ARTICLE
22 May 2023

Fintech Company Secures Dismissal Of Purported Class Action In Northern District Of California

SS
Shearman & Sterling LLP

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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...
United States California Compliance

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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