DEFINED BENEFIT PLAN OF THE MID-JERSEY TRUCKING INDUSTRY AND TEAMSTERS LOCAL 701 PENSION AND ANNUITY FUND v. PAYPAL HOLDINGS, INC. et al
Filing
86
OPINION Filed. Signed by Judge Robert Kirsch on 1/29/2025. (jal, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
IN RE PAYPAL HOLDINGS INC.
SECURTTffiS UTIGATION
Civil Action No. 22-5864 (RK) (JBD)
OPINION
KIRSCH, District Judee
THIS MATTER comes before the Court upon a Motion to Dismiss, (ECF No. 76), filed
by Defendants PayPal Holdings, Lie. ("PayPal" or the "Company"), Daniel Schulman
("Schulman"), John Rainey ("Rainey"), and Jonathan Auerbach ("Auerbach") (collectively
"Defendants"). Defendants seek to dismiss Lead Plaintiff Caisse depot et placement du Quebec
("Lead Plaintiff) and additional named Plaintiffs' Public Employee Retirement Association of
New Mexico's ("PERA") (collectively "Plaintiffs") Amended Consolidated Complaint, ("Am.
CompL," ECF No. 49). Plaintiffs filed a brief in opposition, ("Pis. Opp'n," ECF No. 77), and
Defendants filed a reply brief, ("Defs. Reply," ECF No. 78). The Court has considered the parties'
submissions and resolves the matter without oral argument pursuant to Federal Rule of Civil
Procedure 78 and Local Civil Rule 78.1. For the reasons set forth below, Defendants' Motion to
Dismiss is GRANTED.
I.
BACKGROUND
This matter concerns a purported class action brought by purchasers of PayPal stock
between February 3, 2021 and February 1, 2022 ("the Class Period") against PayPal and its key
officers asserting claims for securities fraud under Section 10(b) and Rule lOb-5, as well as Section
1 The Court will refer to Defendants' brief in support of their Motion to Dismiss, (ECF No. 76-1), as "Defs.
Mot." The Court also refers to Schulman, Rainey andAuerbach together as the "Individual Defendants."
20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78a et seq. The
suit alleges that Defendants—PayPal and three of its officers—made material false or misleading
statements, or omitted material information, relating to its growth and future prospects and that
Defendants had reason to believe their statements were false. When the truth was revealed to
investors, Plaintiffs contend that the stock plummeted, causing Plaintiffs to suffer significant
losses. The facts below are taken from the Amended Complaint and assumed to be true solely for
the purposes of deciding the subject Motion.
A. THE PARTIES
Lead Plaintiff, an investment group, purchased PayPal stock at alleged "artificially inflated
prices" during the Class Period, suffering losses when the stock tumbled. (Am. Compl. ^ 37.)
PERA manages thirty-one retirement plans for New Mexico public employees, including police
and firefighters. {Id. ^ 38.) It too purchased PayPal stock during the Class Period. (M) PayPal, a
Delaware corporation with its principal place of business in San Jose, California, is a technology
company, previously part of eBay, that operates a digital payment platform. (Id. ^ 1, 6, 39.) The
Company's stock trades publicly on the Nasdaq Stock Market under the symbol "PYPL." {Id. ^
39.) Defendant Schulman was the Chief Executive Officer ("CEO") ofPayPal and a member of
the Board of Directors during the Class Period. (Id. ^ 40.) Also during this time period, Defendant
Rainey was the Company's Chief Financial Officer ("CFO"), and Defendant Auerbach was the
Executive Vice President, Chief Strategy, Growth and Data Officer. {Id. ^ 41^2.)
B. PAYPAL'S BUSINESS MODEL AND EXPANSION STRATEGY
As a "leading technology platform," PayPal facilitates transactions between consumers and
merchants—allowing consumers to pay for goods and services or enabling parties to transfer
money between PayPal accounts. {Id. ^51-52.) Among PayPal's numerous product offerings are
its "checkout" products which allow consumers to purchase goods from merchants, as well as
"person-to-person" products such as Venmo and Xoom. (Id. ^ 52.) PayPal collects fees for, inter
alia, completed transactions; therefore, the more transactions that occur on its platform, the more
revenue PayPal accrues. (Id. ^53.) PayPal also earns revenue through partnerships with other
brands, including Shopify and SalesForce, as well as interest and fees from customer accounts.
(Id. If 56.)
Accordingly, PayPal tracks and discloses a number of key metrics that track user growth
and usage on its platform. {Id. ^ 54-55.) First, one of PayPal's "key performance indicators" is
"Total Payment Volume" ("TPV"), or the "total value of payments, net of payment reversals on
its payment platforms or enabled by PayPal via a partner payment solution." {Id. ^ 54.) Second,
PayPal monitors its new users by tracking the "Net New Actives" ("NNA"), or the "net increases
to the number of active accounts." (Id. ^ 55.) An NNA is a new user who completes a transaction
through PayPal or one of its partner accounts within the past 12 months, with the Lifetime Value
("LTV") of an account typically calculated between 18 to 24 months. {Id. ^ 55, 134.) Third,
PayPal tracks the total number of payment transactions on its platform. (Id. ^ 55.)
The Amended Complaint alleges that beginning in November 2020, PayPal adopted a new
strategy in order to become a "Super App," offering a suite of new capabilities, including
budgeting and shopping tools. {Id. ^ 57.) To achieve this, NNAs took on a prominent role that
would "driveQ future TPV and corresponding revenue." (Jd. ^ 59.) As such, NNA growth became
the main focus. {Id. ^ 60.) To achieve this growth, PayPal sought to rapidly grow its NNAs and
expressed this focus both internally among employees and externally to investors. (Id. ^ 61-63.)
Plaintiffs allege that NNAs were "measured daily" through reports, measuring "gross new
additions, chum, and activity," sent to PayPal's executives each day. (M ^ 65.)
To gain new users, PayPal undertook a number of new marketing schemes. (Id. ^66.)
Plaintiffs contend, however, that "this growth [in NNAs] was achieved in large part due to risky
promotions that essentially paid people to sign up for PayPal accounts purely to earn cash that the
Company was offering for new accounts." (Id.) As one example, Plaintiffs reference a promotion
where a new user would receive $5 in exchange for creating a new account. {Id. ^ 67.) This
promotion was allegedly popular among Chinese users, with one website promising each user the
ability to make "$500-1000/person/day" by fraudulently signing up for multiple new PayPal
accounts. (Id. ^ 67-71.) The Amended Complaint alleges that PayPal's marketing budget in 2021
increased 33% from 2020, and up 71% from 2019. {Id. ^ 122.) The "heavy use of promotional
activity" led to a large increase in "unengaged users" on the platform. (Id. H 120.)
C. DEFENDANTS ? PUBLIC STATEMENTS REGARDING NNAs
Beginning at the start of the Class Period and continuing throughout it, Plaintiffs allege
that Defendants highlighted to investors the importance of NNA growth and PayPal's strong
results throughout the period. In February 2021, Defendant Schulman noted the Company's
"record growth in net new active accounts" and its expectations that NNAs would continue to
climb, estimating growth of an additional 50 million NNAs in 2021. (Id. ^ 60-62, 141.) PayPal
continued to tout its growth numbers, stating at the February 11,2021 Investor Day that it expected
"engagement levels [to] increase dramatically throughout our base" and to decrease the chum rate
with which customers left its platform. {Id. ^ 143^4-4.) In PayPal's quarterly reports and
associated earnings calls, PayPal continued to express confidence in its NNA growth. {Id. ^ 148
(noting that PayPal increased active accounts by 21% from Ql 2020 to Ql 2021); ^ 149 (Defendant
Schulman expecting to grow NNAs between 52 and 55 million for 2021).) In July 2021, PayPal
"reaffirmed its guidance of 52-55 million NNAs for the year." {Id. ^ 151.) Again in November
4
2021, PayPal told investors that it believed it would add 52 to 55 million NNAs for the year 2021.
(Id. ^ 159-165.)
Plaintiffs claim, however, that internally the Company was aware that its marketing
strategies had given rise to illegitimate and unengaged accounts. Confidential Witness 4 ("CW4") , a member ofPayPal's "inner circle," contends that he alerted "senior executives, including
Senior Vice President, Chief Compliance Officer Fiachre O'Neill," about certain risks involved
with PayPal's aggressive marketing strategies, including that it would "lead to people opening
accounts without otherwise using PayPal's services." (Id. ^ 75-76.) Despite raising his concerns,
CW-4 claims that the senior executives signed off on these promotional strategies. (M) As CW-4
alleged, such sign-off included a "dollar amount" and would therefore need clearance from
PayPal's CFO. (Id. ^ 76.) CW-5, a former Senior Manager of Finance, alleges that PayPal was
aware of "the risks associated with the accounts generated by the NNA promotions" yet decided
to continue with the aggressive marketing strategies. {Id. T[ 79.)
CW-6, a Senior Manager of Risk and Compliance, contends that PayPal's fraud review
process likely would have identified fraudulent accounts that had signed up for the platform. {Id.
^ 80-81.) CW-6 explains that, as part of its fraud review procedures, PayPal monitors accounts
for various red flags, including the same DP and physical addresses being used across different
accounts. {Id. ^81.) CW-6 discussed with PayPal's strategy team needing "controls [] in place to
prevent accounts being opened solely for the sake of obtaining the promotion." (Id. ^ 83.) CW-3,
a member of the Seller Fraud Operations Department, states that he "first became aware of
fraudulent accounts being created at a large scale to take advantage of PayPal's new account
2 Consistent with Plaintiff's Amended Complaint, all references to "CW-#" refer to one of seven
Confidential Witnesses, who are former PayPal employees. (Am. Compl. ^ 12 n.l.)
payment incentive in early 2021." {Id. ^ 90.) CW-3 continued investigating these accounts, which
culminated in a meeting of the Global Seller Risk teams and Strategy teams in October 2021. (Id.
^ 96.) This meeting was attended by "approximately 400" PayPal employees, including unnamed
and otherwise unidentified "senior directors" but none of the named Defendants. (Id.) At this
meeting, CW-3 explained his process that had identified around one million fake accounts, through
which he later identified approximately two million "accounts that were engaging in incentive
abuse." (Jd. ^ 97-100.) CW-3 "advocated for PayPal to shut down" the suspicious accounts, but
his boss only approved "limiting" those accounts, which would "flag" or designate the accounts
as suspected of fraud and "limit their activity." (Id. ^ 98 & n.6.) This "limiting" process, however,
would not prevent the affected accountholders from withdrawing any money. (M) Aside from
these vague assertions, no additional information was provided.
