Michael Eckert v. Paypal Holdings, Inc. ( 2020 )

FILED
NOT FOR PUBLICATION
DEC 17 2020
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
MICHAEL ECKERT; EDWIN K. BELL, No. 19-16869
Lead Plaintiffs,
D.C. No. 3:17-cv-06956-EMC
Plaintiffs-Appellants,
v. MEMORANDUM*
PAYPAL HOLDINGS, INC.; DANIEL H.
SCHULMAN; JOHN D. RAINEY, Jr.;
TIO NETWORKS ULC; TIO
NETWORKS USA, INC.; JOHN KUNZE,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of California
Edward M. Chen, District Judge, Presiding
Argued and Submitted November 19, 2020
San Francisco, California
Before: THOMAS, Chief Judge, and SCHROEDER and BERZON, Circuit
Judges.
Michael Eckert and Edwin Bell appeal the district court’s Rule 12(b)(6)
dismissal of their class action complaint against PayPal alleging manipulative and
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
deceptive practices in violation of sections 10(b) and 20(a) of the Securities
Exchange Act and SEC Rule 10b-5. 15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R.
§ 240.10b-5. PayPal announced in November 2017 that it had discovered security
vulnerabilities in connection with the recently acquired TIO Networks Corporation
and had consequently suspended TIO’s operations. The next month, PayPal
announced that it had identified a potential compromise of 1.6 million TIO
customers’ personally identifiable information, and PayPal’s share price dropped
5.75%. Plaintiffs, who bought stock in the period between the two
announcements, claim that they suffered losses as a result of PayPal’s failure to
disclose the breach and its potential magnitude in its first announcement.
Since 1995, the Private Securities Litigation Reform Act (PSLRA) has
required plaintiffs to plead, with particularity, “each statement alleged to have been
misleading, [and] the reason or reasons why the statement is misleading.” 15
U.S.C. § 78u–4(b)(1). Plaintiffs bringing section 10(b) and Rule 10b-5 claims
must therefore, among other requirements, plead facts giving rise to a “cogent and
compelling” inference that the defendants made a material misrepresentation or
omission (i.e., falsity) with intent or “deliberate recklessness” (i.e., scienter). In re
NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1052–53 (9th Cir. 2014) (deliberate
recklessness must “present[] a danger of misleading buyers or sellers that is either
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known to the defendant or is so obvious that the actor must have been aware of
it”). The district court dismissed Plaintiffs’ second amended complaint for failure
to adequately allege scienter.
Plaintiffs contend that they satisfied the PSLRA’s heightened pleading
standard by alleging that the defendant in question knew, in November 2017, that
PayPal had discovered an actual security breach, not just “security vulnerabilities.”
Yet the defendant publicly disclosed at that time that the issue was serious enough
to merit suspending TIO’s operations entirely. Under such circumstances, we
cannot conclude that Plaintiffs have shown a cogent and compelling inference that
the defendant’s November announcement was intentionally misleading or so
obviously misleading that he must have been aware of its potential to mislead.
See NVIDIA, 768 F.3d at 1053. This point is underscored by the absence of any
allegation in the complaint that any defendant sold stock during the relevant time
period or otherwise had a motive to mislead investors in November but not in
December. See Webb v. Solarcity Corp., 884 F.3d 844, 856–57 (9th Cir. 2018).
The district court therefore properly dismissed Plaintiffs’ second amended
complaint for failure to state a claim.
AFFIRMED.
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