker, Scott Sanborn, Lawrence H. Summers, and Simon Williams.

          Raymond J. DiCamillo, Eliezer Y. Feinstein, RICHARDS, LAYTON & FINGER P.A., Wilmington, Delaware; Jonathan D. Polkes, WEIL, GOTSHAL & MANGES LLP, New York, New York; Counsel for Defendant John J. Mack.

          Myron T. Steele, T. Brad Davey, Callan R. Jackson, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Robert J. Liubicic, MILBANK LLP, Los Angeles, California; Scott A. Edelman, Adam Fee, Andrew Lichtenberg, MILBANK LLP, New York, New York; Counsel for Defendant Renaud Laplanche.

          Jody C. Barillare, MORGAN, LEWIS & BOCKIUS LLP, Wilmington, Delaware; Charlene S. Shimada, Susan D. Resley, Lucy Wang, MORGAN, LEWIS & BOCKIUS LLP, San Francisco, California; Marc J. Sonnenfeld, MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania; Counsel for Defendant Carrie Dolan.

          William M. Lafferty, Susan W. Waesco, Sabrina M. Hendershot, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Diane M. Doolittle, QUINN EMANUEL URQUHART & SULLIVAN LLP, Redwood Shores, California; David M. Grable, Joseph C. Sarles, Jordan E. Alexander, QUINN EMANUEL URQUHART & SULLIVAN LLP, Los Angeles, California; John Potter, QUINN EMANUEL URQUHART & SULLIVAN LLP, San Francisco, California; Counsel for Nominal Defendant LendingClub Corporation.

          MEMORANDUM OPINION

          McCORMICK, V.C.

         LendingClub Corporation operates an online platform that facilitates loans issued by third parties. The company then purchases the loans and sells them to investors based on the investors' preferred loan characteristics. In March and April 2016, LendingClub sold to an institutional investor $22 million in near-prime loans that did not meet the investor's instructions concerning loan characteristics. When whistleblowers alerted the company's board of directors, the board conducted an internal investigation with the assistance of independent outside counsel and a forensic auditor.

         The internal investigation surfaced other problems. Two members of the board of directors, one of whom was the company's CEO and board Chairman, failed to disclose their personal investments in Cirrix Capital L.P. before the company invested $10 million in Cirrix. Also, certain valuation adjustments made by LendingClub's wholly-owned subsidiary, LC Advisors, LLC, were not consistent with generally accepted accounting principles such that LC Advisors exceeded the investment parameters of one of the funds it managed.

         The LendingClub board promptly self-reported the misconduct to the U.S. Securities and Exchange Commission. Although the SEC's investigation resulted in a cease-and-desist order, the SEC issued a press release contemporaneously with the order praising the LendingClub board for self-reporting, thoroughly remediating, and cooperating with the SEC's investigation. As part of LendingClub's remediation efforts, the board secured the departure of the employees involved (including the CEO and CFO), bifurcated the roles of CEO and Chairman to increase accountability, reviewed and ratified the Cirrix investment, and disclosed all transactions between LendingClub and Cirrix on its financial statements as related party transactions. The board also publicly disclosed the problems that prompted the internal investigation, the results of the internal investigation, and its remediation efforts.

         Two groups of LendingClub stockholders commenced litigation in reaction to the public disclosures. The first stockholder group filed a securities class action in the U.S. District Court for the Northern District of California against the company, the former CEO and CFO, and members of LendingClub's board of directors. As to the director defendants, the complaint alleged violations of Section 11 of the Securities Act of 1933, which are essentially strict liability claims and do not require a showing of scienter. The complaint alleged that LendingClub's December 2014 registration statement contained misstatements in view of LendingClub's later-disclosed weaknesses in its internal controls.

         The second group of stockholders commenced this derivative action claiming that LendingClub's board of directors breached its fiduciary duties. The complaint does not challenge the propriety of the remedial actions taken by the board. Rather, the complaint asserts claims under Caremark, [1] contending that the LendingClub board made no good faith effort to put in place a system of controls or, in the alternative, that it consciously failed to monitor company operations and thus disabled itself from being informed of problems requiring its attention.

