Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 1 of 30
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`LABATON SUCHAROW LLP
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`Michael P. Canty
`140 Broadway
`New York, NY 10005
`Telephone: (212) 907-0700
`Facsimile: (212) 883-7544
`mcanty@labaton.com
`
`Lead Counsel for Lead Plaintiffs
`
`[Additional counsel on signature page]
`
`
`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
`SAN FRANCISCO DIVISION
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
`
`
`HUEI-TING KANG and
`ARTHUR FLORES,
`
`
`
`PAYPAL HOLDINGS, INC., et al.,
`
`
`Plaintiffs,
`
`v.
`
` Defendants.
`
`CASE NO.: 3:21-cv-06468-CRB
`
`LEAD PLAINTIFFS’
`MEMORANDUM OF LAW IN
`OPPOSITION TO DEFENDANTS’
`MOTION TO DISMISS THE
`SECOND AMENDED COMPLAINT
`
`The Hon. Charles R. Breyer
`
`Date: January 27, 2023
`Time: 10:00 a.m.
`Place: Courtroom 6 – 17th Floor
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 2 of 30
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`Page
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`TABLE OF AUTHORITIES .................................................................................................... ii
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`TABLE OF CONTENTS
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`SUMMARY OF ARGUMENT ................................................................................................vi
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`I.
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`INTRODUCTION ............................................................................................................ 1
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`II. BACKGROUND .............................................................................................................. 1
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`A. Facts and Allegations ............................................................................................... 1
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`B. The Court’s August 8, 2022 Order ............................................................................ 3
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`III. RELEVANT LEGAL STANDARDS ............................................................................... 4
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`IV. ARGUMENT ................................................................................................................... 4
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`A. Defendants’ Misrepresentations Are Actionable. ...................................................... 4
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`B. The Complaint Raises a Strong Inference of Scienter. .............................................. 9
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`C. The Complaint Adequately Alleges Loss Causation ............................................... 14
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`D. Scheme Liability and Control Person Claims .......................................................... 15
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`V. CONCLUSION .............................................................................................................. 15
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 3 of 30
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`TABLE OF AUTHORITIES
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`Page(s)
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`Cases
`
`Allegheny Cnty. Employees’ Ret. Sys. v. Energy Transfer LP,
`532 F. Supp. 3d 189 (E.D. Pa. 2021) .................................................................................. 13
`
`In re Alphabet, Inc. Sec. Litig.,
`1 F.4th 687 (9th Cir. 2021) ................................................................................................. 11
`
`In re Amgen Inc. Sec. Litig.,
`No. CV072536PSGPLAX, 2014 WL 12585809 (C.D. Cal. Aug. 4, 2014)............................ x
`
`Ap-Fonden v. Goldman Sachs Grp., Inc.,
`No. 18-CV-12084 (VSB), 545 F. Supp. 3d 120 (S.D.N.Y. 2021).......................................... x
`
`In re Apple Inc. Sec. Litig.,
`No. 19-cv-02033-YGR, 2020 WL 6482014
`(N.D. Cal. Nov. 4, 2020) .................................................................................................... 14
`
`Avila v. LifeLock Inc.,
`No. CV-15-01398-PHX-SRB, 2017 WL 3669615 (D. Ariz. Aug. 21, 2017) ....................... 10
`
`Azar v. Yelp, Inc.,
`No. 18-CV-00400-EMC, 2018 WL 6182756 (N.D. Cal. Nov. 27, 2018) ............................ 12
`
`Berson v. Applied Signal Tech., Inc.,
`527 F.3d 982 (9th Cir. 2008) .............................................................................................. 13
`
`Bos. Ret. Sys. v. Uber Techs., Inc.,
`No. 19-CV-06361-RS, 2020 WL 4569846 (N.D. Cal. Aug. 7, 2020) .................................... 5
`
`Cal. Pub. Ret. Sys. v. ANZ Sec., Inc.,
`137 S. Ct. 2042 (2017) ....................................................................................................... 15
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`China Agritech, Inc. v. Resh,
`138 S. Ct. 1800 (2018) ....................................................................................................... 15
`
`In re ChinaCast Educ. Corp. Sec. Litig.,
`809 F.3d 471 (9th Cir. 2015) ............................................................................................... xi
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`Evanston Police Pension Fund v. McKesson Corp.,
`411 F. Supp. 3d 580 (N.D. Cal. 2019) .................................................................................. 7
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`ii
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 4 of 30
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`
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`In re Facebook Inc. Secs. Litig.,
`477 F. Supp. 3d 980 (N.D. Cal. 2020) .................................................................................. 9
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`Fecht v. Price Co.,
`70 F.3d 1078 (9th Cir. 1995) ................................................................................................ 7
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`Ferraro Fam. Found., Inc. v. Corcept Therapeutics Inc.,
