As the Whitney Defendants point out, the Company’s reported increase in its
chargeback processing reserves prior to the Purported Class Period is neither relevant,
nor indicative of any “sham.” Rather, it is not unexpected for any company that accepts
payment by credit card to have a credit card processing company agree to hold a
certain percentage in reserve to cover chargebacks. Allegations of “ordinary conduct”
do not support an inference that defendants acted with fraudulent intent under Tellabs.
Plaintiff has not alleged with any specificity what the chargeback percentage should
have been, or why such an increase in reserves was abnormal. The increase in
chargebacks does not give rise to an inference of scienter.
Likewise, the allegation that Whitney’s zero-refund policy establishes scienter
fails. While plaintiff paints a sinister picture of this policy, the CAC does not explain how
the zero refund policy translates into securities fraud. Absent a connection, the fact that
Whitney had a zero refund policy does not establish an inference of scienter.
Plaintiff also relies on statements made during an internal Company telephone
conference regarding the increase in chargebacks during which the Company explored
options to decrease the number. Again, the fact Whitney was experiencing
chargebacks does not show securities fraud, much less establish scienter.
Moreover, plaintiff’s reliance on the Paisola Email is insufficient. The email does
not show what accounts were in “crisis mode,” or what the crisis was. It does say say
which divisions were “out of control.” It does not explain what information Paisola had
access to or the basis upon which he made derogatory statements against Whitney.
In addition to the Paisola E-Mail, plaintiff alleges scienter is established because
Paisola was fired shortly after submitting the memo and filed a complaint with OSHA