Author Topic: FTC Files Complaint Against LC, Accuses of Deceptive Practices  (Read 8165 times)

MoMoney

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #15 on: April 28, 2018, 12:01:08 AM »
FWIW LC closed at an all time low today of $2.70 (-5.6%) on modest volume.
The low print of the day was $2.68, the high $2.93.
If there was any important news I missed it. Just the usual law firms soliciting shareholders with large losses to join a suit.
Sure wonder if Mr. Chen is a buyer here? IIRC his last average price was around $3.50. He started buying at $3.14 and stopped at $3.80.
Maybe we will find out Monday.

Xposting from the other thread:
My guess is that they are gonna report results within their guidance but probably at the lower end as cost of borrowing for investors has gone up and bank participation was already sharply lower last quarter partly because of that, and they hinted this could worsen as interest rates hike.
Additionally, according to PeerIQ marketplace securitization was 50% lower in q1 vs q4.
It also looks as if they are having competitive issues on the borrowing side as they have left the interest rates for borrowers unchanged for the most part.
Their CLUB certificates could potentially surprise us tho but the volume was so low in q4 that I don't expect a big origination bump there.
Their interest revenue is probably going to help push the revenue higher although with interest rates having risen so much since last quarter, there could be considerable markdowns (accounting rules).
Having said all of that, the stock is trading at a very attractive valuation right now when you look at their EBIDTA, revenue, and cash on hand so I'm heavily invested in them. I really hope they initiate a stock buyback but that could be unlikely as they are more and more tapping into their balance sheet to originate loans.
The FTC thing is nonsense and political and they will easily clear that but it's unfortunate that their brand is getting a hit from it, and there will be additional legal costs.
Their other legal issues related to the ouster of the CEO are behind them for the most parts.
I think there is a big possibility that they will sell themselves to a bank this year. They have a very strong and well connected board. It's unfortunate that their CEO lacks vision. They could have so much potential as a market leader but the best path forward might be to sell themselves at a good premium. I also hope they won't be subjected to a takeover as that could sharply reduce the premium.

storm

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #16 on: April 28, 2018, 12:50:26 AM »
As someone who's filed more than a few FTC complaints, it takes a lot of complaints to get the FTC to act.  It makes me think there is some basis to these charges.  The CFPB is toothless especially in the current political climate.  It goes to show LC has been suffering from a leadership vacuum the last couple of years, and management hasn't lifted a finger to improve things for borrowers or investors.  This action shouldn't have came as a complete surprise.

Fred93

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #17 on: April 28, 2018, 02:14:48 AM »
If there was any important news I missed it. Just the usual law firms soliciting shareholders with large losses to join a suit.

"Just the usual..." :-)

Quote
Sure wonder if Mr. Chen is a buyer here? IIRC his last average price was around $3.50. He started buying at $3.14 and stopped at $3.80.
Maybe we will find out Monday.

To remind folks on the background, Mr Chen's company "Shanda Asset Management" has bought a huge amount of LC in the past year or so, and now owns 20.43% of the stock.  His intentions are unknown. 

Stock ownership numbers here:  https://finance.yahoo.com/quote/LC/holders?p=LC

You can read about the history of Shanda here... https://www.shanda.com/en-us/home/

jd

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #18 on: April 28, 2018, 10:22:56 AM »
Quote
Direct Holders (Forms 3 and 4)

How does someone end up on that list (besides the obvious answer of buying enough stock)?  Does the company or person have to file in a different way if they get to a certain % of stock held? 

Mutual fund guy myself.  To each his own but I'd lose sleep worrying about one individual stock.

Thanks


Rob L

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #19 on: April 28, 2018, 11:42:54 AM »
I think there is a big possibility that they will sell themselves to a bank this year. They have a very strong and well connected board. It's unfortunate that their CEO lacks vision. They could have so much potential as a market leader but the best path forward might be to sell themselves at a good premium. I also hope they won't be subjected to a takeover as that could sharply reduce the premium.

Per the last quarterly report LC has 409M shares outstanding. At $2.70 per share that's a market cap of about $1.1B. As a guess from the trends over past quarters LC still probably has about $400M in cash or equivalents in the bank. So, the market values all the rest of LC at $700M. What do they have that would prompt a bank to pay $700M for the company? Software? A bank doesn't need lenders so half of the LC software would be useless. Analytics and loan scoring? Maybe some value there. Loan servicing? Banks already have that. Brand recognition? Help me out here. What am I missing? Maybe a buyout deal will be announced next week but even at the current price I'm too thick headed to see the value. Maybe Mr. Chen sees something I don't. Probably does and that's why he's a billionaire.

bobeubanks

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #20 on: April 28, 2018, 12:16:43 PM »
A bank doesn't need lenders so half of the LC software would be useless.

They don't need lenders but they might want to expand into an arena where people are willing to give them virtually unsecured money from which they can take 1% off the top at close to zero risk.

MoMoney

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #21 on: April 28, 2018, 01:36:36 PM »
I think there is a big possibility that they will sell themselves to a bank this year. They have a very strong and well connected board. It's unfortunate that their CEO lacks vision. They could have so much potential as a market leader but the best path forward might be to sell themselves at a good premium. I also hope they won't be subjected to a takeover as that could sharply reduce the premium.

Per the last quarterly report LC has 409M shares outstanding. At $2.70 per share that's a market cap of about $1.1B. As a guess from the trends over past quarters LC still probably has about $400M in cash or equivalents in the bank. So, the market values all the rest of LC at $700M. What do they have that would prompt a bank to pay $700M for the company? Software? A bank doesn't need lenders so half of the LC software would be useless. Analytics and loan scoring? Maybe some value there. Loan servicing? Banks already have that. Brand recognition? Help me out here. What am I missing? Maybe a buyout deal will be announced next week but even at the current price I'm too thick headed to see the value. Maybe Mr. Chen sees something I don't. Probably does and that's why he's a billionaire.

I am shocked you don't see value.
The biggest reason would be opportunity cost which is the biggest reason software companies buy other software companies. Not because the buyer can't make software themselves but because to get to the same scale could take years or decades, and that opportunity cost is not worth it. Marcus started many years ago in development and after that many years there are just doing a fraction of the loans lending club is doing. The lending club's segment is huge. Goldman Sachs expects revenue from Marcus to surpass their trading revenue in the future. If I'm a bank, and I want to enter this space or i want to put my clients money into this space, then it's much faster for me to buy lending club to get a competitive advantage and at the same time still be light years ahead of Marcus. GS then might want to outbid me to not give me that opportunity. Spending a couple billion dollars to get ahead of competition by years in a market that's expected to be trillions of dollars is nothing for a bank.

Also, many big banks including the largest bank Chase, hedge funds, institutional investors are already lending on lending club and prosper and the like agreeing to give up a lot of their margin because they still see a lot of value in this segment.

Additionally banks are very bad at software which is even more incentive to purchase a bay area company that can still attract talent. Marcus is not the norm, it's an anomaly.

Another reason would be years of data on this type of unsecured loans that lending club has. No other company in the world has this much data on this segment. That's why being the market leader gives you an advantage too. The more data you have, the better underwriting you have.

In addition, banks are very bad and inefficient at underwriting. That's why it takes months to close your mortgage. It shouldn't take more than a few days if even. The possibilities for a bank purchasing LC are endless.

Banks can not only use their own balance sheet as well as their clients to lend, they can also position themselves as a platform for everybody else to lend which they would be able to do even more efficiently. Credit Unions, other banks, hedge funds, etc can all use that platform. They could position themselves as the Amazon of unsecured loans.

There are also many synergies that could happen that sweeten the deal even more. Even non-banks could be buyer. I could even see intuit buy them. Companies like Credit Karma are worth billions because they make money referring people to sites like lending club. Intuit's Mint could have free customer acquisition which is one of lending club's biggest costs, and it could use it's own trove of data to improve underwriting giving a huge competitive advantage. Then it could even market that product with every other product they sell even their tax software.

Aside from everything above, let's not forget. Lending club could be profitable if they wanted to. They are already cash flow positive excluding the penalties they paid. They could have EBITDA of 75-90 million dollars in 2018. These are not the numbers to sneeze at. Their value right now excluding assets/cash is less than their revenue. That's a bargain. Companies like Prosper and OnDeck are already profitable while originating a fraction of loans just by controlling their costs. Lending club could still realize way more than its value doing what they do. I have just lost hope that they will be the giant at some point I hoped they would be. They should have started a credit scoring platform like creditKarma a long time ago or have bought one. But make no mistake, there is tons of value in lending club. Even tho, I'm expecting their numbers come in the lower range of their guidance, they would still be sharply up from Q1 2017.

Also, it sounds like you are implying that lending club does not have brand recognition or other positive qualities which is not true. The vast majority of borrower come back to lending club if they need another loan or recommend it to others because they were so happy with their experience. That's another reason being a market leader gives you a competitive advantage. It reduces your future customer acquisition cost because people come back to the same product because it's familiar and they were happy with it.

