Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 1 of 32
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`POMERANTZ LLP
`Jennifer Pafiti (SBN 282790)
`1100 Glendon Avenue, 15th Floor
`Los Angeles, CA 90024
`Telephone:
`(310) 405-7190
`Email: jpafiti@pomlaw.com
`
`Lead Counsel for Lead Plaintiffs
`
`[Additional counsel on signature page]
`
`
`HUEI-TING KANG and
`ARTHUR FLORES,
`
`
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`PAYPAL HOLDINGS, INC., et al.,
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`v.
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`Defendants.
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`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
`SAN FRANCISCO DIVISION
`
`
`CASE NO.: 3:21-cv-06468-CRB
`
`LEAD PLAINTIFFS’
`MEMORANDUM OF LAW IN
`OPPOSITION TO
`DEFENDANTS’ MOTION TO
`DISMISS
`
`The Hon. Charles R. Breyer
`
`Date: July 8, 2022
`Time: 10:00 a.m.
`Place: Courtroom 6 – 17th Floor
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`Plaintiffs,
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 2 of 32
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`TABLE OF CONTENTS
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`Page
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`TABLE OF CONTENTS ................................................................................................................ ii
`TABLE OF AUTHORITIES ......................................................................................................... iii
`SUMMARY OF ARGUMENT ................................................................................................... viii
`INTRODUCTION ......................................................................................................................... 1
`STATEMENT OF FACTS ............................................................................................................ 1
`RELEVANT LEGAL STANDARDS ........................................................................................... 3
`ARGUMENT ................................................................................................................................. 3
`A. Defendants’ Misrepresentations Are Actionable ............................................................... 3
`B. The Complaint Raises a Strong Inference of Scienter ....................................................... 8
`C. The Complaint Adequately Alleges Loss Causation ....................................................... 13
`D. The Complaint Also States a Cause of Action for Scheme Liability .............................. 14
`E. The Complaint Adequately Pleads Control Person Liability ........................................... 15
`CONCLUSION ............................................................................................................................ 15
`PROOF OF SERVICE BY ELECTRONIC POSTING .............................................................. 18
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 3 of 32
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`TABLE OF AUTHORITIES
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`
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`Page(s)
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`Cases
`
`Azar v. Yelp, Inc.,
` No. 18-cv-00400-EMC, 2018 U.S. Dist. LEXIS 200769 (N.D. Cal. Nov. 27, 2018) ............. 9
`
`Berson v. Applied Signal Tech., Inc.,
`527 F.3d 982 (9th Cir. 2008) ................................................................................................. 11
`
`
`Bos. Ret. Sys. v. Uber Techs., Inc.,
` No. 19-cv-06361-RS, 2020 U.S. Dist. LEXIS 141724 (N.D. Cal. Aug. 7, 2020) ............... x, 4
`
`Buttonwood Tree Value Partners, LP v. Sweeney,
` No. SACV1000537CJCMLGX, 2012 U.S. Dist. LEXIS 183438
`
`(C.D. Cal. Dec. 10, 2012) ...................................................................................................... 12
`
`Cal. Pub. Emps.’ Ret. Sys. v. ANZ Sec., Inc.,
`137 S.Ct. 2042 (2017) ............................................................................................................ 15
`
`
`China Agritech, Inc. v. Resh,
`138 S. Ct. 1800 (2018) ........................................................................................................... 15
`
`
`City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc.,
`856 F.3d 605 (9th Cir. 2017) ............................................................................................ x, xi
`
`
`Dura Pharms., Inc. v. Broudo,
`544 U.S. 336 (2005) ............................................................................................................... 14
`
`
`ESG Capital Partners, LP v. Stratos,
`828 F.3d 1023 (9th Cir. 2016) ................................................................................................. 8
`
`
`Evanston Police Pension Fund v. McKesson Corp.,
`411 F. Supp. 3d 580 (N.D. Cal. 2019) ........................................................... xiii, xiv, 5, 12, 14
`
`
`Fecht v. Price Co.,
`70 F.3d 1078 (9th Cir. 1995) ................................................................................................... 3
`
`
`Ferraro Family Found., Inc. v. Corcept Therapeutics Inc.,
` No. 19-CV-01372-LHK, 2021 U.S. Dist. LEXIS 160215
`
`(N.D. Cal. Aug. 24, 2021) .................................................................................................... x, 4
`
`Goldberg v. Rome McGuigan, P.C.,
` No. CV 20-9958-JFW(SKX), 2021 U.S. Dist. LEXIS 80984
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`(C.D. Cal. Mar. 4, 2021) ........................................................................................................ 15
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`Hayden v. Portola Pharms., Inc.,
` No. 20-CV-00367-VC, 2021 U.S. Dist. LEXIS 150136
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`(N.D. Cal. Aug. 10, 2021) ...................................................................................................... 11
`
`In re Alphabet Sec. Litig.,
`1 F.4th 687 (9th Cir. 2021) .......................................................................................... 6, 10, 15
`
`
`In re Am. Apparel, Inc. S’holder Litig.,
`855 F. Supp. 2d 1043 (C.D. Cal. 2012) ................................................................................... 7
`
`
`In re Amgen Sec. Litig.,
` No. CV 07-2536 (PSG) (PLAx),
`
`2014 U.S. Dist. LEXIS 183034 (C.D. Cal. Aug. 4, 2014) ..................................................... 13
`
`In re Apollo Grp., Inc. Sec. Litig.,
` No. 08-16971, 2010 U.S. App. LEXIS 14478 (9th Cir. June 23, 2010) ................................ 14
`
`In re BioMarin Pharm. Inc. Sec. Litig.,
` No. 3:20-CV-06719-WHO, 2022 U.S. Dist. LEXIS 9445
`
`(N.D. Cal. Jan. 6, 2022) ................................................................................................... 11, 12
`
`In re BofI Holding, Inc. Sec. Litig.,
`977 F.3d 781 (9th Cir. 2020) ................................................................................................. 13
`
`
`In re ChinaCast Educ. Corp. Sec. Litig.,
`809 F.3d 471 (9th Cir. 2015) ................................................................................................... 9
`
`
`In re Facebook Inc. Secs. Litig.,
`477 F. Supp. 3d 980 (N.D. Cal. 2020) ..................................................................................... 6
`
`
`In re Gilead Scis. Sec. Litig.,
`536 F.3d 1049 (9th Cir. 2008) ............................................................................................... 13
`
`
`In re Guilford Mills, Inc. Sec. Litig.,
` No. 98 Civ. 7739(CLB), 1999 U.S. Dist. LEXIS 21690 (S.D.N.Y. July 21, 1999) .............. 12
`
`In re Quality Sys.,
`865 F.3d 1130 (9th Cir. 2017) ........................................................................................ xiii, 10
`
`
`In re Questcor Sec. Litig.,
` No. SA CV 12-01623 DMG, 2013 U.S. Dist. LEXIS 142865
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`(C.D. Cal. Oct. 1, 2013) ................................................................................................... 10, 11
`
`In re SeeBeyond Techs. Corp. Sec. Litig.,
`266 F. Supp. 2d 1150 (C.D. Cal. 2003) ................................................................................. 12
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 5 of 32
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`In re STEC Inc. Sec. Litig.,
` No. SACV 09-1304 JVS (MLGx), 2011 U.S. Dist. LEXIS 75093
`
`(C.D. Cal. June 17, 2011) ................................................................................................. xiii, 9
`
`In re VeriFone Holdings, Inc. Sec. Litig.,
`704 F.3d 694 (9th Cir. 2012) ................................................................................................... x
`
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`In re Zillow Grp., Inc. Sec. Litig.,
` No. C17-1387-JCC, 2019 U.S. Dist. LEXIS 67197 (W.D. Wash. Apr. 19, 2019) ................ 10
`
`Institutional Inv’rs Grp. v. Avaya, Inc.,
