CEO resignation, sexual harassment suit could delay SoFi’s bank plans
After a former Uber employee wrote a blog post about sexual harassment at the ride-hailing company, it took four months — and a raft of other problems — for investors to oust then-Chief Executive Travis Kalanick in June.
At SoFi, it took just a month after an allegation of sexual harassment at the fast-growing online lender for Chief Executive Mike Cagney to announce plans to resign, a sign of the growing furor over brutish behavior in Silicon Valley — and the potential regulatory ramifications the company faces as it seeks to become more like a full-fledged bank.
Cagney, who co-founded the San Francisco company formally known as Social Finance Inc. in 2011, wrote in a blog post Monday that he would step down by the end of the year because “HR-related litigation and negative press have become a distraction from the company’s core mission.”
He was replaced by investor Tom Hutton as chairman of the company’s board effective immediately.
Sexual harassment, and the extent to which companies tolerate it, has become a white-hot issue in Silicon Valley, leading to a wave of resignations, lawsuits and investigations.
The issue was one of several factors that led to an internal investigation at Uber and to Kalanick’s eventual ouster. A number of female entrepreneurs also have come forward this summer alleging a pattern of sexual harassment by prominent venture capitalists.
Although sexual harassment has become a thorn in the side of many tech companies, it could be particularly damaging for SoFi.
The company offers mortgages and student loan refinancing but wants to expand into providing credit cards and checking accounts. To do that, the company needs regulators to grant it a state bank charter and federal deposit insurance. The allegations of sexual harassment and other problems could be factors in that process.
“Banks and firms who wish to become banks, they have to be concerned about this,” said Brian Knight, a senior research fellow at George Mason University’s Mercatus Center. “It’s not just public opinion — it’s also the regulators’ opinion of public opinion.”
Jim Prosser, a SoFi spokesman, said the company would not comment on regulatory matters. The Federal Deposit Insurance Corp. does not comment on pending applications.
SoFi, one of the biggest names in financial technology, or fintech, has seen immense growth over the last few years. It now has about 1,200 employees, up from 400 two years ago.
In this year’s second quarter, it originated $3.1 billion in loans, according to Cagney’s most recent blog post. That’s up from $1 billion in the second quarter of 2015.
Cagney’s resignation was spurred by a lawsuit filed Aug. 11 by former employee Brandon Charles, who was hired as a manager at the company’s office in Healdsburg in Sonoma County. He alleged SoFi had fired him for trying to report bad practices at the company, including sexual harassment by a manager at the Healdsburg office and the mishandling of loan applications at another office in Salt Lake City.
On Aug. 31, Charles amended the suit to include Cagney as a named defendant, alleging the CEO made sexual comments about female employees and fostered a culture that allowed sexual harassment to continue unabated. The suit also singles out SoFi’s former chief financial officer, Saturnino “Nino” Fanlo, alleging he “made sexual comments at [SoFi’s] San Francisco office, touched women inappropriately and made them feel uncomfortable.”
Then on Sunday, the Wall Street Journal posted a story quoting unnamed SoFi employees who alleged executives engaged in or condoned sexual harassment and reporting that SoFi in 2012 had reached a monetary settlement with a now-former employee over a dispute with Cagney.
A spokesman for the board confirmed to The Times that there was an investigation, commissioned by the board and handled by an outside law firm, and that the inquiry led to a settlement.
“There was no allegation or evidence of a romantic or sexual relationship between Mr. Cagney and the employee,” the spokesman said.
The Journal also reported that Fanlo, who left SoFi in May to join San Diego health information start-up Human Longevity Inc., said no one had raised complaints to him directly and that he did not know he had done anything to make workers feel uncomfortable.
Fanlo, a board member at Pasadena prepaid debit card issuer Green Dot Corp., could not be reached for comment through that company or Human Longevity.
Cagney had written in a company blog post a day after the suit was amended that SoFi had hired an outside attorney to investigate the claims in Charles’ suit and that sexual harassment “has no place at SoFi.” He also said that the company had learned that several people were willing to come forth and formally allege they had been victims of or had witnessed “improper activity” at the Healdsburg office.
He added that the company was creating “an anonymous means for employees to provide our counsel information that could be helpful to their investigation” and was starting new training and education programs.
At Uber, allegations of sexual harassment were only part of the problems. The company has also faced criticism for how it uses customer data, its treatment of drivers — and its practice of expanding into new territories despite pushback from local officials.
However, in the world of banking, it’s not so easy to simply start offering services and ask permission later.
To issue credit cards and accept federally insured deposits, SoFi needs permission from regulators upfront. And among the factors regulators will consider before granting access to the federal banking systems is the institution’s potential reputational risk.
Bank analyst Bert Ely said defining reputational risk is subjective but that the FDIC and other regulators generally want to ensure that new banks won’t embarrass the banking industry.
“Banks worry about bad actors in the industry giving the whole industry a bad name,” he said.
Knight and Ely said Cagney’s planned resignation is likely to at least delay SoFi’s application for a charter and deposit insurance.
For starters, Cagney’s impending departure means SoFi will need to find a new chief executive. Ely said the FDIC probably won’t approve SoFi’s application for deposit insurance until a new leadership team is in place.
SoFi’s bank would be a subsidiary of the main company and be run by its own CEO with oversight by a five-member board. Cagney is listed as one of the proposed board members in SoFi Bank’s application for deposit insurance.
“Who’s in charge, and how is the likely success of the business and its business plan going to change?” Ely said. “That’s a big question mark, and a question mark will mean a delay.”
SoFi is known for its focus on high-earning millennials and graduates of top-ranked universities as well as for its marketing, which has included Super Bowl ads, cocktail parties and career-building workshops.
The firm had been mulling an initial public offering but held off after raising $1 billion from investors, including Japanese telecom firm Softbank, in late 2015.
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UPDATES:
5:45 p.m.: This article was updated with comments from bank analysts Bert Ely and Brian Knight, as well additional background and details on SoFi’s sexual harassment lawsuit.
This article was originally published at 11:30 p.m. on Sept. 11.