PayPal continued to monitor its NNAs throughout the Class Period. As CW-2, a Director
of Finance, explained, various PayPal units, including teams responsible for PayPal checkout and
Venmo, measured NNAs daily through automated reports sent to PayPal's executives. (M ^[ 10809.) CW-4 also explained that PayPal's regulatory and state law reporting obligations required the
Company to constantly monitor new accounts and NNA activity. {Id. ^110-15.)
D. ALLEGED FALSE AND MISLEADING STATEMENTS
Plaintiffs allege that throughout the Class Period, Defendants made five sets of false or
misleading statements: (1) "touting TPV growth," (2) "tout[ing] PayPal's supposed NNA growth,"
(3) "touting NNA growth [that] counted illegitimate bot-accounts as legitimate NNAs,"
(4) "providing] or confirm[ing] PayPal's guidance as to future NNA growth," and (5) "tout[ing]
3 This October 2021 meeting was corroborated by CW-7, an employee in PayPal's fraud department. (Am.
Compl. ^ 103-04.)
engagement with PayPal's services by NNAs and/or actual or expected reductions in chum due to
such engagement." (Id. ^ 207.) As a result of these statements, Plaintiffs contend that PayPal's
stock price became and remained artificially inflated during the Class Period. {Id. ^ 205.) Within
these five groups, the Amended Complaint breaks down the allegedly problematic statements into
fifteen sets.
The first challenged statements occurred on February 3, 2021 when PayPal reported its
2020 financial results. {Id. ^ 209.) In its 2020 Form 8-K, PayPal reported that it "[e]xpect[ed]
ongoing momentum with strong TPV growth and NNAs" and expected to add "50 million NNAs"
in 2021. (Id.) In addition, on a conference call to discuss the Company's quarterly results,
Defendant Schulman stated: "In 2021, we expect to add another 50 million net new active
accounts." (Id. ^ 213.) Schulman also stated that engagement was strong for new accounts,
referencing "double-digit increases in value" and a 13% increase in engagement rates. (Id. ^ 217;
see also id. ^ 221.) Schulman said that chum rates were decreasing in part "because of increased
engagement." {Id. ^ 219.) On this same call, Defendant Rainey touted the Company's success,
stating that the "core business continues to perform at unprecedented levels" and the Company's
"addressable opportunity has never been more expansive." (Id. ^ 215.) Finally, in its 2020 Form
10-K, PayPal stated that "P2P [peer to peer] is a significant customer acquisition channel that
facilitates organic growth . ..." (Id. ^ 223.)
The second challenged statements occurred on February 11,2021 at PayPal's Investor Day.
(Id. ^ 225.) Defendant Schulman continued to express optimism in PayPal's growth, stating that
he believed "we can grow [] 377 million to 750 million active accounts on our platform" due to
increasing engagement levels and decreased churn rates. (Id. ^ 225, 227.) Auerbach also stated
that PayPal added "roughly 73 million net new actives to PayPal in 12 months. .. . And these new
cohorts are using PayPal more than the old cohorts did." 4 (Id. ^ 229.) Auerbach also noted that the
Company has "gotten much better as a company at generating and engaging high-quality net new
actives." (Id.) In addition, Auerbach touted the NNAs as "not simply a factor of marketing. We're
getting much better [as] a company across PayPal through better user experiences, risk
management, stronger ecosystem partnerships to drive NNAs on a sustainable basis" with
expectations to double consumers over the next three to five years. (Id. ^ 231.)
The third challenged statements were made at PayPaFs Company Conference Presentation
on March 2, 2021. (Id. ^ 233.) In response to a question about PayPal's aspirations to achieve 750
million active users, Defendant Rainey stated that "the plan that we laid out doubles our customers
over the next 5 years . . . [a]nd it really comes through multiple forms. I'll start with one of the big
efforts that we've made related to the increased engagement is to see a reduction in chum." (Id.)
The fourth group of statements occurred on March 4, 2021 at Evercore ISFs Payments and
Fintech Innovators Forum. (Id. ^ 235.) Defendant Rainey again touted the Company's plans to
double its NNAs over the next five years, explaining that "a significant driver of that is actually
reducing the chum of the existing customers." (Id.)
The fifth group of statements were made in Defendant Schulman's comments on March 9,
2021 at the Wolfe Fintech Forum. (Id. f 237.) Schulman stated that PayPal had a "relatively
consistent and growing set of customers and merchants we want to come on to our platform" and
"new demographics, new markets, [and] new products [] are attracting new customers at the top
of that funnel." (M) He also stated that 90-day engagement rates had increased 13% over the past
4 In contrast to CEO Schulman and CFO Rainey, the Court notes that Plaintiffs' only factual allegations of
false or misleading statements involving Defendant Auerbach are his statements at PayPal's Investor Day
on February 11, 2021. (Am. Compl. ^229-32).
year and continued to increase, new users were joining the platform, and PayPal was experiencing
"reduction in chum" along with an "increase in average revenue per user." (Id.)
The sixth group of statements concern the Company's 1Q2021 earnings, announced on
May 5, 2021. {Id. ^ 239.) PayPal's Form 8-K stated that this quarter was the "strongest first quarter
results in PayPal's history" with 14.5 million NNAs, resulting in 392 million active accounts. (Id.)
The 8-K also stated that PayPal was "[r]aising NNAs, TPV, revenue and earnings guidance" and
increased its expectations in NNAs for 2021 to between 52 and 55 million. {Id.) PayPal also
reiterated this expected growth in its corresponding Investor Presentation released on May 5. (M
TI 241.)
Additional challenged statements were made on earnings calls that same day. Schulman
stated: "We added 14.5 million net new active accounts, ending the quarter with 392 million active
accounts, up 21% year-over-year" and emphasized that PayPal "now believe[d] our NNAs will be
between 52 million to 55 million, up from our previous expectations of approximately 50 million
last quarter. (Id. ^ 247.) Schulman also claimed PayPal had "a lot of momentum as we exit Ql."
(Id.) Schulman emphasized that the Company's growth had been due in part to "our marketing
programs [] really beginning to deliver excellent results." (Id. H 251.) Schulman stated that he was
"bullish on ... our NNA trends" and PayPal was poised to remain "really strong on the NNA front
[and] really strong on the engagement front." (Id. ^[253.) Rainey also reiterated this predicted
growth, believing that PayPal would "add more new users between last year and this year than we
did in 2016, '17, '18 and 49 combined." (Id. ^ 249.) In its Form 10-Q for 1Q2021, PayPal
disclosed increased revenues, which grew "primarily" based on "strong growth in TPV and the
number of payment transactions, both of which resulted primarily from an increase in our active
accounts." {Id. ^ 255.) The Company also reported that that it had increased total accounts,
transactions, and TPV by 21%, 34%, and 50%, respectively, from 1Q2020. (Id. ^ 255.)
A seventh group of statements were made on May 10, 2021 on a MoffettNathanson Analyst
Call. (Id. ^ 257.) Schulman again reiterated the Company's focus on NNAs and its 14.5 million
new additions in 1Q2021. (Id.) He also referenced the decreased chum rate and the productive
efforts of the marketing team to bring in new users. {Id.) Finally, Schulman reiterated the
Company's expected goal of adding between 52 and 55 million NNAs. (Id. ^261.)
The eighth set of alleged false or misleading statements was made on May 24, 2021 at J.P.
Morgan's Payments and FT Services Sector Analyst call. (Id. ^ 263.) PayPal repeated its goal of
reaching 750 million total users, which it would achieve through "reducing chum" and bringing
on users with "elevated levels of engagement." {Id. ^ 263.) On the same call, Rainey stated that
PayPal was focused on low cost customer acquisition, as well as not "chasing a low-value, net new
active that maybe pumps up the numbers and the optics look good . ..." (Id. ^ 265-68.)
The ninth group of challenged statements were made on June 9, 2021 at the Bank of
America Securities Keynote Session. (Id. ^ 269.) Schulman, in response to a question concerning
NNAs, stated that "[o]ur marketing is finally starting to kick in, in ways that we can really measure
and look at it, invest wisely and get a return on that and bring in high-quality net new actives at
the top of the funnel." (Id.) He also echoed PayPal's prediction that it would add between 52 and
55 million NNAs during 2021. (Id.)
The tenth group of statements concern the Company's 2Q2021 earnings, announced on
July 28, 2021. (Id. H 271.) PayPal reported 11.4 million NNAs and reaffirmed its guidance to add
52-55 million NNAs for the year. {Id. ^ 271-77) PayPal also stated that TPV grew by 40%, as
did customer engagement, measured as the payment transactions per active account. (M) Other
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challenged statements occurred on the earnings call that same day. Schulman stated that PayPal
had added 11.4 million NNAs for the quarter and expected to hit its projected range for the year.
{Id. ^ 277.) Schulman also noted that consumers were "engaging] more frequently across our
growing suite of services." {Id.) On that same call, Rainey, stated that "growth remains strong"
and raised expectations for TPV growth and revenue. (Id. ^ 279.) In its Form 10-Q, PayPal stated
that its "growth in transaction revenues was mainly attributable to our core PayPal and Braintree
products and services driven by strong growth in TPV and the number of payment transactions,
both of which resulted primarily from an increase in our active accounts." (Id. ^ 281.) The
Company also reported that that it had increased total accounts, transactions, and TPV by 16%,
30%, and 40% respectively, from 2Q2020. (Id. ^ 255.)
The eleventh set of alleged false or misleading statements occurred on September 9, 2021
at the Deutsche Bank Fireside Chat. (Id. ^ 283.) In response to a question concerning PayPal's 750
million user target over the next four years, Rainey responded that the Company has focused on
limiting chum and "keep [ing] those customers engaged and allow them to use us in many different
ways, many avenues that they haven't before to diminish the chance for churn." (M)
Another challenged statement, the twelfth contested, occurred at the J.P. Morgan All Stars
Conference on September 23, 2021. (Id. ^ 285.) With respect to PayPal's expectations for the
quarter, Schulman stated that he believed the Company would "be right down the middle of the
fairway in all the guidance that we talked about. Things are coming in pretty much where we
expected them to be for the quarter." {Id.)
The thirteenth group of statements concern the Company's 3Q2021 earnings, announced
on November 8, 2021. {Id. ^ 287.) In its Form 8-K, PayPal reported 13.3 million NNAs, as well as
increased TPV growth. (Jd.) On the corresponding earnings call, Schulman stated that active
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accounts "were up 15% year-over-year, reaching 416 million." (Id. ^ 289.) Schulman emphasized
that PayPal "remain[ed] on track to deliver more than 52 million NNAs for the year," as well as
double-digit growth in the transactions per active account. {Id.} He characterized the Company's
NNA growth as "incredibly strong," closing the year with over 430 million active users. {Id. ^
297.) Like in past quarters, Schulman emphasized the importance of reducing chum to enable
PayPal to achieve its goals with respect to active users. {Id. ^ 299.) Rainey noted that PayPal has
seen increased growth among key metrics such as active accounts, engagement, and TPV. (Id. ^
293.) Rainey also stated that PayPal's "key strategic initiatives are on track and performing very
well." (Id. ^ 295.) The next day, on a buyside analyst call, Rainey highlighted that PayPal
continued to prioritize engaged users over low quality new actives: "we can certainly go out and
spend money on customer acquisition and get very low value net new actives to inflate or pump
up that number, but that's not the right economic decision for us longer term. And I've got
confidence in where we are longer term around net new actives." (Id. ^ 301.) In PayPal's Form
10-Q, it highlighted that net revenues increased 13% year-over-year "driven primarily by growth
in total payment volume." (Id. ^ 303.) PayPal also saw a 15% increase in active accounts during
that same period. (M)
The fourteenth challenged statement occurred on November 30, 2021 on CNBC's Mad
Money with Jim Cramer. (Id. ^ 305.) Schulman appeared on the program and was asked a question
concerning PayPal's goal of obtaining 750 million users by 2025. {Id.) Schulman responded that
PayPal was on track for 55 million NNAs for the year, with a total of about 430 million active
accounts on the platform. (M)
The fifteenth set of challenged statements were made during a Goldman Sachs Conference
on December 7, 2021. (Id. ^ 307.) Schulman continued to tout PayPal's NNA growth, stating that
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PayPal had added 110 million NNAs between January 2020 to the end of the third quarter 2021.
(Id.} He also mentioned PayPal's user tracking systems, noting that the Company has "200-plus
different indicators to decide instantaneously is it you or not." (M)
E. DISCLOSURES AND MARKET REACTION
On February 1, 2022, PayPal released its earnings and results for the Fourth Quarter of
2021 and held accompanying earnings calls with investors. (Id. ^167.) According to the Amended
Complaint, the Company "disclosed that PayPal's position was far weaker than previously stated,
including because PayPal had counted 'illegitimate' accounts as part of its publicly reported NNA
figures and because the vast majority of even the legitimate accounts that PayPal had generated in
2021 were essentially unengaged with the platform." (Id.) PayPal reported NNAs of only 9.8
million for the Fourth Quarter, well below investor expectations of around 15.8 million new
accounts. (Id. ^ 168-70.) On the February 1, 2022 earnings call, Defendant Rainey explained that
PayPal had counted "illegitimate" accounts in its preceding quarterly results for 2021, including
nearly 4.5 million such accounts in its Third Quarter year-to-date results. (Id. ^ 171.) On a
subsequent analyst call the next day, Defendant Rainey explicated that these illegitimate accounts
"were the primary driver of the miss," and that "bot" accounts had taken advantage of PayPal's
aggressive marketing campaigns. {Id. ^ 172 (internal quotation marks omitted).) Defendant Rainey
stated that many ofPayPal's users were "minimally engaged" and that one third ofPayPal's users
accounts for the "vast majority" of the transactions on the platform. (Id. ^ 174.) PayPal announced
that it would shift its focus in 2022 away from the "less engaged customers," who the Company
believed would leave the platform. {Id. ^178.) Accordingly, PayPal slashed its NNA guidance for
2022 to only 15 to 20 million expected NNAs. (Id. ^ 179.)
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Following the 2021 Fourth Quarter results, Plaintiffs allege that "PayPal shares suffered
their worst selloffin the Company's history." (Id. If 181.) The stock price fell from a closing price
of $175.80 on February 1, 2022 to $132.57 at close of market on February 2, or a 24.6% decline,
resulting in a market capitalization losses of $49.3 billion. (Id.) The stock continued to fall, closing
at $124.30 on February 3, 2022. (Id.) Subsequent analyst and media reports, from sources such as
Barclays, Jeffries, and Bloomberg, focused on the missed NNA guidance. {Id. ^ 182-83.)
Plaintiffs contend that PayPal's misrepresentations concerning its NNA growth and user
engagement artificially inflated the stock price during the Class Period. (Id. ^ 367.) Following
PayPal's disclosures during its 2021 Fourth Quarter results and earnings calls, Plaintiffs contend
that "PayPal's stock price fell dramatically over the next two trading days." (Id. ^ 369.) Plaintiffs
contend that they suffered economic losses as a result of the stock decline. (Id. ^ 371-72.)
F. DEVELOPMENTS AFTER THE CLOSE OF THE CLASS PERIOD
The Amended Complaint chronicles certain developments after the closing of the Class
Period allegedly relevant to Plaintiffs' claims. Plaintiffs contend that PayPal's NNAs continued to
decline in 2022. (Id. ^ 185.) PayPal's focus also shifted to the "quality of the user versus the overall
quantity." (Id. ^ 190; see also ^ 192 (Defendant Schulman, on an April 27, 2022 earnings call,
noting expectations of higher chum rate based on "low engaged users" leaving the platform
"because the ROI to keep them isn't worth it").) On August 2, 2022, PayPal reported its Second
Quarter results for 2022, where the Company reported 400,000 NNAs. {Id. ^ 197.) Significant
executive turnover occurred at the Company, with PayPal replacing Rainey as its CFO in April
2022, its Chief Product Officer in September 2022, its Chief Accounting Officer in February 2023,
Schulman retiring at the end of 2023, and Rainey's replacement CFO leaving in March 2023. {Id.
1HI 31, 199-204.)
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G. No SAFE HARBOR
Plaintiffs also allege that the statutory safe harbor for forward-looking statements does not
apply to any of the false or misleading statements alleged in the Amended Complaint. {Id. ^ 378.)
Plaintiffs contend that the statements were not identified as forward-looking statements when
made, related to existing conditions, or did not contain any meaningful cautionary language
outlining the various risks to PayPal. {Id. ^ 379.) Finally, Plaintiffs contend that Defendants knew
at the time the statements were false or misleading. (Id.)
H. PROCEDURAL HISTORY
On October 4, 2022, Plaintiff Defined Benefit Plan of the Mid-Jersey Trucking Industry
and Teamsters Local 701 Pension and Annuity Fund filed a putative class action complaint. (ECF
No. 1.) On January 11, 2023, the Honorable Georgette Castner, U.S.D.J. appointed Caisse depot
et placement du Quebec as Lead Plaintiff. (ECF No. 18.) An Amended Complaint, (ECF No. 49),
was filed on March 13, 2023. The Amended Complaint asserted one claim for violation of Section
10(b) of the Exchange Act and Rule lOb-5 promulgated thereunder against all Defendants (Count
One) and two violations of Section 20(a) of the Exchange Act against the Individual Defendants
(Counts Two and Three). (Am. Compl. ^ 3 87-4 II.)6 In lieu of answering, Defendants moved to
dismiss the Amended Complaint. (ECF No. 76.)7 This Motion is now ripe.
5 Other allegations from the Amended Complaint, such as Plaintiffs' allegations that Defendants failed to
disclose facts and risks in violation of Items 303 and 105 of SEC Regulation S-K, (Am. Compl. ^[31114), or those facts specifically related to allegations of Defendants' scienter, (id. ^315-66), are not
necessary to resolution of the Subject Motion and are not repeated here.
6 This matter was subsequently transferred to the Undersigned on May 15, 2023. (ECF No. 67.)
7 Plaintiffs filed a notice of supplemental authority on July 15, 2024, (ECF No. 80), to which Defendants
replied on July 22, 2024, (ECF No. 82).
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II. LEGAL STANDARD
Pursuant to Federal Rule of Civil Procedure 12(b)(6), the court may dismiss a complaint
for "failure to state a claim upon which relief can be granted." For a complaint to survive dismissal
under this rule, it "must contain sufficient factual matter, accepted as true, to 'state a claim to relief
that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Ati. Corp.
v. Twombly, 550 U.S. 544, 570 (2007)). In evaluating the sufficiency of a complaint, "[a]ll
allegations in the complaint must be accepted as true, and the plaintiff must be given the benefit
of every favorable inference to be drawn therefrom." Malleus v. George, 641 F.3d 560, 563 (3d
Cir. 2011) (citations omitted). A pleading that "offers labels and conclusions or a formulaic
recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders
naked assertion^] devoid of further factual enhancement." Iqbal, 556 U.S. at 678 (citations and
quotation marks omitted). In short, the pleading's "[f]actual allegations must be enough to raise a
right to relief above the speculative level." Twombly, 550 U.S. at 555.
For fraud claims, a complaint is subject to Rule 9(b)'s heightened pleading standard
"[ijndependent of the standard applicable to Rule 12(b)(6) motions." In re Rockefeller Ctr. Props.,
Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002). "In alleging fraud or mistake, a party must state
with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and
other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). A party
alleging fraud must therefore support its allegations with "the who, what, when, where and how
of the events at issue." U.S. ex rel. Moore & Co., PA. v. Majestic Blue Fisheries, LLC, 812 F.3d
294, 307 (3d Cir. 2016) (citations omitted); see also Feingold v. Graff, 516 F. App'x 223, 226
(3d Cir. 2013) ("[T]he plaintiff must plead or allege the date, time and place of the alleged fraud
or otherwise inject precision or some measure of substantiation into a fraud allegation." (quoting
16
Frederico v. Home Depot, 507 F.3d 188, 200 (3d Cir. 2007))). Rule 9(b)'s heightened pleading
standard "ensure[s] that defendants are placed on notice of the precise misconduct with which they
are charged, and to safeguard defendants against spurious charges of fraud." Craftmatic Sec. Litig.
v. Kraftsow, 890 F.2d 628, 645 (3d Cir. 1989) (citations and quotations omitted). Rule 9(b)'s
requirements are "rigorously applied in securities fraud cases," including those brought under the
Exchange Act. Cal. Pub. Emps'Ret. Sys. v. Chubb Corp., 394 F.3d 126, 144 (3d Cir. 2004) (citing
In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir. 1997)).
In addition to satisfying Rule 9(b), plaintiffs alleging securities fraud pursuant to the
Exchange Act must also comply with the heightened pleading requirements of the Private
Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4, et seq. The PSLRA "imposes
another layer of factual particularity to allegations of securities fraud." In re Rockefeller Ctr.,
311 F. 3 d at 217. To allege fraud under the PSLRA, the plaintiff must "state with particularity both
the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's
intention 'to deceive, manipulate, or defraud.'" Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 313, 321 (2007) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194, and n.l2
(1976)).
III. DISCUSSION
Defendants move to dismiss the Amended Complaint in its entirety and with prejudice.
Defendants argue that Plaintiffs fail to allege a Section 10(b) and lOb-5 claim because Plaintiffs
fail to plead an actionable misstatement or omission or the requisite strong inference of scienter.
Defendants further contend that the Section 20(a) and Section 20A claims must be dismissed based
8 Determining whether Plaintiffs alleged scienter with particularity is not necessary for the resolution of the
present Motion and is therefore not addressed. See supra n. 5.
17
on the failure of Plaintiffs' Section 10(b) claim. Prior to addressing the merits of Defendants'
arguments, the Court first turns to the parties' threshold dispute regarding the documents the Court
may consider in connection with the Subject Motion.
A. JUDICIALLY NOTICEABLE DOCUMENTS
Defendants seek the Court to take judicial notice of 36 exhibits that were submitted with
their Motion. (See Exs. to Decl. of Lyle Roberts, ECF Nos. 76-3 to 76-38.)9 These exhibits,
described in greater detail below, include, inter alia, SEC Filings, Conference Call Transcripts,
and Publicly Available Articles. (See id.) Plaintiffs concede that the Court may consider certain
exhibits "for the existence of these documents, but [] object where Defendants attempt to offer
these exhibits for the truth of the matters contained therein or to support Defendants' inferences."
(Pis. Opp'n at 13.)10 Plaintiffs, however, oppose the Court considering other exhibits, contending
that they are attempts by Defendants to make factual rebuttals to the allegations in the Amended
Complaint. (Id. at 14-15.) Defendants respond that these exhibits are integral to the Amended
Complaint's allegations and are properly considered. (Defs. Reply at 23-25.)
While the Court may normally "not consider matters extraneous to the pleadings" at the
motion to dismiss stage, the Court may rely on documents that are "integral to or explicitly relied
upon in the complaint" without converting the motion into one for summary judgment. In re
Burlington Coat Factory, 114 F.3d at 1426 (emphasis in original) (citations omitted). The
exception's applicability turns on "whether the claims in the complaint are 'based' on an extrinsic
document and not merely whether the extrinsic document was explicitly cited." Id. at 1426
(citations omitted). The exception's purpose is to prevent a plaintiff from "maintam[ing] a claim
9 In this Opinion, all references to "Exhibit" or "Ex." refers to the Exhibits to Lyle Roberts's Declaration.
10 Specifically, Plaintiffs concede the noticeability of Exhibits 4, 7, 18-23, 25-26, and 29-30.
18
of fraud by extracting an isolated statement from a document and placing it in the complaint, even
though if the statement were examined in the full context of the document, it would be clear that
the statement was not fraudulent." Id. at 1426 (citation omitted).
The Court may also consider documents containing facts that are "not subject to reasonable
dispute in that [they are] either (1) generally known within the territorial jurisdiction of the trial
court or (2) capable of accurate and ready determination by resort to sources whose accuracy
cannot reasonably be questioned." In reNAHC, Inc. Sec. Litig., 306F.3d 1314,1331 (3dCir. 2002)
(citing Fed. R. Evid. 201(b)). As the Third Circuit cautioned, "[o]nly in the clearest of cases should
a district court reach outside the pleadings for facts necessary to resolve a case" at the motion to
dismiss stage. Victaulic Co. v. Tieman, 499 F.3d 227, 236 (3d Cir. 2007), as amended (Nov. 20,
2007). Defendant's exhibits fall into the following categories:
(1) SEC Filings and Conference Call Transcripts relied upon in the Amended Complaint:
Exhibits 4, 7, 18-23, 25-26, 28-30;u
(2) SEC Filings and Conference Call Transcripts from outside the Class Period: Exhibits
2-3, 5, 17;
(3) SEC Form 4 Filings: Exhibits 31-33, 35;
(4) Articles and Reports: Exhibits 6, 8-16, 27;and
(5) Compensation Chart: Exhibit 34.
11 As referenced above. Plaintiffs do not contest the Court's consideration of these exhibits for their
existence, but "object where Defendants attempt to offer these exhibits for the truth of the matters contained
therein or to support Defendants' inferences." (Pis. Opp'n at 13.) Defendants concede that "they do not ask
the Court to do so, but rather to recognize that these disclosures and statements were indeed made." (Defs.
Reply at 24.) As such, because these exhibits are not in dispute, the Court will consider them.
The Court does note that Exhibit 28 was not included in either parties' discussion of which exhibits the
Court may consider. However, this exhibit is PayPal's 2021 Form 10-K filed with the SEC. (See Ex. 28.)
As such, the Court groups this exhibit with other SEC filings made during the Class Period.
19
Except for the exhibits relied upon in the Amended Complaint, which Plaintiffs concede
are appropriately considered, the Court briefly discusses each category in turn.12
1. SEC Filings at Issue: Exhibits 2-3, 5,17
The parties disagree as to whether the Court may take judicial notice of SEC filings that
fall outside the class period. A court may "tak[e] judicial notice of properly-authenticated public
disclosure documents filed with SEC." In re NAHC, 306 F.3d at 1331 (citing Oran v. Stafford, 226
F.3d 275, 289 (3d Cir. 2000)). This may include documents not relied upon in the complaint. Id.;
see also In re Amarin Corp. PLC Sec. Litig., No. 19-6601, 2021 WL 1171669, at *8 (D.N.J. Mar.
29, 2021), qff'd No. 21-2071, 2022 WL 2128560 (3d Cir. June 14, 2022). Like the above SEC
filings, these documents "cannot be offered 'to prove the truth of their contents but only to
determine what the documents stated.'" Id. (quoting Oran, 226 F.3d at 289).
2. SEC Form 4 Filings: Exhibits 31-33, 35
Defendants submitted the Individual Defendants' Form 4 plans adopted by Schulman,
Rainey, and Auerbach on various dates between 2019 and 2021. (Exs. 31-33, 35.) "[A] 'Form 4'
filed with the Commission [] sets forth the insider's name, the date of the transaction, the number
of shares sold or bought and the price per share." Payne v. DeLuca, 433 F. Supp. 2d 547, 566 n. 11
(W.D. Pa. 2006) (citing Tristar Corp. v. Freitas, 84 F.3d 550, 552-53 (2d Cir. 1996)). Like the
above, these documents were filed with the SEC. See In re Merck Co., Inc., See., Derivative &
"ERISA" Litig., No. 05-1151, 2006 WL 8460903, at *4 (D.N.J. Jan. 20, 2006) ("It is ... without
dispute that SEC Forms 4 and 5 are in fact SEC filings contemplated by Oran"). As such, the Court
may take judicial notice. See Oran, 226 F.3d at 289 (taking judicial notice of Form 4s filed with
12 The Court will not take judicial notice of Exhibit 24, as Plaintiffs object to same, (Pis. Opp'n at 14), and
Defendants do not oppose.
20
the SEC); see In re Hertz Glob. Holdings, Inc. Sec. Litig., No. 13-7050, 2017 WL 1536223,at *22
n. 10 (D.N.J. Apr. 27, 2017), aff'd sub nom. In re Hertz Glob. Holdings Inc, 905 F.3d 106 (3d Cir.
2018) (considering Form 4s in deciding motion to dismiss and noting "it can take judicial notice
of the public filings showing that the challenged sales by the defendants were made pursuant to
10b5-l plans") (citations omitted).
3. Articles and Reports: Exhibits 6,8-16, 27
Defendants seek the Court to take judicial notice of a number of articles and reports. {See
Defs. Reply at 25.) These concern "commentary and information available to investors about
internet account fraud." (M) Plaintiffs object, arguing that the Court should not take judicial notice
of the "factual arguments predicated on them." (Pis. Opp'n at 14.) The Court did not consider these
documents to reach its decision and therefore need not resolve the parties' dispute over their
noticeability. See In re PTC Therapeutics, Inc. Sec. Litig., No. 16-1124, 2017 WL 3705801, at *3
n.5 (D.N.J. Aug. 28, 2017) (declining to take judicial notice where, in part, documents would not
alter court's analysis).
4. Compensation Chart: Exhibit 34.
Defendants seek the Court to take judicial notice of a compensation chart its counsel
"compiled from public disclosures and pertains to allegations in the Complaint." (Defs. Reply at
25.) Plaintiffs object, contending that "Defendants' self-created and self-serving chart is not
subject to incorporation by reference and it is far from the type of fact 'not subject to reasonable
dispute.'" (Pis. Opp'n at 15 (quoting Fed. R. Evid. 201(b)).) While the contents of the chart may
have been pulled from publicly available information, the Court does not find that this chart created
by counsel is "capable of accurate and ready determination by resort to sources whose accuracy
21
cannot reasonably be questioned." In re NAHC, 306 F.3d at 1331 (citing Fed. R. Evid. 201(b)).
Therefore, the Court will not take judicial notice of Exhibit 34.
***
In summary, in deciding Defendants' Motion to Dismiss, the Court will consider:
i. SEC Filings and Conference Call Transcripts relied upon in the
Amended Complaint: Exhibits 4, 7, 18-23, 25-26,28-30
ii. SEC Filings at Issue: Exhibits 2-3, 5, 17
iii. SEC Form 4 Filings: Exhibits 31-33, 35
However, the Court will not consider:
i. Compensation Chart: Exhibit 34
ii. Articles and Analyst Reports: Exhibits 6, 8-16, 27
iii. Exhibit 2713
iv. Exhibit 24
B. MOTION TO DISMISS SECTION 10(B) CLAIM
In Count One, Plaintiffs assert a claim under Section 10(b) and Rule lOb-5. Section 10(b)
of the Exchange Act creates a private cause of action for the "use or employ, in connection with
the purchase or sale of any security . . . [of] any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the [SEC] may prescribe as necessary or
appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Rule lOb5, which implements § 10(b), makes it unlawful, in connection with the purchase or sale of any
security:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not
misleading, or
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person.
13 Defendants concede that they do not ask the Court to take judicial notice of this exhibit, so the Court will
not do so. (Defs. Reply at 25.)
22
17 C.F.R. § 240.10b-5. In asserting a claim for securities fraud under Section 10(b) and Rule lOb5, a plaintiff "must allege (1) a material misrepresentation or omission, (2) scienter, (3) a
connection between the misrepresentation or omission and the purchase or sale of a security,
(4) reliance upon the misrepresentation or omission, (5) economic loss, and (6) loss causation."
City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014). In a securities fraud
case, "[a] corporation is liable for statements by employees who have apparent authority to make
them." Inst. Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009) (citing Makor Issues &
Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 708 (7th Cir. 2008)).
Material Misrepresentation or Omission
Since Plaintiffs must satisfactorily plead all six elements of Rule lOb-5 securities fraud in
order to state a claim, the Court is compelled to grant Defendant's motion in the event that any
single element is not met. Consequently, the Court's analysis begins and ends with the first
element.
To make out a Section 10(b) claim, a plaintiff must "identify a false representation of
material fact or omission that makes a disclosed statement materially misleading." In re NAHC,
306 F.3d at 1330 (citing In re Burlington Coat Factory, 1 14 F.3d at 1419). A statement or omission
of fact is material if there is "a substantial likelihood that the disclosure of the omitted fact would
have been viewed by the reasonable investor as having significantly altered the 'total mix' of
information made available." Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (citation
omitted); see also In re Newell Brands, Inc. Sec. Litig., 837 F. App'x 869, 874 (3dCir. 2020)
(statements or omissions viewed "in light of all the information then available to the market").
Further, a statement or omission only gives rise to liability if it was "misleading at the time it was
23
made; liability cannot be imposed on the basis of subsequent events." In re NAHC, 306 F.3d at
1330 (citation omitted).
The contours of what qualifies as an actionable misstatement are well articulated. First,
"[o]pinions are only actionable under the securities laws if they are not honestly believed and lack
a reasonable basis." City of Edinburgh Council, 754 F.3d at 170 (citing In re Merck & Co., Inc.
See., Derivative & "ERISA" Litig., 543 F.3d 150, 166 (3d Cir. 2008)). Next, the PSLRA creates a
"safe harbor" for forward-looking statements. Alleged misrepresentations are not actionable if the
statements "are (1) identified as [forward-looking], and accompanied by meaningful cautionary
statements; or (2) immaterial; or (3) made without actual knowledge that the statement was false
or misleading." In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 278-79 (3d Cir. 2010) (citing 15 U.S.C.
78u-5(c)). Finally, the Court must distinguish material representations from statements of
opinions that "constitute no more than 'puff ery' and are understood by reasonable investors as
such." In re Newell Brands, 837 F. App'x at 874 (citing EP Medsystems, Inc. v. EchoCath, Inc.,
235 F.3d 865, 872 (3d Cir. 2000)). The former are actionable while the latter are not.
In addition, while omissions may lead to liability, "Section 10(b) and Rule lOb-5 'do not
create an affirmative duty to disclose any and all material information." In re Cognizant Tech.
Sols. Corp. Sec. Litig., No. 16-6509, 2018 WL 3772675, at *15 (D.N.J. Aug. 8, 2018) (quoting
Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011)). "Disclosure is required only when
necessary to make statements made, in the light of the circumstances under which they were made,
not misleading." Id. (cleaned up). If a defendant "makes an affirmative statement or
characterization about its business, it puts that subject 'in play' and assumes a duty, under the
securities laws, to speak truthfully about that subject. In re Merck & Co., Inc. See., Derivative, &
24
"ERISA" Litig., No. 05-1151, 2011 WL 3444199, at *9 (D.N.J. Aug. 8, 2011) (citing Shapiro v.
UJB Fin. Corp., 964 F.2d 272, 282 (3d Cir. 1992)).
The first element is subject to the PSLRA's "[ejxacting pleading requirements." City of
Edinburgh Council, 754 F.3d at 168 (citing Tellabs, 551 U.S. at 313). Thus, "[a] complaint
involving securities fraud must 'specify each statement alleged to have been misleading, the reason
or reasons why the statement is misleading, and, if an allegation ... is made on information and
belief ... all facts on which that belief is formed.'" In re Newell Brands, 837 F. App'x at 874
(quoting 15 U.S.C. § 78u-4(b)(l)). "The purpose of the heightened pleading requirements is to
ensure that private securities actions do not become "a partial downside insurance policy" against
the vicissitudes of the market." Id. at 874.
As described above, Plaintiffs' claims are based on alleged false or misleading statements
made by Defendants on fifteen separate occasions, which the Amended Complaint groups into five
categories: (1) statements "touting TPV growth," (2) statements "tout[ing] PayPal's supposed
NNA growth," (3) "statements touting NNA growth [that] counted illegitimate bot-accounts as
legitimate NNAs," (4) statements "provid[ing] or confirm[ing] PayPal's guidance as to future
NNA growth," and (5) statements "tout[ing] engagement with PayPal's services by NNAs and/or
actual or expected reductions in chum due to such engagement." (Am. Compl. <| 207.) Defendants
argue that Plaintiffs fail to allege any material misrepresentation or omission, or that any alleged
false statements are nonactionable or protected by the PSLRA's safe harbor for forward-looking
statements. {See generally, Defs. Mot.)
With this as the backdrop, the Court analyzes the alleged false and misleading statements
to determine whether Plaintiffs have satisfied the high bar of the PLSRA's "[e]xacting pleading
requirements." City of Edinburgh Council, 754 F.3d at 168. The Court notes that Plaintiffs' claims
25
are based on alleged mis statements, set out in detailed, block quotes that emphasize certain
language and that span nearly 100 paragraphs and 40 pages. (Am. Compl. ^[ 209-308.) 14
1. NNA Results
Plaintiffs allege that throughout the Class Period, Defendants made numerous false and
misleading statements regarding PayPal's quarterly NNA results. (See, e.g., Am. Compl. ^ 213,
235,239,241,243, 247, 255,257,271, 273, 277, 281,287,289,297, 303.) For example, Plaintiffs
allege that when PayPal reported its 1Q2021 results, it touted that it had "added 14.5 million Net
New Accounts" and "ended the quarter with 392 million active accounts." {Id. ^ 239.) Likewise,
in reporting its 2Q2021 results, PayPal stated that the Company added "11.4 million net new active
accounts in the quarter" and "active accounts now exceed 400 million." (Id. ^ 277.)
Plaintiffs contend that these statements were false and misleading for numerous reasons.
(M T[ 207.) First, the statements failed to "disclos[e] that PayPal's new users were low value
'minimally engaged' accounts," which left investors with the misleading impression that the
growth in supposedly active users would contribute to future TPV." {Id. ^ 207(b).) Second,
Plaintiffs contend that PayPal failed to disclose that "growth was largely dependent on promotional
activity" and as such, the public believed that "PayPal was able to organically generate new users."
(Id.) Additionally, by failing to disclose PayPal's "marketing and customer acquisition strategies,"
PayPal "created the misleading impression that PayPal's NNAs would consist of legitimate and
engaged users." {Id.) PayPal also failed to disclose that "they counted illegitimate bot-accounts as
legitimate." (Id. ^ 207(c).) The inclusion of these bots "inflated PayPal's NNA numbers," a "key
performance indicator[J," led investors to believe these accounts would contribute to future
14 Like the parties, the Court will not examine each statement individually, but rather, consistent with the
parties' approach, will assess each category of allegedly false and misleading statements, and identify
specific statements as examples, where necessary.
26
revenue, and "concealed the risk that PayPal would later disclose significantly worse NNA
numbers." (M)
"Accurate statements of past earnings are not actionable under § 10(b)." In re Merck &
Co., Inc. See., Derivative & "ERISA" Litig., No. 05-1151, 2012 WL 3779309, at *2 (D.N.J. Aug.
29, 2012). Likewise, "disclosure of accurate historical data" does not give rise to a violation of the
federal securities law "absent an allegation that the data are false." In re Cognizant, 2018 WL
3772675, at *21. Plaintiffs make no allegations that the NNA numbers were not accurate at the
time. Each time the Company, whether in an SEC filing or in a statement made by an individual
Defendant, stated the NNA numbers from the previous quarter or year, Defendants were making
true statements of reported historical facts. SeeZuckerv. Quasha, 891 F. Supp.1010,1015 (D.N.J.
1995), aff'd 82 F.3d 408 (3d Cir. 1996) (statement based on "historical fact" not false or misleading
when true when made).
Plaintiffs contend, however, without conceding the accuracy of the reported NNA results,
that the statements were misleading because they failed to disclose that these results were driven
by aggressive marketing tactics which caused the users to have lower engagement and higher
chum. (Pis. Opp'n at 26.) Plaintiffs also contend that Defendants failed to disclose that by October
2021, Defendants knew that many illegitimate accounts were included in these results, rendering
Defendants' November 2021 statements reporting NNA results highly misleading. (Id. at 27-29.)
The Court considers the statements made before October 2021 and those made after
October 2021 separately. Plaintiffs allege that before October 2021, Defendants were aware of the
risks associated with reporting user numbers based on a marketing campaign that was premised on
free money and a susceptibility to manipulation. (See, e.g.. Am. Compl. ^ 74, 77, 78.) But, as
Plaintiffs allege, it was not until after October 2021 that the statements concealed known
27
illegitimate accounts, rather than just the theoretical prospect of illegitimate accounts. (See, e.g.,
id. ^ 90-102.) Therefore, the Court proceeds to analyze statements prior to October 2021 first,
and then statements made after October 2021.
i. Statements Prior to October 2021
Defendants "had no duty to disclose the alleged, unmaterialized risks." SLF Holdings, LLC
v. Uniti Fiber Holdings, Inc., 499 F. Supp. 3d 49, 64 (D. Del. 2020), aff'd No. 20-3427, 2022 WL
3442353 (3d Cir. Aug. 17, 2022); see id. ("no duty to disclose a risk that had not 'actually
materialized' at the time of the allegedly misleading prior disclosure"). Plaintiffs' allegations
regarding the risk of Defendants' promotional activities are exactly that: a potential risk. Plaintiffs
first contend that "[t]hroughout 2021," Chinese websites disclosed ways to take advantage of
PayPal's marketing promotions. (Am. Compl. ^ 67-73.) These postings, Plaintiffs allege, allowed
"PayPal ... to make it look like they were continuing to rapidly grow NNAs" by disclosing
illegitimate accounts throughout its quarterly reports in 2021. (Id. ^ 72-73.) Plaintiffs, however,
fail to show that Defendants knew about these websites, or even if they did, when PayPal might
have learned these accounts were being exploited. As such, with no alleged actual knowledge
about the manipulation of PayPal's marketing promotions, the NNA results cannot be deemed
false or misleading. See Williams v. Globus Med., Inc., 869 F.3d 235, 243 (3d Ctr. 2017) (holding
statement was not false where defendants were not aware of risk at the time statements were made).
Plaintiffs also contend that prior to launching PayPal's promotional campaigns, Defendants
were warned of the risks associated with same. (Am. Compl. ^ 74.) The Amended Complaint
contends that "before the start of 2021," CW-4 raised concerns that "the risk that the promotion to
pay people to open accounts would lead to people opening accounts without otherwise using
PayPal's services." (Id. ^ 75.) These risks of minimally engaged or illegitimate accounts were
28
allegedly included in materials that would have been reviewed and signed off on by Rainey based
on his role as CFO. {Id. ^ 76.) Likewise, CW-5 stated that "the Company was aware of the risk
that new users acquired through this promotional activity would be lower quality." {Id. ^ 77.)15
Despite knowledge of these risks, PayPal "decided to proceed with the promotions." {Id. ^ 78.)
Prior to launching its promotion, Defendants were under no duty to disclose the potential
risks of its marketing campaigns. See SLF Holdings, 499 F. Supp. 3d at 64. It is self-evident that
a risk has not come to fruition prior to it being launched. CW-4 and CW-5's statements that the
company was aware of potential risks reflects that the Company weighed the pros and cons before
deciding on a potential course of action. See In re Newell Brands, No. 18-10878, 2019 WL
6715055, at *11 (D.N.J. Dec. 10, 2019), aff'd 837 F. App'x 869 (3d Cir. 2020) (<<[B]usiness
decisions made in good faith that do not play out as hoped do not give rise to securities fraud.").
Further, although confidential witnesses allegedly identified potential risks before October 2021
(which are inherent in any business decision), at best, this constitutes nothing more than expressed
concern—and not a reasonable belief that such concerns would actually come to bear. Without
such allegations, Defendants had no obligation to disclose the potential risks of its marketing
campaigns to investors. See In re NAHC, 306 F.3d at 1330 (explaining that a company is "not
obligated to predict future events unless there is reason to believe that they will occur"); Oran, 226
F. 3d at 285 ("[N]on-disclosure of material information will not give rise to liability under Rule
lOb-5 unless the defendant had an affirmative duty to disclose that information.").
The Court finds the Honorable Stanley Chesler, U.S.D.J.'s analysis in In re Merck.
persuasive. 2012 WL 3779309, at *2. In that case, the plaintiffs alleged that the defendants'
15 The Amended Complaint fails to plead how CW-5 became aware that the Company was aware of these
risks. SeeAvaya, 564 F.3d at 253 (Rule 9(b) particularity "requires plaintiffs to plead the who, what, when,
where and how: the first paragraph of any newspaper story.").
29
statements of past earnings were misleading where the company failed to disclose that "current
sales were not a reliable metric of its success" because of undisclosed "adverse information"
regarding the safety of one of its drugs. Id. at * 2. The plaintiffs contended that defendants failed
to disclose this information, which "jeopardized and undercut the drug's commercial value and
capacity for growth." Id. Judge Chesler rejected this theory of liability, finding that it would "make
a company's disclosure obligations almost limitless." Id. The court in that case explained that "this
approach... would expose a company to liability every time it reported previous successes without
disclosing any and every reason, established or not, the company had for second-guessing the
reported performance, be it a contemplated change in business strategy, dissension among
company management or adverse information about a key product." Id. Moreover, Judge Chesler
held that the "literally true statements" in the earnings statements did not "put 'in play'" safety
information about the drug that would require the company to disclose any adverse information
regarding same. Id. at *3. In the case at bar, Defendants past statements regarding NNA results
were "literally true" statements, and Defendants were not required disclose the reason it had "for
second-guessing the reported performance." See id. at *2-3. Relying on these allegations and
others, the Court finds that Plaintiffs have not adequately alleged that Defendants misled investors
by failing to disclose the risks ofPayPal's marketing practices. Id.
ii. Statements After October 2021
The Court next considers the statements made after October 2021. The Amended
Complaint details CW-3's investigation into alleged fraudulent accounts. (Am. Compl. ^ 90102.) CW-3 contends that they first discovered approximately 33,000 fraudulent accounts in
August 2021, with the number growing to about one million by October 2021. {Id. ^ 91-96.)
PayPal held a large meeting to discuss these discoveries. {Id. ^ 96.) At that meeting, which was
30
attended by over 400 people, none of whom were named as defendants in this case, CW-3
"advocated for PayPal to shut down the fake accounts." (Id. ^ 96, 98.) CW-3's boss, who is not
identified in the Complaint, decided to "limit" the accounts instead of shutting them down
altogether. {Id. ^ 98.) Plaintiffs' Complaint does not describe where, in the corporate hierarchy,
this "boss" stood, and fails to define or explain what it means to "limit" an account, aside from
circularly noting that "limiting" means "applying flags to accounts ... to limit their activity." (Id.
T[ 98 & n.6.) CW-3 continued his investigations, discovering approximately 2 million accounts he
believed "were engaging in incentive abuse." {Id. ^ 100.) As such, Plaintiffs contend that
Defendants' statements regarding NNA growth, without disclosing the results of this investigation,
was a material misrepresentation to investors. (Pis. Opp'n at 27-28.)
However, "for a statement to constitute a material misrepresentation or omission, the
plaintiff must show that the speaker was in possession of some contrary information at the time
the statement was made - making it so that either the speaker was aware, or at least should have
been aware, that his statement was false or misleading." Tanaskovic v. Realogy Holdings Corp.,
No. 19-15053, 2021 WL 211049, at *6 (D.N.J. Jan. 21, 2021). The statements must be "actionably
unsound when made" and not rely "on hindsight" to establish a false or misleading statement.
Williams, 869 F.3d at 244 (quoting In re Burlington Coat Factory, 114 F.3d at 1430).
As the Court in Tanaskovic explained, "a purported claim of securities fraud based merely
on information that became apparent after the fact, with no indication that the speaker was aware,
or at least should have been aware of the information at the time of his earlier statement, is the
exact type of 'fraud by hindsight' argument that the Third Circuit has long rejected as improper."
Id. (citing Chubb, 394 F.3d at 158); see also Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000)
("Corporate officials need not be clairvoyant; they are only responsible for revealing those material
31
facts reasonably available to them. Thus, allegations that defendants should have anticipated future
events and made certain disclosures earlier than they actually did do not suffice to make out a
claim of securities fraud.").
Ultimately, then, the Court must determine whether Plaintiffs have sufficiently alleged
"that the speaker was in possession of some contrary information at the time the statement was
made." Tanaskovic, 2021 WL 211049, at *6. To support their contentions that, at various times,
Defendants Schulman and Rainey were in possession of such contrary information, Plaintiffs rely
on a parade of confidential witnesses who are alleged to be former PayPal employees in positions
of varying degrees of seniority—all of whom were apparently attenuated from the vortex of power.
The Third Circuit allows pleadings based on these confidential witnesses, but imposes a
"heightened importance" on the particularity requirements for such witnesses, "given the
inadequacy of their documentary source." Chubb, 394 F.3d at 147^-8. Specifically, the Third
Circuit has held:
The PSLRA imposes a particularity requirement on all allegations,
whether they are offered in support of a statement's falsity or of a
defendant's scienter. 15 U.S.C. § 78u-4(b)(l), (b)(2). In the case of
confidential witness allegations, we apply that requirement by
evaluating the "detail provided by the confidential sources, the
sources' basis of knowledge, the reliability of the sources, the
corroborative nature of other facts alleged, including from other
sources, the coherence and plausibility of the allegations, and
similar indicia." Chubb, 394 F. 3 d at 147. If anonymous source
allegations are found wanting with respect to these criteria, then we
must discount them steeply. This is consistent with Tellabs's
teaching that "omissions and ambiguities count against inferring
scienter" under the PSLRA's particularity requirements. Tellabs,
127 S.Ct. at 2511. If, on the other hand, a complaint's confidential
witness allegations are adequately particularized, we will not
dismiss them simply on account of their anonymity.
32
Awya,564F.3dat263.16
Alleging that Defendants Schulman and Rainey possessed the requisite knowledge,
Plaintiffs rely on CW-3's investigation into the alleged accounts that resulted in a meeting among
400 PayPal employees. {See Am. Compl. ^ 98-101.) Plaintiffs contend that "CW-3 believes that
the information about the fake accounts was escalated to the executive level because they would
have needed executive approval to limit that many accounts." (Id. ^98.) Plaintiffs also allege,
based on CW-7's statements, that the "executives at PayPal would have been updated on the fraud
trend by the Policy team." {Id. ^ 106.) Finally, Plaintiffs point to CW-4's statements "that ifPayPal
had identified that a large number ofbot accounts were being created, that information would have
immediately been made known to Schulman and Rainey." (Id. ^ 110.)
However, none of the confidential witnesses were "in a position to possess" information
about when and whether Defendants Schulman and Rainey actually learned about the alleged fake
accounts. See In re Synchronoss Sec. Litg., 705 F. Supp. 2d 367, 400-01 (D.NJ. 2010). For
example, Plaintiffs allege that CW-1 was "3 reporting levels below the SLT, which included the
Individual Defendants." (Am. Compl. T[ 44.) CW-2 was "2-3 reporting levels below CFO Rainey."
(Id. T[ 45). CW-7's reporting structure allegedly placed him four reporting levels below "Chief
Enterprise Officer Aaron Karczmer," though there is no indication of how close Karczmer was to
any of the named Defendants. (See id. ^ 50.) Additionally, Plaintiffs fail to allege how CW-3, an
employee in the Seller Fraud Operations Department in Chandler, Arizona, would have known
that any information would have been disclosed to the executive board, aside from his own
16 As other courts in this district have explained, "the lack of sufficient allegations concerning a Defendant's
knowledge could also be disposed of in [a discussion of] scienter." In re Celgene Corp. Sec. Litig., No. 18-
4772,2019 WL 6909463,at *18 n.24 (D.N.J. Dec. 19, 2019). However, since the parties discuss this issue
both in their discussions of actionable misstatements or omissions as well as scienter, the Court wiU address
this issue here.
33
speculation. See In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262, 362 (D.N.J. 2007)
("confidential witnesses' conclusory allegations of what senior management knew, without
particularity or specificity indicate that the witnesses' knowledge is not averred" (cleaned up)
(citing Zack v. Allied Waste Indus., No. 04-1640, 2005 WL 3501414, at *7 (D. Ariz. Dec. 15,
2005)). Even CW-4, who is vaguely described as being "in the inner circle" (Am. Compl. ^ 75),
and evidently "worked and interacted with" Defendants Schulman and Rainey by "participating in
status updates" on "regulatory matters" {id. ^ 47), is not alleged to have been in a position to
possess any information relating Defendants' knowledge of fake accounts. The simple fact that
CW-4 interfaced with Schulman and Rainey on a particular subject matter does not mean that he
was privy to any relevant communications. In short, Plaintiffs do not allege that any witnesses had
sufficient seniority in the Company to have known what was being discussed in meetings with
Schulman or Rainey; each one was at least a few reporting levels away. Plaintiffs did not plead
that these confidential witnesses were senior executives with the "personal knowledge" of specific
meetings. See In re Synchronoss Sec. Litg., 705 P. Supp. 2d at 401.
Even if the relevant confidential witnesses were senior executives, no confidential witness
has alleged with sufficient particularity any interaction or event where Defendants Schulman and
Rainey learned about fraudulent accounts before making their November 2021 statements.
Statements from undisclosed witnesses must include, inter alia, "the dates on which the relevant
information was acquired, the facts detailing how the source obtained access to the information,
specific details regarding the basis for the source's personal knowledge, and detailed descriptions
of the alleged events." See In re Intelligroup Sec. Litig., 527 F. Supp.2d at 358-59. Plaintiffs have
not alleged any "detailed descriptions of the alleged events" via the confidential witnesses, or
otherwise. Instead, the Complaint is replete with speculative, conclusory, and abstract assertions
34
instead of the required specific details that might render the claims of material misstatement
reliable.