`564 F.3d 242 (3d Cir. 2009)...................................................................................... xiii, 10, 11
`
`
`Iowa Pub. Employees’ Ret. Sys. v. MF Glob., Ltd.,
`620 F.3d 137 (2d Cir. 2010).................................................................................................... xi
`
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`Khoja v. Orexigen Therapeutics, Inc.,
`
`899 F.3d 988 (9th Cir. 2018) .................................................................................... xi, 3, 4, 12
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`Livid Holdings Ltd. v. Salomon Smith Barney, Inc.,
`416 F.3d 940 (9th Cir. 2005) .............................................................................................. xi, 7
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`Lloyd v. CVB Fin. Corp.,
`811 F.3d 1200 (9th Cir. 2016) ........................................................................................ xiv, 14
`
`
`Lomingkit v. Apollo Educ. Grp. Inc.,
` No. CV-16-00689-PHX-JAT, 2017 U.S. Dist. LEXIS 22374
`
`(D. Ariz. Feb. 16, 2017) ........................................................................................................... 7
`
`Lorenzo v. SEC.,
`139 S.Ct. 1094 (2019) ............................................................................................................ 15
`
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`Maiman v. Talbott,
` No. SACV 09-0012AG(ANX), 2010 U.S. Dist. LEXIS 142712
`
`(C.D. Cal. Aug. 9, 2010) ........................................................................................................ 12
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`Makor Issues & Rights, Ltd. v. Tellabs Inc.,
`513 F.3d 702 (7th Cir. 2008) ................................................................................................. 11
`
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`Matrixx Initiatives, Inc. v. Siracusano,
`563 U.S. 27 (2011) ................................................................................................................... 3
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`Meyer v. JinkoSolar Holdings Co.,
`761 F.3d 245 (2d Cir. 2014)................................................................................................ xi, 7
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`Miss. Pub. Emples. Ret. Sys. v. Bos. Sci. Corp.,
`523 F.3d 75 (1st Cir. 2008) .................................................................................................... 12
`
`
`Neborsky v. Valley Forge Composite Techs., Inc.,
` No. 13-CV-2307-MMA (BGS), 2014 U.S. Dist. LEXIS 104681
`
`(S.D. Cal. July 29, 2014).................................................................................................... xii, 7
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`No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp.,
`
`320 F.3d 920 (9th Cir. 2003) ................................................................................................. 12
`
`Novak v. Kasaks,
`216 F.3d 300 (2d Cir. 2000)..................................................................................................... 9
`
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`Nursing Home Pension Fund, Local 144 v. Oracle Corp.,
`380 F.3d 1226 (9th Cir. 2004) ............................................................................................... 12
`
`
`Okla. Police Pension Fund & Ret. Sys. v. Teligent, Inc.,
` No. 19-CV-3354 (VM), 2020 U.S. Dist. LEXIS 106589 (S.D.N.Y. June 17, 2020) ........ 9, 10
`
`Okla. Police Pension & Ret. Sys. v. LifeLock, Inc.,
`780 F. App’x 480 (9th Cir. 2019) ............................................................................ xii, 8, 9, 10
`
`
`Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund,
`
`575 U.S. 175 (2015) ................................................................................................................. 7
`
`Owens v. Kaiser Health Foundation Health Plan, Inc.,
`244 F.3d 708 (9th Cir. 2001) ................................................................................................. 15
`
`
`Police Ret. Sys. of St. Louis v. Granite Constr. Inc.,
` No. 3:19-cv-04744-WHA, 2020 U.S. Dist. LEXIS 88788 (N.D. Cal. May 20, 2020) ........ 7, 8
`
`Reese v. Malone,
`747 F.3d 557 (9th Cir. 2014) ............................................................................... x, xi, xiii, 4, 7
`
`
`Reidinger v. Zendesk, Inc.,