Finally, Mr.Chen could stage a takeover. Maybe take the company private (less likely as it's better to be a public company in this space) but also could some other form of take over such as a Chinese bank partnering up with him to buy lending club. Chinese are also increasingly interested in investing in this space but that's another story.
« Last Edit: April 28, 2018, 01:59:37 PM by MoMoney »

Rob L

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #22 on: April 28, 2018, 10:12:19 PM »
Well put but I disagree with much you have said. Time will tell.
With enough money software is a commodity that can be bought. It's not exclusively Bay area "magic" contrary to popular opinion.
I am neither long nor short LC stock. No dog in this fight.
I prefer LC to succeed rather than fail but am pessimistic. Money wise I am personally agnostic.
Any bank buys LC even at this level of $2.70 per share and I'm stunned; but I'm not a billionaire so what do I know.
I predict LC will continue to plod along as is.
Management continues to benefit from free stock incentives as long as they can keep the company going.
So, with $400M cash left from the IPO, if they keep a lid on things and don't take any chances they can keep it going for quite a while.
Tell me where this management that's getting free stock compensation could go and make more money?

Edit: Guess I'm on a roll but forgot to mention...
LC's underwriting or loan scoring model is designed to optimize originations not loan profitability. They seek to enhance share holder value, not to optimize lender returns. Certainly there is some give and take here. They must walk a fine line to retain enough lenders to provide the money to fund their loans yet maximize their originations (i.e fees). The bank model (Marcus and others) must seek loan profitability since they are funding the loans themselves and profit from their returns. The fundamental goal of the LC underwriting model would have to be revised to place loan profitability ahead of originations.

« Last Edit: April 28, 2018, 10:45:23 PM by Rob L »

Tomp

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #23 on: April 29, 2018, 12:01:03 PM »
FWIW LC closed at an all time low today of $2.70 (-5.6%) on modest volume.
The low print of the day was $2.68, the high $2.93.
If there was any important news I missed it. Just the usual law firms soliciting shareholders with large losses to join a suit.
Sure wonder if Mr. Chen is a buyer here? IIRC his last average price was around $3.50. He started buying at $3.14 and stopped at $3.80.
Maybe we will find out Monday.

Xposting from the other thread:
My guess is that they are gonna report results within their guidance but probably at the lower end as cost of borrowing for investors has gone up and bank participation was already sharply lower last quarter partly because of that, and they hinted this could worsen as interest rates hike.
Additionally, according to PeerIQ marketplace securitization was 50% lower in q1 vs q4.
It also looks as if they are having competitive issues on the borrowing side as they have left the interest rates for borrowers unchanged for the most part.
Their CLUB certificates could potentially surprise us tho but the volume was so low in q4 that I don't expect a big origination bump there.
Their interest revenue is probably going to help push the revenue higher although with interest rates having risen so much since last quarter, there could be considerable markdowns (accounting rules).
Having said all of that, the stock is trading at a very attractive valuation right now when you look at their EBIDTA, revenue, and cash on hand so I'm heavily invested in them. I really hope they initiate a stock buyback but that could be unlikely as they are more and more tapping into their balance sheet to originate loans.
The FTC thing is nonsense and political and they will easily clear that but it's unfortunate that their brand is getting a hit from it, and there will be additional legal costs.
Their other legal issues related to the ouster of the CEO are behind them for the most parts.
I think there is a big possibility that they will sell themselves to a bank this year. They have a very strong and well connected board. It's unfortunate that their CEO lacks vision. They could have so much potential as a market leader but the best path forward might be to sell themselves at a good premium. I also hope they won't be subjected to a takeover as that could sharply reduce the premium.

LC outlook....I got the under....and cash of $502 at 12/31/2017 less $125 M for settlement less $2 M to Massachusetts for lending without license, less legal fees, less cash loss... let's say $300 left.

First Quarter 2018

Total Net Revenue in the range of $145 million to $155 million

Net Income (Loss) (3) in the range of $(25) million to $(20) million

Adjusted EBITDA(2)(3) in the range of $5 million to $10 million

Reconciling Items between net loss and non-GAAP adjusted EBITDA consisting of stock-based compensation of approximately $19 million, and depreciation and amortization and other net adjustments of approximately $11 million

In regard to your comment regarding LC's data and in and of itself makes them better underwriters....they kinda sorta suck at underwriting.

Rob L

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #24 on: April 29, 2018, 01:29:24 PM »
Another reason would be years of data on this type of unsecured loans that lending club has. No other company in the world has this much data on this segment. That's why being the market leader gives you an advantage too. The more data you have, the better underwriting you have.

