PayPal Moves to Dismiss CFPB Investigation-Related Shareholder Derivative Complaint

On Monday, PayPal Holdings Inc. and company leaders sought to dismiss a securities fraud lawsuit filed in the Northern District of California. The memorandum said that the complaint is “fatally defective” because it fails to meet the elements required to state a claim under the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995.

As previously reported, one shareholder filed a complaint against the company last December. The filing contended that PayPal and its executives lied about the company’s compliance with a Consumer Finance Protection Bureau (CFPB) settlement concerning certain practices that the consumer watchdog deemed unfair.

In addition, the complaint pointed to an investigation by the Securities and Exchange Commision (SEC) over a Federal Reserve rule governing debit card interchange fees. The complaint’s theory is that PayPal and its executives hid the truth from the public, until the company filed a Form 10-Q revealing that it had received a civil investigative demand from the CFPB regarding its compliance with the agreement and that it had responded to subpoenas from the SEC over compliance concerns with the Federal Reserve rule.

When the news reached the investing public, PayPal’s share price reportedly tumbled by more than 6% and a few more percentage points in the following days. The case was related to several others before Judge Charles R. Breyer earlier this year.

Now, and several months after the plaintiffs filed their amended complaint, PayPal says the suit lacks merit because it is premised on the fact that PayPal received two regulatory inquiries that never amounted to any charges against the company. “Plaintiffs rely on the existence of those inquiries to make the broad claim that the Company’s general statements about its compliance efforts were intentionally false and misleading,” the filing says.

The company also defends on grounds that the individual defendants said to have sold stock actually increased their holdings during the class period and that PayPal itself bought back billions of stock during the same time. PayPal asserts that these facts are “wholly inconsistent with an intent to benefit from a fraud” and that Ninth Circuit courts routinely reject such theories.

Turning to the elements of a securities fraud claim, the motion to dismiss argues that the plaintiffs fail to allege any materially false or misleading statement or omission. For example, statements that purportedly misled investors about the company’s compliance levels or compliance efforts fall short, owing to the fact that “disclosure of inquiries alone is insufficient to establish falsity of statements about compliance efforts,” the motion says.

In addition, PayPal argues that no defendant acted with the requisite intent. The plaintiffs’ reliance on confidential witnesses does not help their cause because none “purported to have knowledge of any regulatory violation.” 

Finally, the plaintiffs failed to plead that the fraud caused their losses, the company asserts. In support, it points to Ninth Circuit precedent standing for the principle that announcement of an investigation, standing alone, is insufficient to satisfy the loss causation requirement.

The plaintiffs are represented by lead counsel Pomerantz LLP and Labaton Sucharow LLP, The Rosen Law Firm P.C., and Roche Freedman LLP. PayPal is represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP.