Kang v. PayPal Holdings, Inc

Background

Huei-Ting Kang and Arthur Flores asserted claims under the Securities Exchange Act of 1934 against PayPal Holdings, Inc. and four of its officers and employees. They alleged that PayPal made false or misleading statements about compliance with regulatory obligations concerning PayPal Credit and Regulation II. The claims relied in part on a 2015 consent order concerning PayPal Credit practices.

The plaintiffs previously amended their complaint after the court dismissed their first amended complaint. The second amended complaint added allegations from confidential witnesses, including allegations about customer enrollment in PayPal Credit without consent, PayPal’s monitoring of merchants, and company executives’ awareness of complaints and compliance efforts.

Rule 10b-5(b) Claim

The court granted the motion to dismiss the claim based on allegedly false or misleading statements under Securities and Exchange Commission Rule 10b-5(b). The court held that the plaintiffs still did not plausibly plead a material misrepresentation or the required scienter, meaning a sufficiently strong inference that the defendants acted knowingly or recklessly.

The court gave three principal reasons for finding no plausible misrepresentation. First, it held that PayPal had no obligation to disclose alleged noncompliance because the plaintiffs had not alleged that PayPal had been found noncompliant. Second, the plaintiffs did not plausibly allege that PayPal violated Regulation II or the relevant provisions of the consent order. The allegations about customers who did not recall consenting to PayPal Credit, merchants’ allegedly misleading statements, and promotional offers were insufficient. Third, the court held that PayPal’s compliance statements were corporate puffery—general, vague statements that were not specific enough to be actionable securities fraud.

The court also found that the new allegations did not establish scienter. The confidential-witness allegations showed that certain executives received information about complaints and participated in discussions about the consent order, but they did not show that the executives had firsthand knowledge of a specific regulatory violation. The court concluded that the more likely inference was that PayPal and its officers were attempting to comply with the consent order and took action after learning of the concerns identified by the Student Borrower Protection Center.

Rule 10b-5(a) and (c) Claim

The court granted the motion to dismiss the claim alleging scheme liability under Rule 10b-5(a) and (c). The plaintiffs did not materially amend that claim or allege facts showing that the alleged scheme was distinct from the misstatements underlying the Rule 10b-5(b) claim. Because the misstatement allegations failed, the alleged scheme failed for the same reasons.

Section 20(a) Claim and Disposition

The court granted the motion to dismiss the Section 20(a) control-person claim because such a claim could not stand without an underlying primary securities-law violation. The court therefore granted PayPal’s motion to dismiss as to all claims and granted the motion without leave to amend, finding that the plaintiffs had failed to cure the deficiencies identified in the prior order and that further amendment would be futile.