`No. 19-CV-01372-LHK, 2021 WL 3748325 (N.D. Cal. Aug. 24, 2021) ............................... 5
`
`Howard v. Everex Sys., Inc.,
`228 F.3d 1057 (9th Cir. 2000) ............................................................................................. xi
`
`Institutional Inv’rs Grp. v. Avaya, Inc.,
`564 F.3d 242 (3d Cir. 2009) ......................................................................................... 11, 13
`
`Khoja v. Orexigen Therapeutics, Inc.,
`899 F.3d 988 (9th Cir. 2018) ............................................................................................ 5, 9
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`Makor Issues & Rights, Ltd. v. Tellabs Inc.,
`513 F.3d 702 (7th Cir. 2008) .............................................................................................. 13
`
`In re McKesson HBOC, Inc. Sec. Litig.,
`126 F. Supp. 2d 1248 (N.D. Cal. 2000) ................................................................................ 4
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`Meyer v. JinkoSolar Holdings Co.,
`761 F.3d 245 (2d Cir. 2014) ............................................................................................ ix, 8
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`Mineworkers’ Pension Scheme v. First Solar Inc.,
`881 F.3d 750 (9th Cir. 2018) .............................................................................................. 15
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`N.M. State Inv. Council v. Ernst & Young LLP,
`641 F.3d 1089 (9th Cir. 2011) ............................................................................................. xi
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`Nursing Home Pension Fund, Local 144 v. Oracle Corp.,
`380 F.3d 1226 (9th Cir. 2004) ............................................................................................ 14
`
`Oklahoma Police Pension Fund & Ret. Sys. v. Teligent, Inc.,
`No. 19 CIV. 3354 (VM), 2020 WL 3268531 (S.D.N.Y. June 17, 2020).............................. 11
`
`Oklahoma Police Pension & Retirement System v. LifeLock,
`780 F. App’x 480 (9th Cir. 2019) ........................................................................... 10, 11, 13
`
`In re Oracle Corp. Sec. Litig.,
`627 F.3d 376 (9th Cir. 2010) ................................................................................................ 9
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`In re Quality Sys., Inc. Sec. Litig.,
`865 F.3d 1130 (9th Cir. 2017) ............................................................................................ 10
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`iii
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 5 of 30
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`In re Questcor Sec. Litig.,
`No. SA CV 12-01623 DMG, 2013 WL 5486762 (C.D. Cal. Oct. 1, 2013) .......................... 13
`
`Reese v. Malone,
`747 F.3d 557 (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 (9th Cir. 2017) ................................................................... viii, ix, xi, 5, 9
`
`Reidinger v. Zendesk, Inc.,
`No. 19-cv-06968-CRB, 2021 WL 796261 (N.D. Cal. Mar. 2, 2021) ..................................... 8
`
`Retail Wholesale & Department Store Union Local 338 Retirement Fund v.
`Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017) ........................................................... 7
`
`S. Ferry LP v. Killinger,
`542 F.3d 776 (9th Cir. 2008) ............................................................................................ x, 9
`
`In re Silicon Graphics Sec. Litig.,
`183 F.3d 970 (9th Cir. 1999) .............................................................................................. 14
`
`Smilovits v. First Solar, Inc.,
`No. CV-12-00555-PHX-DGC, 2012 WL 6574410
`(D. Ariz. Dec. 17, 2012)....................................................................................................... 6
`
`In re STEC Inc. Sec. Litig.,
`No. CV09-08536-JVS MLGX, 2011 WL 2669217 (C.D. Cal. June 17, 2011) ................ x, 11
`
`Steginsky v. Xcelera Inc.,
`741 F.3d 365 (2d Cir. 2014) ............................................................................................... 14
`
`Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
`551 U.S. 308 (2007) ............................................................................................................. 4
`
`In re Zillow Grp., Inc. Sec. Litig.,
`No. C17-1387-JCC, 2019 WL 1755293 (W.D. Wash. Apr. 19, 2019) ................................ 12
`
`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) ........................................................................................................ 5
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`Rules
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`Fed. R. Civ. P. 8 ...................................................................................................................... xii
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`Fed. R. Civ. P. 9(b) .................................................................................................................... 4
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`iv
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 6 of 30
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`Rule 10b-5, 17 C.F.R. § 240.10b-5......................................................................................... 15
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 7 of 30
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`SUMMARY OF ARGUMENT
`Lead Plaintiffs Huei-Ting Kang and Arthur Flores (“Plaintiffs”) adequately plead in their
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`Second Amended Class Action Complaint (“Complaint”)1 that Defendants2 deceived investors
`regarding PayPal’s compliance with numerous federal statutes, regulations and a Consent Order
`entered in May 2015, resulting in an investigation into PayPal Credit by the Consumer Financial
`Protection Bureau (“CFPB”) (hereafter the “Consent Order,” ECF No. 71-10). 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. ¶¶46, 80. There
`is no dispute in this case that predatory for-profit schools using PayPal Credit misled customers
`about deferred promotions throughout the Class Period. ¶¶88-96. 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.