For example, CW-3 attended a meeting in October 2021 where fraudulent accounts were
discussed, but Plaintiffs do not allege that any of the Defendants were at that meeting or that CW3 or any other of the 400 meeting attendees definitively spoke with any Defendant about the
meeting. (See Am. Compl. ^ 98-101.) CW-3 merely "believes that the information about the fake
accounts was escalated to the executive level because they would have needed executive approval
to limit that many accounts." (Id. ^ 98 (emphasis added).) Similarly, CW-7 alleges that the Policy
team "would have" updated executives regarding the October meeting {Id. ^ 106 (emphasis
added)), but not that any such update actually occurred. See In re Adolor Corp. Sec. Litig., 616 F.
Supp. 3d 551, 574-75 (E.D. Pa. 2009) (discounting claims from a confidential witness that the
individual defendants knew certain information because a separate team learned of that
information).
As for CW-4, who was allegedly in the "inner circle" at PayPal (Am. Compl. ^ 75), his
contention that information about fraudulent accounts "would have immediately been made
known" (id. ^ 110 (emphasis added)) to Rainey and Schulman contains no "facts detailing how the
source obtained access to the information." In re Intelligroup, 527 F. Supp.2d at 359. His similar
allegation that an issue affecting 250,000+ PayPal accounts "would be automatically and
immediately escalated to the CEO" (Am. Compl. ^ 116 (emphasis added)), does not demonstrate
7 Repeated assertions such as "believes;" "would have needed;" and "would have been updated," etc., are,
by definition, riddled with surmise and conjecture. (See, e.g.. Am. Compl. ^ 98, 100, 101, 106, 107,110,
112,116.)
18 Further, while CW-2 described the various reports regarding NNAs that would have been automatically
generated, he does not allege that these reports contained information regarding the October meeting. {Id.
H 109.)
35
any actual escalation. Likewise, CW-4's allegation that he "did not understand how PayPal could
not have immediately been aware of widespread activity to create fake accounts through bot
farms," is insufficient to show that named Defendants were aware. {Id. ^ 113.) See City ofBrockton
Ret. Sys v. Shaw Grp. Inc., 540 F. Supp. 2d 464, 473 (S.D.N.Y. 2008) (explaining that it is not
enough for "plaintiff to allege that because executives like the Individual Defendants were 'closely
involved' in [the] business, one can strongly infer" that they were in possession of information
contrary to their statements). However seemingly earnest such hypotheses might be, they do not
provide the necessary "who, what, when, where and how" evidencing PayPal leadership's
knowledge. SeeAvaya, 564 F.3d at 253.
None of the above representative allegations—of any similar allegations in the
Complaint—contains details about actual meetings or communications where Defendants learned
information that contradicted their public statements. Although multiple confidential witness
hypothecated that there might have or would have been occasions for Defendants to receive
information that would render their statements false, none can point to a date, time, or location.
See In re Hertz Glob. Holdings, Inc. Sec. Litig., No. 13-7050, 2015 WL 4469143, at *20 (D.N.J.
July 22, 2015) ("Nowhere in Plaintiffs . . . allegations is there any suggestion that any of the CWs
communicated in any way with [individual defendants], or any person at [defendant company]
who might have been familiar with [individual defendants'] thinking."). Plaintiffs also present no
account of any conversation that might have transpired at any meeting with named Defendants.
This dearth of allegations "renders that source irrelevant for the purposes of plaintiff's allegations."
In re Intelligroup, 527 F. Supp. 2d at 290 (explaining that "allegations attributed to the information
obtained from a confidential source must contain specific details regarding the basis for the
source's personal knowledge and describe supporting events in detail"); Nat'I Junior Baseball
36
League v. Pharmanet Dev. Grp. Inc., 720 F. Supp. 2d 517, 540 (D.N.J. 2010) (discounting
confidential allegations where the complaint failed to specify when confidential witnesses learned
of information).
Aside from conclusory allegations, the Amended Complaint lacks any details regarding
when discussions with executives occurred. As such, the Court finds that Plaintiffs fail to plead
with particularity that Defendants knew the statements concerning NNA results made in November
2021 were misleading. See Tanaskovic, 2021 WL 211049, at *6.
2. NNA and TPV Growth and Guidance
Plaintiffs allege that Defendants made numerous false or misleading statements relating to
NNA, TPV, and chum growth and guidance relating to same. {See, e.g.. Am. Compl. ^ 207,209,
211, 213, 219,231,239, 241, 245, 247, 249, 257, 261, 269, 271, 275, 277, 279, 289, 291, 297.)
With respect to TPV growth, Plaintiffs contend that Defendants misled investors by "touting" such
growth, leading investors to believe that PayPal users were highly engaged and understating the
risk of continued growth. (Id. ^ 207(a).) Plaintiffs allege that Defendants' NNA guidance failed to
disclose that growth was due to "minimally engaged" users, which therefore gave the false
impression that these users would contribute to future TPV. {Id. ^ 207(d).) Further, Defendants
allegedly misled investors into thinking the NNA guidance was achievable without disclosing the
risks that illegitimate accounts would need to be removed, or that PayPal's lofty numbers were
19 Defendants released their 3Q2021 results on November 8, 2021. (See Am. Compl. ^ 293.) Without
allegations concerning when executives may have learned about CW-3's investigation, it is not clear that
Defendants had any duty to update their projections if they were "made reasonably and in good faith." See
In re Burlington Coat Factory, 114 F.3d at 1433 ("F^VJe do not think it can be said that an ordinary earnings
projection contains an implicit representation on the part of the company that it will update the investing
public with all material information that relates to that forecast."); see also In re Focus Media Holding Ltd.
Litig., 701 F. Supp. 2d 534, 539^0 (S.D.N.Y. 2010) (noting that "courts have been reluctant to impose
liability based upon a failure to disclose financial data for a fiscal quarter in progress" (quoting Schoenhaut
v. American Sensors, Inc., 986 F. Supp. 785, 791(S.D.N.Y. 1997))).
37
only achievable by including these fake accounts. (M) Finally, Plaintiffs contend that Defendants
misled investors on the expected reductions in chum, as Defendants failed to disclose its users
were minimally engaged and a byproduct of the aggressive promotions. {Id. ^ 207(e).) Defendants
contend that many of these statements are forward looking statements that fall under the PSLRA's
safe harbor.
The safe harbor provision of the PSLRA "immunizes from liability any forward-looking
statement, provided that: the statement is identified as such and accompanied by meaningful
cautionary language; or is immaterial; or the plaintiff fails to show the statement was made with
actual knowledge of its falsehood." Avaya, 564 F.3d at 254 (citing 15 U.S.C. § 78u-5(c)). A
"forward-looking" statement is one that contains a "projection of revenues, income [], earnings []
per share, capital expenditures, dividends, capital structure, or other financial items," or statements
of "future economic performance, including any such statement contained in a discussion and
analysis of financial condition by the management." Id. at 255 (citing 15 U.S.C. § 78u-5(i)(l)(A)(C)). These statements also may include "any statement of the assumptions underlying or relating
to any statement described" in such statements. Id. (quoting § 78u-5(i)(l)(D)). This safe harbor
may apply to material misstatements and omissions. 15 U.S.C. § 78u-5(c).
Many of the statements at issue here involve Defendants' representations about its NNA
growth for the year. (See., e.g., id. ^ 209 ("50 million NNAs expected to be added to PayPal's
platform in FY'21."); id. ^ 249 ("Based on the 14.5 million additional accounts added in Ql and
our current trends, we now expect to add in the range of 52 million to 55 million new users this
year.").) Plaintiffs concede that PayPal's user growth underlies its financial growth. (See Am.
Compl. T[ 207(c) ("[IJnflating the NNA results left investors with the misleading impression that
the growth in supposedly active users would contribute to future TPV growth (from these NNAs
38
transacting at a meaningful level on PayPaFs system) and future revenue and profit from PayPal's
additional services.").) As such, the Court finds projections related to NNA growth fall within the
PLSRA's safe harbor for forward-looking statements. See In re Aetna, 617 F.3d at 281
("Statements about future profitability and assumptions underlying management's expectations
about the future fall squarely within the definition of forward-looking statement.").
Plaintiffs contend that these forward-looking statements were misleading because
Defendants "knew, but did not disclose, that the NNA numbers were being boosted by PayPal's
unprecedented cash incentive programs and the low-quality and fraudulent accounts they
generated." (Pis. Opp'n at 25.) Plaintiffs further argue that by October 2021, Defendants knew that
"millions of fraudulent accounts had been included in the publicly stated NNA numbers." {Id.)
For the same reasons discussed in the preceding section, the Court finds Defendants
statements regarding NNA guidance to fall within the forward-looking safe harbor. Plaintiffs have
"not alleged specific facts showing that the Individual Defendants had such actual knowledge" of
the alleged fraudulent accounts when the statements were made. In re Datatec Sys., Inc. Sec. Litig.,
No. 04-525, 2006 WL 3095951, at * 17 (D.N.J. Oct. 30, 2006). Defendants were under no duty to
disclose risks that had not yet materialized. See SLF Holdings, LLC, 499 P. Supp. at 64 ("[N]o
duty to disclose [a] risk that had not 'actually materialized at the time of the allegedly misleading
prior disclosure."). Moreover, the safe harbor "immunizes from liability any forward-looking
statement. . . [where] the plaintiff fails to show the statement was made with actual knowledge of
its falsehood." In re Synchronoss Techs., Inc. Sec. Litig., No. 17-2978, 2019 WL 2849933, at *19
(D.N.J. July 2, 2019) (quoting Avaya, 564 F.3d at 254). The Court held above that Plaintiffs failed
to demonstrate actual knowledge that any November or December 2021 statements were false and
misleading. "Therefore, because Plaintiff has failed to adequately plead that Defendants were
39
actually aware of the falsify of the revenue projections, Plaintiffs claims based on forward-looking
statements fail. ..." Id.20
3. Statements Regarding the Quality of its Users TPV Growth
Plaintiffs allege that throughout the Class Period, Defendants made numerous false and
misleading statements regarding the quality ofPayPaFs users and its "strong" TPV growth. {See,
e.g., Am. Compl. ^ 209, 211, 217, 219, 221,225, 227, 229, 263, 237, 247, 253, 293, 299,305.)