` No. 19-cv-06968-CRB, 2021 U.S. Dist. LEXIS 39066 (N.D. Cal. Mar. 2, 2021) ................. xi
`
`S. Ferry LP v. Killinger,
`542 F.3d 776 (9th Cir. 2008) ................................................................................................... 8
`
`
`Shenwick v. Twitter, Inc.,
`282 F. Supp. 3d 1115 (N.D. Cal. 2017) ................................................................................... 4
`
`
`Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
`551 U.S. 308 (2007) ....................................................................................................... 3, 8, 10
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`Veal v. LendingClub Corporation,
`423 F. Supp. 3d 785 (N.D. Cal. 2019) ..................................................................................... 6
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`
`Rules
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`Fed. R. Civ. P. 15 ......................................................................................................................... 15
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`Statutes
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`15 U.S.C. § 78t(a) ........................................................................................................................ 15
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`15 U.S.C. § 78u- 4(b)(1)(B) ........................................................................................................... 3
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`Private Securities Litigation Reform Act .................................................................................. x, xi
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 8 of 32
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`SUMMARY OF ARGUMENT
`Lead Plaintiffs Huei-Ting Kang and Arthur Flores (“Plaintiffs”) adequately plead in their
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`Amended Class Action Complaint (“Complaint”)1 that Defendants2 lied to investors about
`violating numerous federal statutes, regulations and a Consent Order entered in May 2015
`following an investigation into PayPal Credit by the Consumer Financial Protection Bureau
`(“CFPB”) (hereafter the “Consent Order”). The Consent Order required PayPal to ensure that
`neither the Company nor any of the merchants that utilized its products made misrepresentations
`about any promotional offer associated with deferred interest, and prohibited the enrollment of
`customers in PayPal Credit without their consent. ¶¶42, 73. There is no dispute in this case that
`predatory for-profit schools using PayPal Credit misled customers about deferred promotions
`throughout the Class Period. ¶¶76-84. Federal regulations, the Consent Order and the
`Compliance Plan submitted to the CFPB required Defendants to ensure that merchants, such as
`these schools, did not mislead students about deferred interest promotions. ¶¶41-43, 79-81, 155.
`Numerous Confidential Witnesses (“CW[s]”) state that PayPal’s internal policies required it to
`vet merchants, police its promotions, and ensure that merchants provided products and services
`that complied with the Consent Order. ¶¶54-61, 156. Senior Company executives directly told
`investors that the Company assumed the responsibility to ensure that merchants complied with
`the law. ¶161.
`Throughout the Class Period, Defendants failed to disclose the misleading deferred
`interest promotions, some of which were disseminated for five years, ¶¶68-70, and PayPal’s
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`1 References to “¶__” are to the Complaint. Internal quotation marks and citations are omitted
`throughout this Opposition and emphases are added unless otherwise noted.
`
` Defendants are PayPal Holdings, Inc. (“PayPal” or the “Company”), its Chief Executive Officer
`(“CEO”) Daniel H. Schulman (“Schulman”), Chief Financial Officer (“CFO”) John Rainey
`(“Rainey”), head of Global Credit Doug Bland (“Bland”), and Director of Communications
`Joseph Gallo (“Gallo”). Schulman, Rainey, Bland, and Gallo are the “Individual Defendants.”
`Plaintiffs cite to Defendants’ Supporting Memorandum of Points and Authorities in support of
`their Motion to Dismiss as “Defs.’ Br. __” and refer to it as “the Motion.”
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 9 of 32
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`resulting noncompliance with the Consent Order and multiple federal statutes and regulations.
`Nor did Defendants disclose that the Company continued to enroll customers in PayPal Credit
`without their consent more than a year after the Consent Order was entered, as a CW with personal
`knowledge confirms. ¶¶73-74. Instead, Defendants explicitly linked the Company’s improved
`compliance with an increase in customer satisfaction, ¶105, claimed to “work to ensure
`compliance with the Consent Order,” ¶¶109, 114, 117, 119, 122-24, 127-31, 135, and 140, and
`repeatedly touted that PayPal’s “world class” compliance regime was superior to competitors and
`perfectly aligned with the interests of regulators. ¶¶115, 120, 125, 133, 142. On July 17, 2020,
`the Student Borrower Protection Center (“SBPC”) released a report and on August 21, 2020 sent
`letters to Schulman and the CFPB that put Defendants on notice of more than one hundred
`misleading promotions related to deferred interest. ¶62 (“SBPC Report” and “SBPC Letters,”
`respectively). In response, Defendants launched a targeted media campaign to misleadingly
`distance the Company from these misleading promotions. The Company’s spokesman,
`Defendant Gallo, continued to misrepresent that PayPal “adheres to all state and federal
`regulations to ensure clear, easy to understand information about products.” ¶136. Defendant
`Bland, the head of Global Credit, made a similar misrepresentation after the SBPC Report and
`Letters were released. ¶144.
`Throughout the Class Period, PayPal also engaged in a shadow banking scheme to reap
`fees in excess of the Federal Reserve’s regulations by using a small financial institution, The
`Bancorp, Inc. (“Bancorp”), as a conduit to claim an exemption. On its face, the regulation does
`not allow an entity that holds most of the customers’ funds to claim the exemption, as PayPal’s
`debit card user agreements admit, and to the extent that any small amount was held at Bancorp to
`maintain the façade, Defendants are still not entitled to the excessive fees. ¶¶96-101. Despite
`these obvious violations of federal law, PayPal told investors that any reduction in revenues from
`such fees in the United States or regulatory challenges to the fees collected were merely remote
`possibilities. ¶¶111, 114, 117, 124, 127, 131, 141.
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`For the reasons fully explained in Plaintiffs’ brief and the reasons identified herewith, the
`Complaint exceeds the pleading standards of the Private Securities Litigation Reform Act
`(“PSLRA”), and Defendants’ Motion is without merit.
`Falsity: In Reese v. Malone, the Ninth Circuit held that statements of legal compliance
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`are actionable if a plaintiff describes specific violations of law that existed at the time the
`statements were made. 747 F.3d 557, 570 (9th Cir. 2014), overruled on other grounds by City of
`Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 616 (9th
`Cir. 2017). In particular, the Circuit considered violations of a Corrective Action Order issued
`by a federal agency before any charges were brought to sustain the complaint’s falsity and scienter
`allegations. Id. at 578-79. Other courts in the District have repeatedly sustained securities fraud
`claims predicated on illegal conduct regardless of whether the defendant was subject to any
`regulatory investigations, enforcement actions or criminal charges. See, e.g., Ferraro Family
`Found., Inc. v. Corcept Therapeutics Inc., No. 19-CV-01372-LHK, 2021 U.S. Dist. LEXIS
`160215, at *60-63 (N.D. Cal. Aug. 24, 2021); Bos. Ret. Sys. v. Uber Techs., Inc., No. 19-cv-
`06361-RS, 2020 U.S. Dist. LEXIS 141724, at *22-25 (N.D. Cal. Aug. 7, 2020).
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`The Court should reject Defendants’ attempt to pluck certain words and phrases from their
`statements to investors to minimize their misleading impact. Compare Defs.’ Br. at v-vi with In
`re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 710 (9th Cir. 2012) (reversing dismissal and
`warning against crediting “selective quotation and mischaracterization” by a defendant).
`Defendants disregard that Schulman explicitly linked improved compliance with customer
`satisfaction, ¶105, the Company repeatedly and specifically misled investors about compliance
`with the Consent Order, ¶¶109, 114, 117, 119, 122-24, 127-31, 135, and 140, and Gallo continued
`to affirmatively misrepresent that the Company followed all laws to ensure transparency even
`after the SBPC Letters were released, ¶136. These misrepresentations cannot be mischaracterized
`as puffery, and even Defendants’ loosely optimistic statements have been upheld as actionable by
`the Ninth Circuit. Compare ¶142 (touting “world class” compliance) with Reese, 747 F.3d at 577
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 11 of 32
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`(holding that misrepresentations about a “world class” monitoring program were actionable).
`Even assuming that any part of Defendants’ statements constituted an opinion, Defendants remain
`liable because they failed to disclose information that undermined their statements. Compare
`Defs.’ Br. at vi (misstating that subjective falsity is required) with Align Tech, 856 F.3d at 616
`(holding that subjective falsity is not required to be liable for an opinion statement, and the
`omission of facts that undermine a statement is actionable).
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`The Court should also reject Defendants’ attempt to disclaim liability based on boilerplate
`warnings about unidentified regulatory investigations and remote possibilities of noncompliance
`in the abstract. Defendants do not invoke the PSLRA’s safe harbor, and such vague language
`cannot immunize their fraud. See Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d
`940, 947-48 (9th Cir. 2005) (holding that the bespeaks caution doctrine only applies to forward-
`looking statements); Iowa Pub. Employees’ Ret. Sys. v. MF Glob., Ltd., 620 F.3d 137, 142 (2d
`Cir. 2010) (holding that a defendant cannot hide behind purported disclosures when
`misrepresentations of current fact or omissions of existing fact are alleged). Defendants’ reliance
`on the Court’s decision in Reidinger v. Zendesk, Inc., No. 19-cv-06968-CRB, 2021 U.S. Dist.
`LEXIS 39066, at *9 (N.D. Cal. Mar. 2, 2021) is misplaced. The challenged statements there were
`all forward-looking. Id. That Defendants did not guarantee compliance is also beside the point.
`See Meyer v. JinkoSolar Holdings Co., 761 F.3d 245, 251 (2d Cir. 2014) (reversing dismissal
`when the district court accepted the same mischaracterization of the complaint, and holding that
`warning investors that there was no guarantee of compliance does not allow a defendant to
`conceal existing violations of the law).
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`With respect to the interchange fees, Defendants’ claim that their statements “only
`describe the regulations” is false. Defs.’ Br. at vi. Defendants told investors that regulatory
`challenges could reduce the fees collected in the United States and described the possibility of
`such challenges as remote. ¶¶111, 114, 117, 124, 127, 131, 141. But see Khoja v. Orexigen
`Therapeutics, Inc., 899 F.3d 988, 1010 (9th Cir. 2018) (telling investors that data “might change”
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 12 of 32
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`is misleading when the defendant knows or recklessly disregards that the data was “likely to
`change”). By speaking on these topics, Defendants affirmatively created a duty to disclose that
`the shadow banking scheme violated federal regulations. See Neborsky v. Valley Forge
`Composite Techs., Inc., No. 13-CV-2307-MMA (BGS), 2014 U.S. Dist. LEXIS 104681, at *16-
`18 (S.D. Cal. July 29, 2014) (positive statements about the source of revenue imposed a duty to
`disclose illegal exportation scheme).
`Ignoring Gallo’s affirmative misrepresentation that the Company continued to comply
`with all laws, Defendants contend that they should be excused because some of the misleading
`promotions were taken down after the SBPC Letters were released. Defs.’ Br. at vii. This misses
`the point. Numerous misleading promotions were disseminated for years during the Class Period,
`and the failure to remove, at least, 8, not 4, misleading promotions as of the date the Complaint
`was filed despite being told where to find them and falsely assuring investors that they would be
`removed, exposes the falsity of Defendants’ statements regarding PayPal’s “world class”
`compliance regime. ¶88.
