LendingClub had problems before its CEO was ousted

LendingClub (LC) CEO Renaud Laplanche, who was fired Monday after the peer-to-peer lending company discovered he had misled an investor, was already struggling to convince Wall Street that his business plan for the largest P2P lending network would be able to turn a consistent profit.

The San Francisco-based financial firm went public in 2014 at a valuation of $8.5 billion, which was higher than all but 14 U.S. banks at the time. Shares have plummeted since then and closed Monday at $4.66 -- down 34.4 percent on the day -- more than $10 under its IPO price of $15. Although LendingClub had repeatedly posted quarterly profits that exceeded Wall Street expectations, it only matched them in the latest period even as revenue nearly doubled.

"P2P lenders have leveraged low operating costs, minimal regulations, Big Data and technology streamlined for a mobile generation to mediate terms between everyday borrowers who want quick access to cash and the lender-next-door starved for yield," according to Morgan Stanley.

Investors, though, have long worried about whether the industry's growth was sustainable.

Laplanche, a native of France who sold a startup to Oracle (ORCL), was well regarded personally. He made Bloomberg Markets' 2015 Most Influential List and won the 2014 Economist Innovation Award. Henry Blodget's Business Insider site declared him the "best startup CEO to work for." One analyst described Laplanche as one of the "godfathers" of P2P lending.

"There are some big shoes for the next management team to fill," said Juliana Balicka, an analyst with Keefe Bruyette & Woods, who rates the stock as "market perform." "He was very vocal and a big champion of the industry."

According to LendingClub, Laplanche misrepresented the characteristics of $22 million in loans that the company sold to an investor, violating the investor's "express instructions." Other executives involved in the transaction were also terminated. The investor's identity and the specifics of how the deception weren't disclosed.

Apparently, a LendingClub employee discovered that a date on $3 million worth of loans had been altered in some way and raised the issue with Laplanche, who alerted the company's internal auditor, according to The New York Times. A subsequent internal investigation uncovered more irregularities, including that Laplace also failed to disclose that he had a stake in a fund that LendingClub was considering investing in, the paper said.

Though the amount of the loan in question was trivial for a company with a market capitalization nearing $2 billion, the ramifications of Leplanche's actions are huge because they raise concerns about whether Lending Club can be a trusted trading partner.

"It's disappointing anytime you have a problem like this," said Bob Ramsey, an analyst with FBR, who rates the stock as an "outperform." "It does appear that there were some efforts to cover this up, too, which is obviously problematic."

The board, though, took decisive action as soon as it learned of the situation. Company President Scott Sanborn will serve as acting CEO. He'll report to director Hans Morris, who will assume the newly created job of executive chair. LaPlanche isn't getting any severance.

"It is not good at all that this happened, but I think they have handled the situation as well as you can ask for," Ramsey said.

The revelations about LePlanche cast a shadow over the P2P lending industry just as it's starting to worry the traditional banks whose lending business it threatens. According to Balicka, LendingClub's poor post-IPO performance is probably dissuading rival such as Prosper Marketplace from going down that path anytime soon.

Nonetheless, traditional banks can't afford to ignore these upstarts. According to Morgan Stanley, P2P loan origination had a compounded annual growth rate of 123 percent between 2010 and 2014. However, that rate has slowed as credit conditions have tightened.

Up to now, these upstarts have focused on providing consumer credit, but they're bound to move on to other markers such as mortgages, auto loans and student loans. Or at least try to.