         The defendants in this action have moved to dismiss the complaint pursuant to Court of Chancery Rule 23.1 for failure to plead demand futility. On a motion to dismiss under Rule 23.1, a court evaluates whether the complaint alleges with particularity facts sufficient to create a reasonable doubt that the board of directors in place at the time the complaint was filed could have impartially considered a pre-suit demand. To meet their pleading burden in this case, the plaintiffs' primary argument is that the majority of the demand board members were compromised because they faced a substantial likelihood of personal liability relating to the subject matter of the complaint. To prevail on a Caremark claim, however, a plaintiff must prove that the director defendants acted in bad faith. The complaint does not contain a single fact that would demonstrate bad faith on the part of the demand board members, who were lauded for self-reporting, investigating, and remediating the wrongdoing at the heart of this matter. This decision thus holds that the majority of the demand board members did not face a substantial likelihood of liability arising from the subject matter of the complaint at the time it was filed and grants the defendants' motion to dismiss.

         I. FACTUAL BACKGROUND

         The background facts come from the Consolidated Supplemented Verified Stockholder Derivative Complaint (the "Complaint") and the documents it incorporates by reference.[2]

         A. The Company

         LendingClub Corporation ("LendingClub" or the "Company") is a Delaware corporation with its principal place of business in San Francisco, California. As an alternative to the traditional banking system, the Company owns and operates an online platform that facilitates loans. The platform allows borrowers to apply for consumer, small business, and other types of loans using the LendingClub website, and the Company relies on its issuing bank partners to originate those loans. The Company then purchases the loans from its bank partners and sells them to investors based on the investors' preferred loan term and credit characteristics. Since its initial launch in 2007, LendingClub has facilitated approximately $16 billion in loans. The Company filed a registration statement with the SEC and went public in December 2014.[3]

         B. The May 2016 Disclosures

         In an SEC Form 8-K filed on May 9, 2016 (the "May 9 Form 8-K"), [4] the Company announced that LendingClub's Board of Directors (the "Board") had accepted the resignation of Chairman and CEO Renauld Laplanche, who is a defendant in this action. According to the May 9 Form 8-K, Laplanche's resignation followed an internal review of certain "material weaknesses" in the Company's internal controls.[5] The May 9 Form 8-K identified two primary material weaknesses.

         The first identified material weakness involved the sale of non-conforming loans to an investor. In March and April of 2016, LendingClub sold to an institutional investor over $22 million in near-prime loans that did not meet the investor's express instructions as to certain desired loan characteristics. Certain LendingClub personnel were aware that the loans did not meet the investor's criteria. The Audit Committee learned of the sales in April 2016, and the Board created a subcommittee, assisted by independent counsel and a forensic auditor, tasked with investigating the transaction. The Company ultimately repurchased the loans at par and resold them at par to another investor. Because of the repurchase, the loans were recorded on the Company's balance sheet as secured borrowings at fair value. LendingClub was unable to recognize approximately $150, 000 in revenue as a result. Three senior managers involved in the initial sales were given the choice to either be terminated or resign.

         The second identified material weakness involved Board members failing to disclose issues relevant to the Company's investment in Cirrix, an entity formed in 2012 to invest in online marketplace loans, including those facilitated by LendingClub. As of December 31, 2015, Laplanche owned a two percent stake in Cirrix and another board member, Defendant John J. Mack, owned a ten percent stake. Laplanche increased his interest in Cirrix to eight percent sometime between January 1, 2016 and March 31, 2016, while Mack reduced his interest to eight percent within that period.

         As Laplanche was increasing his investment in Cirrix, he approached the Board's Risk Committee-which comprised Defendants John C. Morris, Daniel T. Ciporin, Lawrence H. Summers, and Simon Williams-and proposed that LendingClub invest $10 million to acquire a fifteen percent limited partnership interest in Cirrix. Laplanche did not disclose the fact that he and Mack had financial interests in Cirrix. The Risk Committee approved the investment, and LendingClub thereafter acquired a fifteen percent stake in Cirrix, notwithstanding the Company's public statement that it would not assume credit risk or use its own capital to invest in loans facilitated by the LendingClub marketplace. As of April 1, 2016, Laplanche, Mack, and LendingClub owned approximately thirty-one percent of Cirrix. Once the Board learned of Laplanche's omission, he was asked to resign. The May 9 Form 8-K informed LendingClub's stockholders that the Board would continue to take remedial action.

         The disclosures in the May 9 Form 8-K made headlines. Several large institutional investors ceased purchasing loans from LendingClub. The Company's stock fell from $7.10 at the close of trading on May 6, 2016 to $4.62 at the close of trading on May 9, 2016. By May 13, LendingClub stock closed at $3.51 per share.