If LC has "hidden" (or obvious) value this could be it. In a world increasingly driven by big data, somebody out there may think they have the mother lode. LC may or may not have done a good job of underwriting using the data but somebody may think they could do very well with it. Could possibly be used for purposes other than unsecured lending; who knows? I haven't a clue how to place a value on it though.

MoMoney

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #25 on: April 30, 2018, 05:52:07 PM »
FWIW LC closed at an all time low today of $2.70 (-5.6%) on modest volume.
The low print of the day was $2.68, the high $2.93.
If there was any important news I missed it. Just the usual law firms soliciting shareholders with large losses to join a suit.
Sure wonder if Mr. Chen is a buyer here? IIRC his last average price was around $3.50. He started buying at $3.14 and stopped at $3.80.
Maybe we will find out Monday.

Xposting from the other thread:
My guess is that they are gonna report results within their guidance but probably at the lower end as cost of borrowing for investors has gone up and bank participation was already sharply lower last quarter partly because of that, and they hinted this could worsen as interest rates hike.
Additionally, according to PeerIQ marketplace securitization was 50% lower in q1 vs q4.
It also looks as if they are having competitive issues on the borrowing side as they have left the interest rates for borrowers unchanged for the most part.
Their CLUB certificates could potentially surprise us tho but the volume was so low in q4 that I don't expect a big origination bump there.
Their interest revenue is probably going to help push the revenue higher although with interest rates having risen so much since last quarter, there could be considerable markdowns (accounting rules).
Having said all of that, the stock is trading at a very attractive valuation right now when you look at their EBIDTA, revenue, and cash on hand so I'm heavily invested in them. I really hope they initiate a stock buyback but that could be unlikely as they are more and more tapping into their balance sheet to originate loans.
The FTC thing is nonsense and political and they will easily clear that but it's unfortunate that their brand is getting a hit from it, and there will be additional legal costs.
Their other legal issues related to the ouster of the CEO are behind them for the most parts.
I think there is a big possibility that they will sell themselves to a bank this year. They have a very strong and well connected board. It's unfortunate that their CEO lacks vision. They could have so much potential as a market leader but the best path forward might be to sell themselves at a good premium. I also hope they won't be subjected to a takeover as that could sharply reduce the premium.

LC outlook....I got the under....and cash of $502 at 12/31/2017 less $125 M for settlement less $2 M to Massachusetts for lending without license, less legal fees, less cash loss... let's say $300 left.

First Quarter 2018

Total Net Revenue in the range of $145 million to $155 million

Net Income (Loss) (3) in the range of $(25) million to $(20) million

Adjusted EBITDA(2)(3) in the range of $5 million to $10 million

Reconciling Items between net loss and non-GAAP adjusted EBITDA consisting of stock-based compensation of approximately $19 million, and depreciation and amortization and other net adjustments of approximately $11 million

In regard to your comment regarding LC's data and in and of itself makes them better underwriters....they kinda sorta suck at underwriting.

The $125 million which was paid from their insurance as well as $75 million cash was already reflected in their last earning report. Also, it's good to note that their cash doesn't tell their whole story. They have loans that they are holding on their balance sheet for sale so they have a lot more assets. Their 10k indicates that they have over $922 million of assets so their business is worth only $200 million according to Mr. Market. Their cash is also expected to go up not down; in fact it's gonna keep going up every quarter even if they stay unprofitable. They are cash flow positive, they are unprofitable because of stock dilution from their RSUs.

In regards to your comment about underwriting, that couldn't be further from the truth. I know this forum loves to bash lending club's returns because people were used to their high single digits/low teens returns that no longer exists, but what they have done with unsecured loans is never done at this scale. F & G loans that got the biggest hit last year were also a very small portion of their total loans. They have had consistently positive returns on all their other loans even through recession. It looks like their new credit model has also improved underwriting significantly. It's also a good long term sign when they have on purpose reduced the pool of people getting approved for loans so that they can have better underwriting. 4-6% consistent returns for such a short term investment vehicle where interest rates are near 0 is very decent. No company has been able to do the same for unsecured loans at this scale. We don't even have data on how Marcus is doing at a much smaller scale.
« Last Edit: April 30, 2018, 06:27:01 PM by MoMoney »

MoMoney

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #26 on: April 30, 2018, 06:16:10 PM »
Another reason would be years of data on this type of unsecured loans that lending club has. No other company in the world has this much data on this segment. That's why being the market leader gives you an advantage too. The more data you have, the better underwriting you have.