`¶¶45-47, 91-93, 167. 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. ¶¶58-65, 168. Senior Company
`executives directly told investors that the Company assumed the responsibility to ensure that
`merchants complied with the law. ¶175. Given these avenues of exposure to the misleading
`promotions and the assumption of responsibility to monitor the merchants, Defendants either
`knew about the misleading promotions or recklessly disregarded them.
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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.
`2 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 the Second Amended Complaint as “Defs.’ Br. __” and refer to it as “the
`Motion.”
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 8 of 30
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`Throughout the Class Period, Defendants failed to disclose the misleading deferred
`interest promotions, some of which were disseminated for five years, ¶¶75-77, and PayPal’s
`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 for several years after the Consent Order was entered, as multiple CWs with
`personal knowledge and documentary proof from the CFPB now confirms. ¶¶80-87. Instead,
`Defendants explicitly linked the Company’s improved compliance with an increase in customer
`satisfaction, ¶117, claimed to “work to ensure compliance with the Consent Order,” ¶¶121, 126,
`129, 131, 134-36, 139-43, 147, and 152, and repeatedly touted that PayPal’s “world class”
`compliance regime was superior to competitors and perfectly aligned with the interests of
`regulators. ¶¶127, 132, 137, 145, 154. 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. ¶¶69-74 (“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.” ¶148. Defendant Bland, the head of Global Credit, made a similar misrepresentation
`after the SBPC Report and Letters were released. ¶156.
`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 Bank (“Bancorp”), as a conduit to claim an exemption. On its face, the regulation does
`not allow an entity that holds 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. ¶¶108-13. Despite these obvious
`violations of federal law, PayPal told investors that any reduction in revenues from such fees in
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 9 of 30
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`the United States or regulatory challenges to the fees collected were merely remote possibilities
`as opposed to likely ones given the plain language of the regulation itself. ¶¶123, 126, 129, 136,
`139, 143, 153.
`The Court’s August 8, 2022 Order: On August 8, 2022, the Court issued an order
`granting Defendants’ Motion to Dismiss the First Amended Complaint. ECF No. 80 (“Order”).
`In doing so, the Court held that Plaintiffs failed to plead falsity, scienter, and loss causation.
`However, the Court’s holding with respect to loss causation was limited and did not rule on the
`merits of the Parties’ arguments. As explained in Sections II & IV infra, Plaintiffs respectfully
`submit that the Court misunderstood Plaintiffs’ allegations and, as a result, misapplied applicable
`law.
`
`For the reasons fully explained in Plaintiffs’ brief and the reasons identified herewith, the
`Complaint meets the pleading standards of the Private Securities Litigation Reform Act
`(“PSLRA”), and Defendants’ Motion is without merit.
`Falsity: The Ninth Circuit’s decision in Reese v. Malone supports Plaintiffs’ contention
`
`that the facts and allegations contained within the Complaint are sufficient for falsity. The Ninth
`Circuit there did not require that “systemic” violations be pled or that regulatory charges be
`brought before a plaintiff can seek recovery in a civil case. 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). This Court found Reese distinguishable because
`the “systemic noncompliance was later confirmed by the company’s guilty plea, consent decree,
`and millions of dollars in fines and penalties under three sets of laws.” Order at 18 n.2 (internal
`citations omitted). Plaintiffs respectfully submit that there is no categorical rule that requires fines,
`penalties, or adjudicatory action for securities fraud claims. Moreover, the Ninth Circuit has never
`held that “systemic” violations are required for a statement to be materially misleading, and such
`a rule would only create a license to escape liability for infrequent yet serious violations of the
`law. Regardless, even assuming this is required, the Complaint pleads “widespread” violations
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 10 of 30
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`(Order at 18 n.2) given that PayPal enrolled customers without their consent for years after the
`Consent Order was entered, and failed to remove all misleading deferred interest promotions
`throughout the Class Period.