         On May 16, 2016, the Company filed its SEC Form 10-Q for the first quarter of 2016.[6] The Form 10-Q made additional disclosures, including the fact that the Company had received a grand jury subpoena from the U.S. Department of Justice and had contacted the SEC. The Form 10-Q explained that the "material weakness" identified in the Form 8-K was the result of an aggregation of internal control deficiencies caused by senior management's improper "tone at the top."[7] To address these concerns, the Company requested the resignations of the senior managers involved, requested the resignation of Laplanche as CEO and Chairman of the Board, and bifurcated the roles of CEO and Chairman by appointing Defendant Scott Sanborn (who also serves as the Company's President) and Morris to those positions, respectively.

         The Form 10-Q further explained that the Risk and Audit Committees were not fully aware of Laplanche's and Mack's Cirrix interests when the Company's Cirrix investment was approved. At no point did Laplanche or Mack disclose their respective interests in Cirrix to the Board's Audit Committee or Risk Committee. Neither Laplanche nor Mack disclosed their respective interests in Cirrix in their annual director questionnaires. The Form 10-Q concluded that the Company's controls were not effective to ensure that information about related party investments would be adequately conveyed to the relevant Board committees on a timely basis. Ultimately, when the Audit Committee learned of Laplanche's omission in late April 2016, it decided to disclose all transactions between LendingClub and Cirrix as related party transactions in the Company's quarterly financial statements. On May 15, 2016, after Laplanche's resignation, the Audit Committee ratified LendingClub's and Mack's respective investments in Cirrix as related party transactions.

         C. The Securities Class Action

         In response to LendingClub's May 2016 disclosures, stockholders of the Company filed two securities class actions in the U.S. District Court for the Northern District of California. The federal court consolidated those actions under the caption In re LendingClub Securities Litigation (the "Securities Class Action"). The Securities Class Action named as defendants LendingClub, former LendingClub CFO Carrie Dolan (who is also a Defendant in this case), Laplanche, and several members of the Board during the relevant period.[8] The complaint alleged that all of the named defendants violated Section 11 of the Securities Act of 1933.[9] It further alleged that LendingClub, Laplanche, and Dolan violated Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder.[10]The complaint did not allege that the director defendants violated Section 10(b) or Rule 10b-5.[11]

         The Section 11 claims were premised on the allegation that LendingClub's December 2014 registration statement contained untrue statements or omissions of material fact regarding "(i) the weaknesses in LendingClub's internal controls, (ii) LendingClub's relationship with Cirrix, (iii) the adequacy of [LendingClub's] loan-approval process, and (iv) the adequacy of [LendingClub's] data integrity and security protocols."[12]

         On May 25, 2017, the federal court granted in part and denied in part the defendants' motions to dismiss for failure to state a claim in the Securities Class Action. The court addressed each of the plaintiffs' four Section 11 claims against the named director defendants. It observed that Section 11 liability requires a plaintiff to show only that "any part of the registration statement . . . contained an untrue statement of a material fact or omitted to state a material fact."[13] The court further noted that plaintiffs asserting claims under Section 11 typically "need not prove . . . that the defendant acted with any intent to deceive or defraud."[14] The court ultimately sustained three of the Section 11 claims against the director defendants, [15] but it dismissed the claim alleging misstatements concerning LendingClub's loan approval process.[16]

         The court denied the defendants' motion to dismiss the first 10b-5 claim- that Laplanche and Dolan made misrepresentations about several material weaknesses in LendingClub's financial reporting internal controls-because Laplanche and Dolan could not "escape allegations of scienter."[17] The court then allowed the plaintiffs' second 10b-5 claim-that Laplanche and Dolan failed to disclose the Cirrix-LendingClub relationship-to proceed as to defendant Laplanche, since Laplanche "knew about his relationship with Cirrix and his company's relationship and the misleading nature of failing to disclose that relationship."[18]

         More than a year after the order regarding the motion to dismiss, the federal court approved a final settlement in the Securities Class Action totaling $125 million plus interest.[19] The order approving the settlement stated that the lead plaintiff in the action faced risks with continued litigation because the "defendants were actively developing the argument that LendingClub's internal control issues were nonexistent at the time of the IPO."[20] All in all, the settlement comprised "approximately 17 percent of the estimated $711 million in recoverable damages at trial," and the court found that it was fair and reasonable.[21] All of the defendants "denied and continue[d] to deny all charges of wrongdoing or liability against them" in the Securities Class Action, [22] and the plaintiffs agreed on behalf of the class to release claims against the defendants arising out of the facts alleged in the Securities Class Action.[23] Accordingly, at present, none of the director defendants in this case are at risk of any liability arising from the Securities Class Action.

         D. The June 2016 Disclosures

         On June 28, 2016, the Company filed another SEC Form 8-K (the "June 28 Form 8-K") disclosing further accounting and compliance issues relating to the Company's wholly owned subsidiary, LC Advisors.[24] LC Advisors is a registered investment advisor to certain private funds and accredited investors, and is thus subject to regulatory and legal requirements-including those imposed under the Investment Advisers Act of 1940 (the "Advisers Act"). LendingClub controlled LC Advisors through an Investment Policy Committee whose three members were Dolan, Laplanche, and the Company's former general counsel.

         The June 28 Form 8-K explained that the Company chose to review LC Advisors' asset valuation methodologies with respect to six particular funds it managed. Because there was no quoted market price for the investment assets held by those funds, LC Advisors determined the funds' fair value using its own estimates and calculations. The Company determined that adjustments made to the valuation of those assets were not consistent with generally accepted accounting principles. It further determined that LC Advisors exceeded the investment parameters of one of the funds. To alleviate concerns regarding these events, the Company: (1) stated that it would reimburse limited partners who entered or exited the funds and who were adversely impacted by the improper adjustments; (2) engaged an independent valuation firm to provide valuation services to the affected funds; and (3) established a majority independent governing board for the affected funds.[25]

         E. The 2018 SEC Order

         Two years after the June 2016 disclosures, on September 28, 2018, the SEC issued an order instituting public administrative and cease-and-desist proceedings against LC Advisors, Laplanche, and Dolan (the "SEC Order").[26] The SEC Order made findings of fact concerning LC Advisors' misconduct and the roles Laplanche and Dolan played in that conduct. Ultimately, the SEC found that LC Advisors, Laplanche, and Dolan had willfully violated various sections of the Advisers Act and its accompanying regulations. Neither LendingClub nor any of the Company's directors-excluding Laplanche-were named as respondents in the SEC proceedings. The SEC found that both LendingClub and LC Advisors provided "significant cooperation" throughout the duration of its investigation and put forth "extensive" remediation efforts.[27] The SEC Order further acknowledged that LendingClub self-reported the problematic conduct it identified after the Board first initiated its review in May 2016.

         F. This Litigation

         On December 14, 2016, LendingClub stockholders filed this derivative action based on allegations related to the Company's May 2016 disclosures. While briefing was underway on a motion to stay, a second derivative action was filed on August 18, 2017. The Court consolidated the two actions in October 2017, and the lead plaintiffs-Chaile Steinberg, William A. Blazek, and William Rhangos ("Plaintiffs")-filed a consolidated complaint on December 1, 2017. After settlement efforts proved unsuccessful, Plaintiffs filed their consolidated supplemented complaint on January 8, 2019.

         The Complaint names as defendants eight of the nine members of the Board when the initial complaint was filed: Morris, Mack, Ciporin, Crowe, Meeker, Sanborn, Summers, and Williams (the "Director Defendants"). The Complaint separately names as defendants Dolan and Laplanche (with the Director Defendants, "Defendants") and LendingClub as a nominal defendant.

         Defendants moved to dismiss the Complaint on February 22, 2019. The parties fully briefed the motion, [28] and the Court heard oral argument on July 17, 2019.[29]

         II. LEGAL ANALYSIS

         Defendants have moved to dismiss the Complaint for failure to adequately plead demand futility under Court of Chancery Rule 23.1.[30] "A cardinal precept of [Delaware law] is that directors, rather than shareholders, manage the business and affairs of the corporation."[31] Because derivative litigation "impinges on the managerial freedom of directors," Rule 23.1 requires that stockholders exhaust their intracorporate remedies before filing suit.[32] In order to satisfy the Rule 23.1 mandate, stockholders must either demand that the board of directors pursue the claim on behalf of the corporation, or allege that making demand on the board would have been futile.[33] Stockholders choosing to allege demand futility rather than make pre-suit demand "must comply with stringent requirements of factual particularity that differ substantially from . . . permissive notice pleadings."[34] "Vague or conclusory allegations do not suffice, rather the pleader must set forth particularized factual statements that are essential to the claim."[35]

         Delaware courts apply one of two tests in evaluating whether demand is futile. As the Delaware Supreme Court has instructed:

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. Under the two-part Aronson test, demand will be excused if the derivative complaint pleads particularized facts creating a reasonable doubt that "(1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." In Rales v. Blasband, this Court identified three circumstances in which the Aronson standard will not be applied: "(1) where a business decision was made by the board of a company, but a majority of the directors making the decision has been replaced; (2) where the subject of the derivative suit is not a business decision of the board; and (3) where . . . the decision being challenged was made by the board of a different corporation." In those situations, demand is excused only where 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.[36]

         The Complaint contains two causes of action. The first cause of action alleges that the Defendants breached their fiduciary duties in connection with (a) the Board's failure to implement internal controls at LendingClub, which resulted in allegedly false and misleading statements in the Company's public disclosures, (b) the Cirrix investment, and (c) the non-conforming loans.[37] The second cause of action alleges (d) that the Defendants breached their fiduciary duties by failing to monitor LC Advisors' compliance with federal law and oversee LC Advisors' risk management.[38] Properly understood, the subject of each of these causes of action is not a business decision of the board, but rather, alleged violations of the Board's oversight duties under Caremark.[39] Thus, the Rales standard governs the demand futility inquiry.[40]

         When conducting the Rales analysis, "[t]he operative question is whether the Board could impartially consider the merits of a demand without being influenced by improper considerations."[41] This analysis focuses on the board in place "as of the time the complaint was filed."[42] In this case, the board in existence at the time the complaint was filed comprised the eight Director Defendants and non-party Timothy Mayoloulos (the "Demand Board").[43] To meet their pleading burden, Plaintiffs must demonstrate that at least five of the nine directors serving on the Demand Board would have been incapable of exercising their independent and disinterested business judgment in responding to a pre-suit demand.

         For the sake of argument, this decision assumes that Mack would have been incapable of impartially considering a pre-suit demand with respect to the subject matter of each of the four claims, [44] and evaluates Plaintiffs' arguments as to the other Demand Board members.

         A. Interestedness

         A plaintiff can demonstrate interestedness by alleging particularized facts demonstrating that "a director has received, or is entitled to receive, a personal financial benefit from the challenged transaction"[45] or that the directors "face a 'substantial likelihood' of personal liability" relating to the subject matter of the complaint.[46] A "mere threat of personal liability" is not enough to challenge a director's disinterestedness.[47] Where, as here, the corporation's charter includes an exculpatory provision, [48] "a substantial likelihood of liability 'may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts."[49] With the exception of Mack, Plaintiffs do not allege that any director derived a personal financial benefit from any of the challenged transactions. They instead contend that a majority of the Demand Board faced a substantial likelihood of liability from this action and the Securities Class Action.

         1. The Derivative Claims

         This Court evaluates whether a substantial likelihood of liability impugns the impartiality of a demand board on a claim-by-claim basis.[50] As discussed above, the Complaint contains two causes of action effectively asserting four separate claims. The first cause of action alleges that the Defendants breached their fiduciary duties in connection with (a) the Board's failure to implement internal controls at LendingClub, which resulted in allegedly false and misleading statements in the Company's public disclosures, (b) the Cirrix investment, and (c) the non-conforming loans.[51] The second cause of action alleges (d) that the Defendants breached their fiduciary duties by failing to monitor LC Advisors' compliance with federal law and oversee LC Advisors' risk management.[52]

         a. Oversight of LendingClub

         Plaintiffs' first claim is that the Director Defendants breached their fiduciary duties because "they failed to take steps to maintain adequate internal controls necessary to prevent against the issuance of false and misleading statements" at LendingClub.[53] These false and misleading statements allegedly surfaced in a variety of the Company's proxy statements, including in its December 2014 registration statement, where the Company stated that it would not "assume credit risk or use [its] own capital to invest in loans facilitated by [the LendingClub] marketplace"[54] and that it maintained "an effective information security program."[55]

         This first claim calls for the application of Caremark, which sets out the "standard for liability for failures of oversight that requires a showing that the directors breached their duty of loyalty by failing to attend to their duties in good faith."[56] Caremark articulates two categories of oversight claims: "(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention."[57] "In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations."[58] As the Delaware Supreme Court recently explained: "[F]or a plaintiff to prevail on a Caremark claim, the plaintiff must show that a fiduciary acted in bad faith-'the state of mind traditionally used to define the mindset of a disloyal director.'"[59]

         Because Plaintiffs' first claim alleges a complete failure to maintain adequate internal controls, it falls within Caremark's first category.[60] On that point, Delaware courts "give[] deference to boards and ha[ve] dismissed Caremark cases even when illegal or harmful company activities escaped detection, when the plaintiffs have been unable to plead that the board failed to make the required good faith effort to put a reasonable compliance and reporting system in place."[61]

