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At LendingClub, the cover up may have been worse than the crime.
The online lender's board ousted CEO Renaud Laplanche on Monday because he wasn't fully cooperative and transparent during an internal investigation of a loan sale, according to sources familiar with the situation.
Laplanche actually called for the initial probe after discovering that the application date on $3 million worth of loans was wrong, these sources told CNBC. They asked not to be named because the matter is confidential.
He brought in the company's auditor, who then decided an outside firm needed to investigate the company's loans more thoroughly.
The outside investigator found a bigger problem, and one that included Laplanche.
Employees of the San Francisco-based company, which issues consumer loans online funded by other institutions and individuals, had knowingly sold $22 million of near-prime debt to an investor despite the fact that "the sale did not meet the investor's criteria," LendingClub said in a statement.
Laplanche was one of the executives who knew that the loans weren't appropriate for the buyer, the sources said. The company bought the loans back at the same price, ensuring that the investor didn't lose money, and then sold them to another party.
No harm perhaps, but serious foul.
The news has shocked the market because Laplanche is seen as an industry pioneer and highly-respected leader of the market's first break-out success. Just last month, Laplanche gave the keynote at the LendIt conference for the fourth consecutive year.
His forced departure comes at a particularly bad time. Investors have turned skittish towards a new class of loans, uncertain how they'll perform should the economy slow and capital become less readily available.
"When I first read the news when I woke up this morning I thought it must have been a joke," wrote LendIt founder and industry expert Peter Renton, in a blog post.
LendingClub shares plunged 35 percent on Monday to a record low $4.62. The stock is almost 70 percent below its IPO price from December 2014. On Deck Capital, an issuer of online small business loans, dropped 4.1 percent and is off 75 percent from its debut the same month.
While Laplanche was clearly viewed by the board as culpable in the troubled loan sale, his behavior didn't rise to the level of forced resignation—until he failed to cooperate in a timely and transparent fashion with the investigation, the sources said.
That all bubbled up over the past week, leading the board to conclude that it had lost the full trust and confidence in Laplanche, who started the company in 2006.
Separately, the investigators discovered that Laplanche had an interest in a third-party fund that LendingClub was considering as an investment. Again, the problem wasn't that he owned the stake, but that it wasn't disclosed, the sources said. Many funds have been formed to buy LendingClub loans, because of the returns (high-single digits or more) they offer and at reasonably low risk.
Laplanche didn't respond to an e-mailed request for comment.
Scott Sanborn, LendingClub's president, will assume the role of acting president. Hans Morris, a director, is now executive chairman.
--Josh Lipton and Jon Marino contributed to this report