`
`Defendants still disregard that Defendant Schulman put the issue at play when he
`explicitly linked improved compliance with customer satisfaction, ¶117, and Defendant Gallo
`continued to affirmatively misrepresent that the Company followed all laws to ensure
`transparency even after the SBPC Letters put Defendants on notice of the violations (¶148). The
`Order did not rule on the actionability of these statements, and the Ninth Circuit has held that
`such statements are not puffery. Compare ¶154 (touting “world class” compliance) with Reese,
`747 F.3d at 577 (holding that misrepresentations about a “world class” monitoring program were
`actionable). That Defendants did not guarantee compliance is irrelevant. See Meyer v. JinkoSolar
`Holdings Co., 761 F.3d 245, 251 (2d Cir. 2014) (reversing dismissal where 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). This strawman does not excuse concealing existing violations of the law or explain
`why Defendants misled investors about a “world class” compliance regime that failed to remove
`misleading promotions even after a third-party spoon-fed Defendants with specific information
`about where to find the misleading promotions.
`
`With respect to the interchange fees, Defendants cannot explain why the plain language
`of Regulation II should be ignored, as the exemption does not apply where, as here, PayPal admits
`to holding its customer’s funds and still operates decoupled debit card arrangements. ¶¶123, 126,
`129, 136, 139, 143, 153. Defendants’ self-serving opinions about Regulation II or even the
`opinions of a third party are not sufficient to disclaim responsibility for the violations when no
`meaningful attempt has been made to refute either that PayPal retains the customer’s funds or
`operates non-exempt decoupled debit cards, both of which take its actions outside the exemption’s
`scope.
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`ix
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 11 of 30
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`The Motion’s new evidentiary attacks dressed up as pleading defects are easily dispatched
`when the applicable pleading standards are fairly applied. Pointing to the absence of certain
`allegations and attempts to punch holes in the Complaint’s theories are not sufficient to win
`dismissal. See, e.g., Ap-Fonden v. Goldman Sachs Grp., Inc., 545 F. Supp. 3d 120, 141 (S.D.N.Y.
`2021) (rejecting similar tactics and emphasizing that the PSLRA and Rule 9(b) do not require
`plaintiffs to plead details such as dates, times and places, so long as the complaint gives fair notice
`of the claims and grounds upon which they are based); In re Amgen Inc. Sec. Litig., 2014 WL
`12585809, at *10–11 (C.D. Cal. Aug. 4, 2014) (observing that the absence of certain allegations
`is not sufficient to win dismissal). While the Motion is filled with cries of “vagueness,” the Ninth
`Circuit has held that alleged vagueness is not sufficient to dismiss a complaint if sufficient detail
`is provided to plead a securities fraud claim. See S. Ferry LP v. Killinger, 542 F.3d 776, 784 (9th
`Cir. 2008) (noting that the Supreme Court now requires courts to consider even vague and
`ambiguous allegations as part of a proper holistic review even though Circuit precedent
`previously did not).
`Scienter: The Motion still 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. ¶¶166-71. Defendants again do not
`address why this is insufficient to plead scienter, and the Order did not address these allegations.
`Defendants also 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.,
`2011 WL 2669217, at *11-12 (C.D. Cal. June 17, 2011) (inferring scienter from letters exchanged
`with the SEC that put defendants on notice that their representations were false). This is sufficient
`to demonstrate Schulman’s personal knowledge, yet he kept making misleading statements after
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 12 of 30
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`these events. 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”).
`This Court previously found that the First Amended Complaint failed to plead facts
`sufficient to support a strong inference of scienter because Plaintiffs were unable to point to any
`“statement or conduct by an Individual Defendant that indicate[d] knowledge about any
`regulatory violation.” Order at 20. However, Plaintiffs are not required to plead this smoking
`gun, and the Complaint adequately alleges numerous facts to support that Defendants knew
`enough facts to be put on notice of the regulatory violations, which rendered their statements at
`least reckless. The gravamen of the Complaint rests on awareness of facts that rendered
`Defendants’ statements to investors misleading, not direct admissions of guilt or subjective
`knowledge of illegality. The former is sufficient to plead claims, and the latter attacks a
`strawman. See, e.g., In re ChinaCast Educ. Corp. Sec. Litig., 809 F.3d 471, 478-79 (9th Cir. 2015)
`(reversing dismissal because defendants “turned a blind eye” and “failed to take significant action
`or heighten oversight.”); N.M. State Inv. Council v. Ernst & Young LLP, 641 F.3d 1089, 1100 (9th
`Cir. 2011) (holding that “overlook[ing] significant events without further questioning or
`investigation” is sufficient to be liable for securities fraud); Howard v. Everex Sys., Inc., 228 F.3d
`1057, 1063-64 (9th Cir. 2000) (holding that a failure to obtain and disclose facts that can be
`discovered without extraordinary effort is reckless).