         To demonstrate interestedness, Plaintiffs argue that the majority of the Demand Board members faced a substantial likelihood of liability from their first claim.[62] This argument fails. The Complaint "is empty of the kind of fact pleading that is critical to a Caremark claim, such as contentions that the company lacked an audit committee [or] that the company had an audit committee that met only sporadically and devoted patently inadequate time to its work."[63] The factual allegations in the Complaint indicate that LendingClub's Audit Committee both (1) existed, and (2) met monthly.[64] The Complaint offers no facts concerning LendingClub's internal controls-or lack thereof-that would persuade a finding that the Board faced a substantial likelihood of liability for utterly failing to implement them. And the Complaint offers no factual support for a finding that a majority of the Demand Board acted in bad faith.

         b. Cirrix Investment

         Plaintiffs' second claim is that Defendants breached their fiduciary duties by failing to prevent harm to the Company stemming from the Cirrix investment.[65] This claim falls within Caremark's second category, since it alleges a conscious failure to monitor such that the personal ownership interests of Laplanche and Mack in Cirrix went undetected at the time the board approved the Cirrix investment.[66]

         To recover under the second prong of Caremark, Plaintiffs must demonstrate that the directors, having implemented adequate internal controls, "consciously failed to monitor or oversee [their] operations thus disabling themselves from being informed of risks or problems requiring their attention."[67]

Under this formulation of Caremark, a plaintiff may state a valid oversight claim by pleading (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. In practice, plaintiffs often attempt to satisfy the elements of a Caremark claim by pleading that the board had knowledge of certain "red flags" indicating corporate misconduct and acted in bad faith by consciously disregarding its duty to address that misconduct.[68]

         In other words, Plaintiffs must allege that "the directors were conscious of the fact that they were not doing their jobs, and that they ignored red flags indicating misconduct."[69]

         To demonstrate that this claim compromises the Demand Board for demand futility purposes, Plaintiffs argue that the Risk Committee members-Morris, Ciporin, Summers, and Williams-faced a substantial likelihood of liability for consciously failing to perform their duties in connection with the Cirrix Investment.[70] Plaintiffs argue that conscious disregard can be inferred because the Risk Committee approved the Company's Cirrix investment at Laplanche's recommendation "without so much as questioning the propriety of the action or taking any steps to learn of Laplanche's and Mack's interests in Cirrix."[71]

         This Court "has consistently found that just being a director on the committee where the alleged wrongdoing is 'within [its] delegated authority' does not give rise to a substantial threat of personal liability under Caremark."[72] Thus, Plaintiffs must make "supporting allegations of particularized facts showing bad faith" in order to show that the members of the Risk Committee did not have the ability to impartially consider pre-suit demand.[73] Plaintiffs have not met their burden on this point, as the Complaint does not plead such facts with particularity. However, there was significant overlap between the Audit and Risk Committees' membership-three of the members of the Audit Committee doubled as members of the Risk Committee.[74]The Complaint portrays the Audit Committee as having actively discussed the "significant and unusual non-routine" nature of the Cirrix investment.[75] The Risk Committee members, through their diligence on the Audit Committee, certainly seem to have "question[ed] the propriety" of the Cirrix investment, despite Plaintiffs' assertion to the contrary.[76] And, there are no facts indicating that the Risk Committee knew or should have known about Laplanche's and Mack's Cirrix investments. The Complaint affirmatively alleges that Mack and Laplanche did not disclose their Cirrix interests to the Board's Audit Committee or Risk Committee and did not list their Cirrix interests in their director questionnaires.[77]

         Further, upon discovering Laplanche's and Mack's interests in Cirrix, the Audit Committee resolved that "all transactions between [Cirrix] and the Company will be disclosed as related party transactions in [the Company's] quarterly financial statements.[78] It then ratified the LendingClub-Cirrix and the Mack-Cirrix investments as related party transactions.[79] Plaintiffs do not plead facts sufficient to support a finding that a majority of the Demand Board consciously ignored red flags relating to the Cirrix investment such that it faced a substantial likelihood of liability in this action.[80]

         c. Sale of Non-Conforming Loans

         Plaintiffs' third claim is that Defendants breached their fiduciary duties by failing to prevent the sale of non-conforming loans, either because they failed to implement board-level oversight mechanisms or consciously ignored red flags.[81]The legal standard applicable to this ...


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