Court Opinion

ID: 4644305
Source: CourtListenerOpinion
Date Created: 2020-12-17 21:00:21.731177+00
Date Added: 2024-06-11T08:00:44.407131
License: Public Domain

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                           NOT FOR PUBLICATION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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