`Nevertheless, Plaintiffs have now also bolstered their scienter allegations by adding
`additional facts and allegations to the Complaint. For example, the Complaint contains statements
`from CW17, an employee in the Risk Management Organization at PayPal, who explained that
`Defendants Rainey and Schulman received weekly or biweekly updates pertaining to regulatory
`matters impacting PayPal and the company’s remediation and progress related to the 2015
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 13 of 30
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`Consent Order with the CFPB. In addition, CW17 stated, inter alia, that “Every response, every
`regulatory matter, John and Dan are required to know. That’s just part of the process.” ¶169.
`These statements are corroborated by CW18, who suggested that PayPal’s CEO and CFO were
`most likely made aware about the complaints, especially any that potentially implicated the
`Consent Order. ¶170.
`Loss Causation: Defendants incorporate and repeat the same arguments made in their
`motion to dismiss the First Amended Complaint concerning this element. Their arguments are
`wrong for the same reasons identified in Plaintiffs’ earlier opposition.
`Defendants’ new argument that the Complaint fails to plead a corrective disclosure for the
`allegations that PayPal enrolled customers in PayPal Credit without their consent is without merit.
`This kind of specific disclosure cannot be required where even the revelation of fraud is not
`required to plead loss causation in this Circuit. In any event, the Complaint sufficiently alleges
`that news regarding the CFPB’s and SEC’s probes into the Company “alerted investors to the
`materialization of serious regulatory scrutiny, including the fact that the CFPB would discover
`violations of the 2015 Consent Order. . . .” ¶165. That is more than sufficient to plead claims
`under Rule 8.
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 14 of 30
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`I.
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`Lead Plaintiffs hereby oppose Defendants’ Motion to Dismiss the Complaint and state:
`INTRODUCTION
`During the Class Period, Defendants materially misled investors about compliance with
`the law, including the Consent Order, and the issuance of debit cards in violation of “Regulation
`II,” which caps the amount of interchange fees that a financial entity can earn from debit card
`transactions. While Defendants repeatedly made misleading statements about compliance (¶¶117-
`59), Defendants were violating the Consent Order, enrolling customers in PayPal Credit without
`their knowledge or consent, misrepresenting the terms and conditions of deferred interest
`promotions, and enabling merchants who offered PayPal Credit to mislead customers. ¶¶8-9, 81-
`87. Defendants also violated Regulation II by using a smaller bank, Bancorp, as a conduit to evade
`the regulatory cap on interchange fees. ¶¶108-13. The Complaint sufficiently pleads that
`Defendants materially misled investors, raises a strong inference of scienter, and alleges loss
`causation. As such, Defendants’ motion to dismiss should be denied in full.
`BACKGROUND
`II.
`A. Facts and Allegations
`PayPal is a digital payments company that enables consumers and merchants to send and
`receive payments. ¶38. Two of its seven core products are PayPal Credit and Venmo. ¶39. PayPal
`Credit is a consumer credit program that gives the account holder the ability to pay for purchases
`over time. Id. Venmo is a payments service that enables consumers to make and share payments.
`¶41. In 2018, Venmo released a physical debit card. Id. Venmo is the fastest growing of PayPal’s
`core products, and generated nearly $1 billion in revenue in 2021, of which nearly 30% was
`derived from interchange fees from the Venmo debit card. Id.
`On May 19, 2015, the CFPB filed a complaint and the Consent Order was entered against
`PayPal for a litany of violations of the Consumer Financial Protection Act. According to the
`CFPB, PayPal deceptively advertised promotional benefits, misled customers about deferred
`interest, enrolled customers in PayPal Credit without their consent, engaged in illegal billing
`practices, and mishandled customer disputes. ¶42. The Consent Order enjoined and restrained
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`LEAD PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
`THE SECOND AMENDED COMPLAINT
`CASE NO. 3:21-CV-06468-CRB
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`Case 3:21-cv-06468-CRB Document 88 Filed 12/15/22 Page 15 of 30
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`Defendants from misrepresenting the terms and conditions of any deferred interest promotion and
`required them to ensure that all merchants offering PayPal Credit honored the promotion exactly
`as advertised even if that is not what was intended. ¶¶7, 12, 77. The Consent Orde