This stockholder derivative action is brought on behalf of PayPal against certain current and former PayPal executives and members of the Board (the “Individual Defendants”) (defined further infra) for, among other things, breaching their fiduciary duties to the Company’s stockholders by intentionally or recklessly making or permitting the dissemination of false and misleading statements regarding PayPal’s Net New Active Accounts (“NNAs”).

PayPal operates one of the world’s largest digital payment platforms. Over 90% of the Company’s revenue is generated through fees on payment transactions.

As alleged in the Complaint, From February 3, 2021, through February 1, 2022 (the “Relevant Period”), PayPal claimed massive growth in NNAs, which the Company held out as a significant indicator of its overall success. According to the Company’s Proxy statement, filed with the SEC on April 19, 2021, “the Compensation Committee [determined] that NNAs reinforces the critical importance of growing our customer base to build for the future” and “[t]he number of NNAs is [ ] a key operational metric that the Company uses internally to measure ongoing performance.”

In an attempt to further NNA growth, PayPal offered related cash incentives, including ten dollars to each customer who opened a new account. Unbeknownst to the public, and as the Individual Defendants later admitted, the Company failed to disclose that many new users acquired through these and other incentive campaigns were fraudulent. Specifically, PayPal failed to disclose that its aggressive cash incentive campaigns significantly increased PayPal’s susceptibility to bot farms, which systematically manipulated PayPal’s $10.00 cash marketing incentive by creating millions of illegitimate accounts. Of course, these fraudulent accounts generated no revenue for the Company.

Underscoring the Individual Defendants’ knowledge of the fraud, the Company maintained these fake bot accounts on the platform throughout the Relevant Period to prevent turnover and to inflate its NNA guidance – including its prediction that PayPal would add 50 million NNAs in 2021, and 750 million by the end of 2025.

On February 1, 2022, the end of the Relevant Period, PayPal reported that its NNAs fell short of its 2021 prediction. The Company and the Individual Defendants also admitted that “in connection with the increased use of cash incentive campaigns throughout 2021, [it] identified 4.5 million accounts that [it] believe(s) were illegitimately created”. As a result of these issues and purported change in strategy going forward, the Company announced its expectation of only 15-20 million NNAs for 2022 and that it “no longer believe(s) that the 750 million medium-term account aspiration [it] set last year, is appropriate.” Indeed, just one year after the Company’s prediction that it would add 50 million NNAs by the end of 2021 and 750 million by the end of 2025, it completely abandoned both goals and suggested it would only add 15 million NNAs by the end of 2022.

The Company and the Individual Defendants also admitted that it pursued customer acquisition strategies at the expense of revenue and without regard for whether the strategies overly encouraged “churn” or turnover – i.e., whether the strategy signed up legitimate customers that increased revenue. For the first time, the Company disclosed that “[W]e also leaned into incentivized customer acquisition tactics to a much greater extent than we ever have in our history,” admitting that while “these programs are very successful in generating account creation, these customers have lower engagement and a higher propensity to churn, and have not met our required level of return. This dynamic compounds over time as it requires increasing investment simply to keep minimally-engaged users on our platform.” The Company promised that, going forward, it would focus on actually driving active customer engagement rather than trying to grow its NNAs. The Company admitted it was manipulating the natural churn rate to inflate its NNA guidance number by incentivizing customers to stay on the platform who ordinarily would have been considered inactive. PayPal further stated it would no longer focus on preventing churn or retaining inactive customers and would focus on increasing engagement of more active customers.

On this news, the Company’s stock price fell $43.23, or 25% in one-day, to close at $132.57 per share on February 2, 2022.

The Individual Defendants knowingly or recklessly made false and misleading statements that were unquestionably material to shareholders, including with regard to NNAs, the Company’s expected growth from NNAs, and the adequacy of the Company’s internal controls.

As a result of the foregoing, PayPal, Defendant Paul Schulman (“Schulman”), the Company’s President and Chief Executive Officer (“CEO”), and Defendant John D. Rainey (“Rainey”), the Company’s Chief Financial Officer (“CFO”), have been named as defendants in the Securities Action (the “Securities Defendants”), which alleges investors were damaged when they purchased PayPal shares during the Relevant Period.

As a direct and proximate result of the Individual Defendants’ misconduct, the Company has incurred significant financial losses, including the costs of defending and paying class-wide damages in the Securities Action, as well as additional losses, including reputational harm and loss of goodwill.

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