If LC has "hidden" (or obvious) value this could be it. In a world increasingly driven by big data, somebody out there may think they have the mother lode. LC may or may not have done a good job of underwriting using the data but somebody may think they could do very well with it. Could possibly be used for purposes other than unsecured lending; who knows? I haven't a clue how to place a value on it though.
All I will say is that I know many companies with less revenue, growing slower than lending club, but worth a few billion dollars more. The market is valuing the business at around 200 million dollars. That's insanely low for a company that's expected to have a revenue of  $700 million dollars this year and has already shown it can be profitable! 

Fred93

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #27 on: April 30, 2018, 06:16:32 PM »
Their 10k indicates that they have over $922 million of assets so their business is worth only $200 million according to Mr. Market. Their cash is also expected to go up not down; in fact it's gonna keep going up every quarter even if they stay unprofitable. They are cash flow positive, they are unprofitable because of stock delusion from their RSUs.

;-)  I suspect that when you said "delusion" you meant "dilution".  Looks like spell-checker gotcha.

Yes, but we should take that dilution seriously.  They're diluting at the rate of about 5% per year recently.  (Just looking at fully diluted share count.)  You may not agree with the method of computing the earnings hit for that stock dilution, but it is real. 

If you back out all the noncash items except for stock based employee compensation, they're still losing money. 

MoMoney

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #28 on: April 30, 2018, 06:23:17 PM »
Well put but I disagree with much you have said. Time will tell.
With enough money software is a commodity that can be bought. It's not exclusively Bay area "magic" contrary to popular opinion.
I am neither long nor short LC stock. No dog in this fight.
I prefer LC to succeed rather than fail but am pessimistic. Money wise I am personally agnostic.
Any bank buys LC even at this level of $2.70 per share and I'm stunned; but I'm not a billionaire so what do I know.
I predict LC will continue to plod along as is.
Management continues to benefit from free stock incentives as long as they can keep the company going.
So, with $400M cash left from the IPO, if they keep a lid on things and don't take any chances they can keep it going for quite a while.
Tell me where this management that's getting free stock compensation could go and make more money?

Edit: Guess I'm on a roll but forgot to mention...
LC's underwriting or loan scoring model is designed to optimize originations not loan profitability. They seek to enhance share holder value, not to optimize lender returns. Certainly there is some give and take here. They must walk a fine line to retain enough lenders to provide the money to fund their loans yet maximize their originations (i.e fees). The bank model (Marcus and others) must seek loan profitability since they are funding the loans themselves and profit from their returns. The fundamental goal of the LC underwriting model would have to be revised to place loan profitability ahead of originations.

As for you comment regarding cash, unless something drastically changes about their business, they will never run out because they are already cash flow positive. In addition, the cash amount is just their cash on hand. They have over $920 million worth of assets when you include the loans they holding on their balance sheet and their other assets.
I don't buy your assumption that lending clubs origination is not designed to maximize loan profitability. Loan profitability and long term origination growth go hand in hand. In addition, lending club is holding more and more loans on their balance sheet. Also, with their new CLUB certificates, legally they have to keep 5% of the loans originated on their balance sheet so they have skin in the game as well. 
« Last Edit: April 30, 2018, 06:25:18 PM by MoMoney »

MoMoney

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Re: FTC Files Complaint Against LC, Accuses of Deceptive Practices
« Reply #29 on: April 30, 2018, 06:34:29 PM »
Their 10k indicates that they have over $922 million of assets so their business is worth only $200 million according to Mr. Market. Their cash is also expected to go up not down; in fact it's gonna keep going up every quarter even if they stay unprofitable. They are cash flow positive, they are unprofitable because of stock delusion from their RSUs.

;-)  I suspect that when you said "delusion" you meant "dilution".  Looks like spell-checker gotcha.

Yes, but we should take that dilution seriously.  They're diluting at the rate of about 5% per year recently.  (Just looking at fully diluted share count.)  You may not agree with the method of computing the earnings hit for that stock dilution, but it is real. 

If you back out all the noncash items except for stock based employee compensation, they're still losing money.

Haha Yes!

Oh I 100% agree! In fact, I'm hope they use their cash for stock buyback because I don't want dilution at prices this low. But lending club could be profitable if they wanted to and have in the past. They don't need 2000 employees to run their business if they wanted to only focus on their core product and not worry about growth. If they laid off half of their employees , that would make them profitable by roughly 50-100 million dollars, giving them a p/e of 2-4 ex assets but they have been growing revenue at a very respectable level yoy so no reason to cut costs like that.
« Last Edit: April 30, 2018, 06:36:07 PM by MoMoney »