PayPal touted growth in net new active accounts without disclosing that much of its subscriber growth came from incentive marketing campaigns that were susceptible to the generation of fraudulent accounts.
An institutional investor, Defined Benefit Plan of the Mid-Jersey Trucking Industry and Teamsters Local 701 Pension and Annuity Fund, has filed a class action lawsuit today against digital payment firm PayPal Holdings, Inc. (“PayPal” or the “Company”) (NASDAQ: PYPL), alleging it defrauded investors by issuing false and misleading statements concerning the source and sustainability of its net new active accounts (“NNAs”), a key metric investors evaluated in deciding whether to invest in PayPal.
The suit, brought in federal court in the United States District Court for the District of New Jersey, was filed jointly by leading investor law firm Grant & Eisenhofer.
The action is brought on behalf of all persons or entities who purchased or otherwise acquired PayPal common stock between February 3, 2021 and February 1, 2022, inclusive (the “Class Period”). The action is captioned: Defined Benefit Plan of the Mid-Jersey Trucking Industry and Teamsters Local 701 Pension and Annuity Fund v. PayPal Holdings, Inc., John Rainey, and Daniel Schulman, 3:22-cv-05864 (D.N.J.).
The complaint alleges violations of Sections 10(b) and 20(a) of the 1934 Securities Exchange Act. Specifically, the lawsuit alleges that throughout the Class Period, Defendants touted massive growth in its NNAs and instructed investors to view the high growth in this metric as an important indicator of the Company’s successful performance. PayPal earns a fee with each payment transaction, and thus the more active accountholders it could claim, the more revenues it could generate.
To achieve growth in its NNAs, however, PayPal was becoming increasingly reliant on cash marketing incentives, which induced subscribers to register for new accounts in exchange for a cash payment. However, this marketing technique was susceptible to creation of fraudulent accounts by users looking only to receive the cash payment, and who had no intention of using PayPal as a digital payment platform. These fraudulent accounts would provide no revenue to PayPal.
As the complaint further notes, PayPal did not inform investors that many of the new accounts generated through its cash incentive marketing program, which were boosting its NNA numbers, were illusory. These cash payments led to the creation of millions of fraudulent accounts. At the same time, the Company was going to great lengths to keep inactive users and fake accounts on its platform, so its NNA numbers would remain inflated.
The truth was finally disclosed on February 1, 2022, when PayPal reported disappointing fourth quarter and full year results for 2021. The Company admitted that 4.5 million accounts were believed to have been illegitimately created, and therefore slashed its projections. The Company also admitted that its cash incentive marketing strategy was likely the root of its problems. As a result, it would now focus on increasing the engagement of its active users, which would reduce its ability to maintain growth in its NNA figures.
When investors learned the truth about PayPal’s inflated NNA figures, the price of its common stock fell $43.23 per share in one day, dropping from a closing price of $175.80 per share on February 1, 2022 to close at $132.57 per share, on February 2, 2022, a one-day decline of approximately 25%.
For investors who purchased or acquired PayPal common stock during the Class Period, you are a member of this proposed Class and may be able to seek appointment as lead plaintiff, which is a court-appointed representative for the Class, by complying with the relevant provisions for the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). See 15 U.S.C. Section 78u-4(a)(2)(A)(i)-(iv). If you wish to serve as lead plaintiff, you must move the Court by no later than December 5, 2022, which is the first business day on which the U.S. District Court for the District of New Jersey is open that is at least sixty days after the publication of this notice. You do not need seek to become a lead plaintiff in order to share in any possible recovery. You may also retain counsel of your choice to represent you in this action.
If you wish to discuss this action or have any questions concerning this notice or your rights, please contact Caitlin M. Moyna at Grant & Eisenhofer at 646-722-8513, or via email at email@example.com.
Caitlin M. Moyna
Grant & Eisenhofer