Upstart is a financial technology firm that uses artificial intelligence (“AI”) and data science to underwrite consumer credit. The Company partners with banks to offer credit to consumers, either through the Upstart website or through banking partner websites embedded with Upstart technology. Upstart claims that its underwriting process allows banking partners to originate credit with higher approval rates, lower loss rates, and a high degree of automation. Throughout the Class Period, Defendants claimed that the lack of loans the Company retained on its balance sheet ensured it only was exposed to limited credit risk. Further, Defendants assured investors the Company was “cognizant of the fluidity in the macro environment,” but was “not expecting any meaningful adverse impact from rising defaults on our volumes or economics.” Additionally, Upstart’s “technology and model-driven” growth “manifest[ed] as increasing conversion rates,” an important metric representing the number of rate inquiries that resulted in loan transactions.
The Class Action alleges that, during the Class Period, Defendants misled investors and/or failed to disclose: (1) Upstart’s AI underwriting model could not and did not adequately account for macroeconomic factors such as interest rate increases and the end of the U.S. government stimulus; (2) that, as a result, Upstart was experiencing negative impacts on its conversion rate; (3) that, as a result, the Company was reasonably likely to use its balance sheet to fund loans, rendering its balance sheet highly exposed to credit risk; and (4) as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially false and/or misleading and/or lacked a reasonable basis.
The truth emerged after the markets closed on May 9, 2022, when Upstart released its financial results for the first quarter of 2022, which included a dramatic increase in loans on its balance sheet. Specifically, loans on the Company’s balance sheet had more than doubled in just one quarter: from $252.4 million for the period ending to December 31, 2021, to $597.9 million for the period ended March 31, 2022. During a related earnings call, Defendants attributed the increase of loans on the Company’s balance sheet to “rising interest rates and rising consumer delinquencies putting downward pressure on conversion.” In response to this news, Upstart’s stock price fell 56%, from a closing price of $77.13 per share on May 9, 2022, to a closing price of $33.61 per share on May 10, 2022.