`Scienter: The Motion fails to address straightforward facts that support a strong inference
`of scienter at this stage. The Consent Order required Defendants to prepare a Compliance Plan
`to prevent misleading promotions, arm themselves with specific knowledge to report on the status
`of compliance to the Board of Directors, and take immediate, corrective steps to prevent the
`Company from failing to comply with the law. ¶¶154-57. Defendants’ attempt to now disclaim
`knowledge of the violations in their papers strongly suggests that they lied to both investors and
`the CFPB and submitted a deficient Compliance Plan, which constitute independent breaches of
`the Consent Order rendering the Class Period statements misleading when made. ¶157. Either
`way, liability must attach. The critical importance of the products and services involved, and
`false assurances to remove the misleading promotions bolster an inference of fraud. In Oklahoma
`Police Pension & Ret. Sys. v. LifeLock, Inc., 780 F. App’x 480, 484-85 (9th Cir. 2019), the Ninth
`Circuit reversed dismissal where the district court disregarded similar facts. Defendants also
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 13 of 32
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`ignore that Schulman was informed about the problem by the SBPC no later than August 2020,
`that the Company sent representatives to meet with the SBPC, and dispatched Gallo to engage in
`a misleading media campaign. See In re STEC Inc. Sec. Litig., No. SACV 09-1304 JVS (MLGx),
`2011 U.S. Dist. LEXIS 75093, at *31-33 (C.D. Cal. June 17, 2011) (inferring scienter from letters
`exchanged with the SEC that put defendants on notice that their representations were false).
`Defendants also ignore that Gallo’s false assurances and the representations of other executives
`that PayPal ensured merchants’ compliance with the law enhances an inference of scienter. See
`Reese, 747 F.3d at 572 (holding that defendant “addressed corrosion rate data specifically,
`rendering it unlikely that she was not aware of it or the concerning aspects of the company’s
`findings”).
`A true holistic analysis cannot ignore the massive windfall Defendants earned through
`disproportionate insider sales during the Class Period. ¶¶166-68. Defendants disregard that the
`Court does not entertain affirmative defenses based on trading plans at the pleadings stage, and
`the Company’s decision to buy back stock does not undermine the Individual Defendants’
`personal motive to reap benefits from the fraud. See Evanston Police Pension Fund v. McKesson
`Corp., 411 F. Supp. 3d 580, 605 n.3 (N.D. Cal. 2019).
`Contrary to Defendants’ demands, Plaintiffs are not required to plead any internal reports
`or details about meetings where admissions of guilt were heard, and the CWs are not required to
`talk to or hear from any Defendant to be credited. Compare Defs.’ Br. at vii with Institutional
`Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 268-69 (3d Cir. 2009) (emphasizing that the law does
`not require a plaintiff to produce documents or rely on witnesses to plead scienter), and In re
`Quality Sys., 865 F.3d 1130, 1138-39 (9th Cir. 2017) (crediting numerous accounts from lower-
`level employees who had no interaction with the defendants).
`Loss Causation: Defendants’ arguments concerning this element cannot be taken
`seriously at this stage. Defendants disregard both Ninth Circuit precedent and the Court’s prior
`decisions. The Complaint adequately pleads loss causation pursuant to the Court’s decision in
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 76 Filed 06/02/22 Page 14 of 32
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`McKesson, 411 F. Supp. 3d at 604 and the Ninth Circuit’s holding in Lloyd v. CVB Financial
`Corp., 811 F.3d 1200, 1210-11 (9th Cir. 2016). The SBPC Letters’ release was followed by a
`less than 1% decline in the Company’s stock price because of Defendants’ continued
`misrepresentations. ¶148. This minimal decline was followed by a multi-day decline of over
`10% in the Company’s stock price immediately upon the announcement of the CFPB and SEC
`investigations. ¶¶151-53. These facts are sufficient to plead loss causation pursuant to Lloyd and
`McKesson. Defendants’ factual contentions concerning when the Clearing House Association’s
`(“CHA”) letter became public are both beyond the pleadings and incorrect. The CHA’s website
`states that the comment was submitted on October 26, 2020. See Declaration of Brian P.
`O’Connell in Support of Plaintiffs’ Response to Defendants’ Request for Judicial Notice, Ex. A.
`(“