On April 27, 2023, Judge Charles R. Breyer of the United States
District Court for the Northern District of California granted a
motion to dismiss a proposed securities class action suit against a
financial technology company (the "Company") and four
executives, including its CEO and CFO, alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
SEC Rule 10b-5(b). Huei-Ting Kang v. PayPal Holdings Inc.,
No. 3:21-cv-06468 (N.D. Cal. Apr. 27, 2023). The Court dismissed
the complaint with prejudice for failure to plead falsity and
failure to plead a strong inference of scienter. The Court had
previously dismissed plaintiffs' prior complaint without
prejudice, in a decision covered here.
Plaintiffs alleged that the Company, which offers products and
services for consumers and merchants to send and receive digital
payments, misled investors about its compliance with regulatory
obligations, including its compliance with a consent order (the
"Consent Order") entered into with the Consumer Financial
Protection Bureau (the "CFPB") in 2015. According to
plaintiffs, the Consent Order, which resolved claims that the
Company enrolled students at for-profit colleges in the
Company's credit product without their knowledge, prohibited
the Company from enrolling customers in its credit product without
their affirmative consent. Plaintiffs alleged that the Company made
false statements about its compliance with the Consent Order such
as statements that the Company "continue[d] to cooperate and
engage with the CFPB and work to ensure compliance with the Consent
Order." Plaintiffs also alleged that the Company's
executives falsely stated that they took allegations that
for-profit educational institutions were misrepresenting the
Company's credit product "very seriously." According
to plaintiffs, the Company's stock price dropped after the
Company disclosed that it was under investigation by the SEC and
CFPB for potential compliance failures.
Although plaintiffs attempted to buttress the allegations in their
complaint with evidence from a number of confidential witnesses
("CWs"), the Court did not find the additional facts to
be persuasive. First, the Court held that the Company "had no
obligation or requirement to elaborate on any alleged
non-compliance because it had not yet been found to be
noncompliant." Second, the Court held that plaintiffs failed
to plausibly plead that the Company actually violated a regulatory
obligation. The Court noted that the CWs only "recall[ed]
unsubstantiated and vague customer complaints, not actual
violations." And, although plaintiffs alleged that some
third-party merchants misrepresented the Company's credit
product, "they never allege[d] that [the Company] did
so." Moreover, with respect to the Company's affirmative
statements about its compliance with regulatory obligations, the
Court held these statements to be "the kind of corporate
puffery that are rarely (if ever) actionably
misleading."
With respect to scienter, the Court rejected plaintiffs'
argument that Company executives had knowledge of the alleged
compliance failures, again pointing to the inadequacy of the
CWs' allegations. Specifically, the Court noted that "no
CW attest[ed] to having first-hand knowledge of [the executives]
knowing about a specific regulatory violation; instead, [the]
allegations only show that [the executives] were aware of
unsubstantiated and unspecified customer complaints."
Because plaintiffs failed to cure the deficiencies identified in
the Court's previous dismissal order, the Court held that
further amendments would be futile and dismissed plaintiffs'
claims with prejudice.
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