Payments firm Paysafe is seeking to strike out a shareholder lawsuit over its sharp fall in share price in 2021.
On July 15, 2024, Paysafe Limited f/k/a Foley Trasimene Acquisition Corp. II, Philip McHugh and Ismail Dawood, filed a motion to dismiss the Consolidated Amended Complaint (CAC) with prejudice pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The documents, seen by FX News Group, were filed in the Southern District Court of New York.
Paysafe offers a range of payment processing services, including digital wallet and electronic cash services, to businesses and consumers. Its digital wallet and e-cash services specifically position it as a key player in the iGaming industry — which includes multiple forms of online gaming.
In the second half of 2021, Paysafe faced headwinds partly due to seasonality as the COVID lockdowns ended in some markets and fewer people engaged in iGaming during the summer months and partly due to softness in the European market as a result of regulatory changes affecting the iGaming industry.
Of particular relevance here, Germany passed legislation known as the Fourth Intergovernmental Treaty on Games of Chance (the “German Regulations”), which was announced in March 2020 and entered into force on July 1, 2021. Among other changes, the German Regulations introduced a €1,000 monthly deposit limit between operators for iGaming players. Paysafe has revealed the regulations and risks associated with regulatory changes in the market.
Faced with these headwinds, Paysafe announced in August 2021 that it was reducing guidance for the third quarter, and in November 2021 it announced that it had missed guidance for the third quarter.
As the complaint alleges, Paysafe’s stock price declined after each of these announcements. The plaintiffs brought securities fraud claims on the basis that Paysafe’s disclosures regarding the German Regulations must have been insufficient. Plaintiffs bring securities fraud claims based on the theory that Defendants knew, but failed to disclose, that the monthly business-to-business deposit limit was likely to have a significant, adverse impact on Paysafe’s operations.
According to Paysafe, Plaintiffs’ claims must fail for several reasons.
First, Paysafe argues, the Plaintiffs’ entire case rests on the alleged omission of the German Regulations’ anticipated adverse effects, which is inoperative under the recent Supreme Court decision in Macquarie Infrastructure Corp. v. Moab Partners, LP, 601 US 257 , 259 (2024). Challenged statements are also legally inactive, whether as posthumous statements subject to the PSLRA safe harbor, statements of opinion, corporate optimism, or optimism. The courts are clear that Plaintiffs cannot proceed based on such statements.
Furthermore, the Plaintiffs do not allege that contemporaneous facts show that the impugned statements were false when they were made – the only allegation is that the German market was important to Paysafe and therefore the Defendants should have known that the forthcoming German Regulations would have significant negative financial impact on Paysafe.
Second, according to Paysafe, plaintiffs fail to plead particulars that give rise to a strong inference of scienter. Plaintiffs’ theory that Defendants engaged in a scheme to inflate the prices of FTAC and Paysafe shares until the merger was completed is not supported by anything other than pure speculation—such as a single insider witness—or any allegations about the McHughs’ motives. and Dawood for participating in such a program.
Further, according to Paysafe, Plaintiffs fail to plead specific evidence to support the allegations that Defendants knew that the monthly business-to-business deposit limit would have a material effect on Paysafe’s overall financial performance.
Third, Paysafe insists that Plaintiffs fail to plead causation because the purported corrective disclosures do not correct any of the previously alleged inaccuracies or omissions. Instead, the so-called corrective disclosures provide that Paysafe’s decision to lower third-quarter guidance and the subsequent lack of such guidance was based in part on the “more material impact of [] expected’ result of German regulations and partly to completely unrelated headwinds. Furthermore, the allegedly hidden information—the monthly inter-business deposit limit and the fact that Germany was an important market for Paysafe—was publicly available prior to the two alleged remedial disclosures.
Fourth, Plaintiffs allege that Defendants engaged in a “scheme” to keep the stock price inflated by making the alleged misstatements and omissions so that the merger would be completed. Paysafe says that system liability requires more than a simple repackaging of Plaintiffs’ deficient Rule 10-b(5)(b) claim and thus their Rule 10-b(5)(a) claim and (c) should be rejected.
Finally, Paysafe argues that Plaintiffs’ 20(a) claim must be dismissed because CAC fails to establish any justifiable, fundamental violation of the securities laws or any culpable participation.