PayPal Holdings, Inc. (NASDAQ: PYPL) investors pursuing securities fraud claims against the company and three executives saw their case dismissed again after a federal judge in New Jersey granted the defendants’ second motion to dismiss, finding that the plaintiffs still failed to adequately plead actionable false or misleading statements.
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The lawsuit centered on statements PayPal made between February 2021 and February 2022 regarding user growth, particularly its “Net New Active Accounts” (NNAs), a key metric investors used to evaluate the company’s expansion strategy. Plaintiffs alleged that PayPal artificially inflated this metric by relying heavily on incentive-based customer acquisition campaigns that generated low-quality, minimally engaged, or fraudulent accounts.
Judge Robert Kirsch ruled that the amended complaint still failed to adequately plead that the challenged growth-metric statements were false or misleading when made, and dismissed the claims in full.
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What the Case Was About
The case was brought on behalf of investors who purchased PayPal stock between February 3, 2021, and February 1, 2022. Plaintiffs alleged violations of Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 against PayPal and former executives Daniel Schulman, John Rainey, and Jonathan Auerbach.
According to the complaint, PayPal’s business model depended heavily on transaction volume, making growth in active users especially important. Investors closely tracked NNAs, which measured newly activated or reactivated accounts minus inactive accounts.
As PayPal pursued its “Super App” strategy and sought to scale its platform to hundreds of millions of users, plaintiffs alleged the company increasingly relied on aggressive promotional campaigns to attract customers. They claimed these efforts created “hollow” accounts, users who completed only one or two transactions before becoming inactive, as well as fraudulent accounts created to exploit promotions.
Plaintiffs argued that PayPal knew these tactics were inflating reported NNAs but continued making public statements suggesting the company was attracting high-quality, highly engaged users.
The February 2022 Disclosure
On February 1, 2022, PayPal released fourth-quarter 2021 results and disclosed that it had added only 9.8 million NNAs for the quarter, far below prior expectations of roughly 15.8 million. The company also sharply reduced its full-year 2022 NNA outlook to just 15 to 20 million.
During the earnings call, CFO John Rainey said PayPal had “leaned into incentivized customer acquisition tactics,” which increased NNAs. The court recited the plaintiffs’ allegation that many of those NNAs were minimally engaged or fraudulent. PayPal also disclosed that it had removed 4.5 million illegitimate accounts created in 2021 and expected roughly 20 million “one-and-done” customers to roll off in 2022. Rainey stated that the removal of the illegitimate accounts was the primary driver of the missed NNA forecast.
Following those disclosures, PayPal’s stock fell sharply. On February 2, 2022, shares dropped from $175.80 to $132.57, and the next day fell further to $124.30. Plaintiffs alleged a total two-day decline of 29.3%, representing approximately $58.7 billion in lost market capitalization.
Why the Court Dismissed the Claims
The Court held that the case failed on the first required element of a Section 10(b) securities fraud claim: pleading a material misrepresentation or omission.
Judge Kirsch explained that for a statement to be actionable, plaintiffs had to show that defendants possessed contrary information at the time the statements were made, meaning they knew, or should have known, that their statements were false or misleading.
The Court found that the plaintiffs largely repeated the same allegations as in their previously dismissed complaint and relied on substantially the same statements. Most of the alleged misstatements had already been analyzed in the Court’s earlier January 2025 dismissal order.
The judge specifically focused on the plaintiffs’ argument that PayPal’s November 2021 statements about adding 13.3 million NNAs were misleading because the company allegedly already knew millions of accounts were illegitimate.
But the Court found the plaintiffs’ allegations of confidential witness insufficient. The witnesses described fraud issues and fake accounts, but did not adequately show when those accounts were discovered or that Schulman or Rainey actually knew about them when the November 2021 statements were made.
The Court characterized the theory as an improper attempt at “fraud by hindsight,” meaning plaintiffs were trying to infer fraud based on later disclosures rather than showing the statements were false when originally made.
Claims Against Individual Executives Also Failed
Because plaintiffs failed to adequately plead the underlying Section 10(b) claim, the Court also dismissed the Section 20(a) control-person claims and Section 20A insider trading claims against the individual defendants.
The Court noted that those claims were contingent on a sufficient pleading of a primary securities fraud violation.
What Happens Next
This was the second dismissal in the case. The Court had previously dismissed the First Amended Complaint in January 2025 and granted plaintiffs leave to amend. Plaintiffs then filed the Second Amended Complaint in March 2025, but the Court found that the revised pleading did not cure the same core deficiencies.
The March 31, 2026, opinion granted defendants’ motion to dismiss the Second Amended Complaint in full.
As with all motions to dismiss, the ruling does not determine liability. Instead, it means the Court found that plaintiffs failed to plead sufficient facts to allow the securities fraud claims to proceed past the pleading stage.
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