Plaintiffs allege that Defendants misled investors when claiming that its new users were highly
engaged without disclosing that many of these users in fact were illegitimate. (See, e.g., id. ^ 209
("Expect ongoing momentum with strong TPV growth and NNAs"); id. ^ 225 ("[W]e are seeing
engagement levels increase dramatically throughout our base especially with the new products that
we've put out."); id. ^ 263 (explaining new users were going to be "tied to [] the increase in
engagement that we expect to see from these new cohorts that are coming on. And irrespective of
what new cohort we're talking about, post pandemic, we see much elevated levels of
engagement.").) According to Plaintiffs, these "implied that the new users being added to PayPal
would be highly engaged, and thus profitable and paving a path to the promised 'Super App,' and
less likely to chum." (Pis. Opp'n at 31-32.) Plaintiffs argue that Defendants knew that their new
active users were less engaged and had a higher propensity to chum. (Id. at 32.) Defendants, on
the other hand, contend that they had no knowledge regarding the alleged engagement of its users
before it its 4Q2021 disclosures. (Defs. Mot. at 29-33.) Further, Defendants contend that these
statements are non-actionable puffery. (Id. at 35-38.)
20 Like the Court in In re Synchronoss, 2019 WL 2849933, at * 19, this Court need not address Defendants'
arguments regarding the risk disclosures.
40
"[AJlthough questions of materiality have traditionally been viewed as particularly
appropriate for the trier of fact, complaints alleging securities fraud often contain claims of
omissions or mis statements that are obviously so unimportant that courts can rule them immaterial
as a matter of law at the pleading stage." In re Aetna, 617 F.3d at 283. "A representation is
immaterial if the 'statement at issue is too vague to be actionable.'" Id. (quoting In re Burlington
Coat Factory, 114 F.3d at 1428). These statements may include "opinions, motives, and intentions,
or general statements of optimism." Id. Puff cry may also include statements regarding "dramatic
deposit growth," "strong performance," and "unique business model." Galati v. Corn. Bancorp,
Inc., 220 F. App'x 97, 102 (3d Cir. 2007). Any such statements, however, must be considered
within their context, including the alleged facts that underlie the opinion or optimism. In re
Allergan Generic Drug Pricing Sec. Litig., No. 16-9449, 2019 WL 3562134, at *10 (D.N.J. Aug.
6, 2019). Statements of opinion "are only actionable under the securities law if they are not
honestly believed and lack a reasonable basis. City of Edinburgh Council, 754 F. 3 d at 170 (citing
In re Merck, 543 F.3d at 166). As the Third Circuit explained, "in the context of a claim alleging
falsely-held opinions or beliefs, investors must have sufficient information to suspect that the
defendants engaged in culpable activity, i.e., that they did not hold those opinions or beliefs in
earnest." In re Merck, 543 F. 3 d at 166.
The Court finds that these statements are inactionable as opinions and immaterial puff ery.
{See, e.g.. Am. Compl. ^ 223 ("P2P is a significant customer acquisition channel that facilitates
organic growth"); id. ^ 265 ("What we've done over the last, call it, 18 months is put much more
rigor into the CLV component of that rather than chasing a low-value, net new active that maybe
pumps up numbers and the optics look good, really looking at how they're going to contribute to
the PayPal platform over time."); id. ^ 301 ("[W]e can certainly go out and spend money on
41
customer acquisition and get very low value net new actives to inflate or pump up that number,
but that's not the right economic decision for us longer term.").)
The Court's above analysis further supports the conclusion that these statements are not
actionable. When Defendants made the statements, Defendants genuinely believed them to be true
based on the earnings that the Company was reporting. Plaintiffs have not alleged that it was clear
to PayPal, at this point, that its marketing practices had led to an increase in illegitimate accounts.
Rather, PayPal only knew about certain risks associated with its promotions. Further, when PayPal
employees did become aware of the fraudulent accounts, it was not clear that Defendants were
made aware of these statements prior to disclosing its 4Q2021 results.
Likewise, statements regarding Defendants' expectations on chum are based on
Defendants' opinions regarding what could help lead to reductions in chum. In addition, it is not
clear that these statements were false when made. {See, e.g., Am. Compl. ^ 283 ("And so as we
look forward over the coming years, as we add capabilities into the digital wallet, things like
crypto, things like investing, buy now, pay later, all of these things are key drivers that increase in
engagement and therefore, decrease chum."); id. ^ 263 ("And I think that's going to come through
a number of different ways, but I think very importantly is reducing chum.").)
Moreover, it is not clear that the failure to disclose the results of the October team meeting
and CW-3's investigation was misleading under the Supreme Court's decision in Omnicare, Inc.
v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175 (2015). In
interpreting Omnicare, the Third Circuit has stated that "an opinion statement is misleading if it:
(i) was not sincerely believed when made; (ii) contains an expressly embedded, untrue factual
assertion; or (iii) reasonably implies untrue facts and omits appropriate qualifying language." City
of Warren Police & Fire Ret. Sys. v. Prudential Fin., Inc., 70 F.4th 668, 686 (3d Cir. 2023). First,
42
as discussed above, Plaintiffs' allegations fail to adequately allege facts that Defendants did not
believe their optimism when expressed or did not believe thetr statements when made. Plaintiffs
fail to allege that Defendants did not believe their statements, or that such were untrue, that the
Company believed "growth remains strong," (Am. Compl. ^ 279), or was "on track and performing
very well," (id. ^ 295). As discussed in detail above, Plaintiffs fail to demonstrate that Defendants
had knowledge of the illegitimate accounts prior to issuing its 4Q2021 disclosures. Moreover, even
assuming arguendo that Defendants did have knowledge of the October team meeting and its
results, it is not clear that Defendants did not believe their opinions. City of Warren, 70 F.4th at
686 ("[AJctual knowledge that sales from one source might decrease is not the same as actual
knowledge that the company's overall sales projections are false." (quoting Williams, 869 F.3d at
246)).
Moreover, under the third Omnicare factor regarding "falsity by omission," it is not clear
that the failure to disclose the results of the October 2021 investigation were misleading. Id. at
687. As the Third Circuit has explained, "because '[rjeasonable investors understand that opinions
sometimes rest on a weighing of competing facts,' an opinion statement is 'not necessarily
misleading when an issuer knows, but fails to disclose, some fact cutting the other way.'" Id.
(quoting Omnicare, 575 U.S. at 189-90). Thus, the allegations of the omitted fact must render that
fact "so great that it would, for a reasonable investor, eclipse the balance of the numerous other
considerations." Id. In the case at bar, the October 2021 investigation revealed close to one million
fraudulent accounts. (See Am. Compl. ^ 95.) However, Plaintiffs fail to demonstrate that disclosure
of the one million NNAs (of the projected 52 to 55 million) from 2021 would have been of such
great importance to Defendants' projections as to render its opinions, such as Rainey's "confidence
in where we are," (id. ^ 301), to be misleading. Therefore, the Court finds that Defendants'
43
statements expressing confidence in the quality of its users or the quality and its strong growth,
among other like statements, inactionable as statements of opinion or puff ery.21
The Court grants Defendants' Motion to Dismiss Count I of the Amended Complaint. As
the Court finds that Plaintiffs fail to allege with particularity misstatements or omissions of
material facts made by Defendants, the Court does not address Defendants arguments regarding
the remaining requirements of Plaintiffs' Section 10(b) claim. See In re BioLineRx Ltd. Sec. Litig.,
No. 23-041, 2024 WL 3409800, at *11 (D.N.J. July 15, 2024) ("Because the Court finds the FAC
does not sufficiently allege with particularity misstatements or emissions of material facts made
by Defendants, it concludes that further analysis of the complaint is unnecessary at this time.").22
C. COUNTS II AND HI - SECTION 20(A) - CONTROL PERSON LIABILITY
In Counts Two and Three, Plaintiffs asserts claims for control person liability against the
Individual Defendants under Section 20(a). (Am. Compl. ^ 395-411.) "Section 20(a) makes
controlling persons jointly and severally liable with the controlled person. [] But controllingperson liability is 'premised on an independent violation of the federal securities laws.'" In re
Merck & Co., Inc. Sec. Litig., 432 F.3d 261, 275-76 (3d Cir. 2005) (quoting In re Rockefeller Ctr.,
311 F.3d at 211). To allege a violation of Section 20(a), a plaintiff must show "(I) the defendant
controlled another person or entity; (2) the controlled person or entity committed a primary
violation of the securities laws; and (3) the defendant was a culpable participant in the fraud." In
re Newell Brands, 2019 WL 6715055, at *14 (citations and quotation marks omitted). As such,
21 The Court cited a number of examples of statements which the Court viewed as typical but did not address
each and every purported statement. For the above-mentioned reasons, the Court finds that Plaintiffs fail to
allege an actionable omission or misstatement.
22 Plaintiffs further allege that Defendants made materially false or misleading statements in violation of
Item 303 and Item 105. {See Am. Compl. ^ 311-14.) However, as the Court finds that Plaintiffs failed to
identify material misrepresentations or omissions, the Court need not consider whether these statements
violated Item 303 and Item 105.
44
"liability under Section 20(a) is contingent upon sufficiently pleading an underlying violation of
Section 10(b) by the controlled person." Id. (citation omitted). Accordingly, because the Section
10(b) claims are dismissed for the reasons stated above, the Court also dismisses Counts Two and
Three.
Finally, the Court notes that the Defendants seek dismissal with prejudice. (Defs Mot. at
7.) Indeed, the Court notes that the operative pleading here is an Amended Complaint. (ECF No.
49.) However, until now, the allegations in the original Complaint were never subjected to judicial
scrutiny since Plaintiffs filed an Amended Complaint following the appointment of a Lead
Plaintiff. {See ECF Nos. 4, 56-1.) The Court recognizes that "allowing amendments in order to
correct deficiencies in pleadings furthers one of the basic objectives of the federal rules—the
determination of cases on the merits." Pro. Cleaning & Innovative Bldg. Servs., Inc. v. Kennedy
Funding, Inc., 245 F. App'x 161, 165 (3d Cir. 2007).
The Court finds, in the interest of justice, and in the event they so choose, that Plaintiffs
should be afforded another opportunity to amend their complaint and comport with the
particularized pleading standards articulated above. See Phillips v. Cnty. of Allegheny, 515 F.3d
224, 236 (3d Cir. 2008) ("[I]f a complaint is vulnerable to a 12(b)(6) dismissal, a district court
must permit a curative amendment, unless an amendment would be inequitable or futile.").
Accordingly, the Amended Complaint is DISMISSED WITHOUT PREJUDICE.
45
CONCLUSION
For the foregoing reasons, Defendants' Motion to Dismiss is GRANTED. Plaintiffs may
file an amended complaint addressing the deficiencies identified by the Court within 45 days.
Failure to file an amended pleading within 45 days will result in dismissal with prejudice. An
appropriate Order will accompany this Opinion.
ROBERT KlRSCH
UNITED STATES DISTRICT JUDGE
Dated: January 29, 2025
46
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