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 class action against a financial technology company (the “Company”) and four executives, including its CEO and CFO, alleging infringement on 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 (ND Cal. Apr. 27, 2023). The Court dismissed the complaint subject to failure to plead falsity and failure to plead a strong inference of scienter. The court had previously dismissed the plaintiffs’ previous complaint without prejudice, in a covered decision here.
Plaintiffs alleged that the company, which provides 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 (” CFPB”) in 2015. According to the 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 “continues[d] to cooperate and engage with the CFPB and work to ensure compliance with the consent order.” Plaintiffs also claimed that company executives falsely stated that they took allegations that for-profit educational institutions misrepresented the company’s credit product “very seriously.” According to the plaintiffs, the company’s stock price fell after the company disclosed that it was under investigation by the SEC and CFPB for potential compliance failures.
Although plaintiffs attempted to substantiate the allegations in the complaint with evidence from numerous confidential witnesses (“CWs”), the court did not find the additional facts persuasive. First, the court ruled that the company “had no obligation or requirement to elaborate on any alleged non-compliance because it had not yet been found to be in breach of the requirements.” Second, the court held that the plaintiffs could not plausibly plead that the company actually breached a regulatory obligation. The court noted that the CWs merely “remind[ed] undocumented and vague customer complaints, not actual violations.” And although the plaintiffs claimed 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 that those statements were “the kind of corporate mission that rarely (if ever) misleads into action.”
With regard to scienter, the court rejected the plaintiffs’ argument that the company’s executives had knowledge of the alleged compliance failures, again pointing to the inadequacy of CW’s allegations. Specifically, the court noted that “no CW certificate[ed] to have first-hand knowledge of [the executives] knowing about a specific rule violation; instead, [the] claims only show that [the executives] was aware of undocumented and unspecified customer complaints.”
Because Plaintiffs failed to cure the deficiencies identified in the Court’s earlier dismissal order, the Court held that further amendments would be futile and dismissed Plaintiffs’ claims with prejudice.
