PayPal Hit with Shareholder Derivative Complaint After Disclosing Federal Investigations

A shareholder sued PayPal after it disclosed federal investigations, citing the decline in stock value after the disclosure. 

Specifically, the case concerns a sudden loss in stock value that the shareholder attributes to company executives’ alleged concealment of an Consumer Financial Protection Bureau (CFPB) investigation, the second one since 2011, and an Securities and Exchange Commission probe. The shareholder names PayPal Holdings Inc. as a nominal defendant and the company’s board of directors as well as a number of officers as defendants in the derivative suit.

Thursday’s Northern District of California complaint avers that PayPal offers a variety of payment solutions, including consumer credit services through its PayPal Credit, as well as debit card services. In 2015, according to the complaint, PayPal entered into a final judgment with the CFPB over regulatory claims arising from PayPal Credit practices between 2011 and 2015. In addition to paying $15 million in redress to consumers and a $10 million civil monetary penalty, the company had to alter various PayPal Credit business practices.

The complaint states that after PayPal entered into the consent order, individual defendants made misleading representations about the company’s business, operations, and outlook. In particular, the individuals repeatedly touted PayPal’s compliance with the order in SEC filings. 

However, the defendants purportedly failed to mention additional compliance issues with PayPal Credit that led to an investigation by the CFPB and compliance issues with a Federal Reserve rule governing debit card interchange fees that led to a second one by the SEC. The complaint claims that the individual defendants’ public deception artificially buoyed the stock price. In addition, it says that three defendants “benefitted from lucrative insider sales at artificially inflated prices for proceeds of approximately $6.25 million.”

On July 29, 2021, the shareholder claims that the truth came to light with the company’s filing of its quarterly SEC Form 10-Q, disclosing that it was subject to investigations by federal authorities. The filing specified that PayPal received a civil investigative demand (CID) from the CFPB in connection with the marketing and use of PayPal Credit with certain educational services merchants. PayPal also said that it responded to subpoenas from the SEC over compliance concerns with the Federal Reserve rule.

The shareholder alleges that in response, the company’s share price tumbled by $18.81 per share from its closing price of $301.98 on July 28, 2021, to close at $283.17 the following day, representing a decline of approximately 6.23% .

The complaint states seven claims for relief: negligence, breach of fiduciary duty, unjust enrichment, gross mismanagement, abuse of control, and contribution. 

The plaintiff seeks damages as well as a variety of corporate reforms, including allowing PayPal shareholders to nominate at least six candidates for election to the board of directors.

The shareholder and putative class are represented by The Brown Law Firm P.C.