August 6, 2026  ·  Complaint filed August 5, 2026  ·  ilnd, No. 1:26-cv-09391

Newman News, By David Brunk

Read the filing

Swaziek v. Hochschild Alleges Discover Hid $1.2B in Liabilities to Pump Stock

15-Year Card Misclassification Scheme Allegedly Overcharged Merchants

The complaint alleges Discover Financial Services misclassified approximately 5 million consumer credit cards as commercial for interchange fee pricing beginning no later than 2007 and continuing until September 2023, causing harm to merchants. The scheme allegedly lacked internal controls to ensure proper card classification, leading to "inaccurate revenue recognition" (Compl. ¶223). The complaint states, "Discover did not have controls designed or implemented to ensure” credit cards were being correctly classified" (Compl. ¶223).

The misconduct resulted in a $365 million initial liability for refunds to merchants and merchant acquirers, later increased to $1.2 billion, and a $0.55 reduction in restated 2023 earnings per share (from $11.26 to $10.71). The estimated monetary harm to merchant customers from the misclassifications is approximately $1 billion (Compl. ¶126). Discover operated in two segments: digital banking (consumer banking and lending) and payment services (transaction processing and settlement) (Compl. ¶106). As a banking holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act, Discover was subject to oversight by the FDIC, CFPB, and Federal Reserve (Compl. ¶107).

The complaint further alleges that Discover's enterprise risk management framework, which used a "three lines of defense" model (business-unit management, compliance/risk management, internal audit), failed to prevent the misclassifications due to systemic weaknesses in compliance and internal controls (Compl. ¶108). The company's internal controls over financial reporting (ICFR) were allegedly deficient, with ICFR failures classified as deficiencies, significant deficiencies, or material weaknesses (Compl. ¶117).

Student Loan Servicing Violations Allegedly Persisted Despite CFPB Consent Orders

The complaint alleges Discover's student loan servicing misconduct persisted despite two CFPB consent orders, exposing the company to further regulatory action. After acquiring Citigroup's student loan division in 2010 for $600 million (approximately 800,000 accounts with a $4.2 billion balance), Discover allegedly failed to remediate servicing errors, including incorrect payment allocations and misapplied fees (Compl. ¶130). The 2015 CFPB Consent Order required Discover to pay $16 million in consumer refunds and a $2.5 million civil penalty, while the 2020 CFPB Consent Order mandated $10 million in consumer redress and a $25 million civil penalty (Compl. ¶131, ¶134).

A former risk manager stated that managers responsible for the student loan business "didn’t know the regulations that applied to student loans" (Compl. ¶137), while another former employee cited 400 "outstanding issues" and inconsistent execution of remediation plans. The complaint describes a culture of non-compliance, with one former employee calling the situation a "genuinely terrible compliance situation" and a "culture of non-compliance" (Compl. ¶146), and another characterizing the cards business risk and compliance environment as the "wild west" (Compl. ¶147).

Discover's compliance department was allegedly critically understaffed, and first-line testing only verified whether controls were performed, not their effectiveness (Compl. ¶148). Executives reportedly refused to sign off on compliance reports until findings were removed or downgraded, with one former employee stating that business executives "refused to sign off on compliance reports until findings were removed or downgraded" (Compl. ¶153). The complaint also alleges that Discover's systems lacked the ability to map business processes and assess control gaps, with Brian Hughes, Discover’s later Chief Risk Officer, dismissing system updates as "too much work" (Compl. ¶154).

On November 29, 2023, Discover announced the sale of its student lending business, with then-CFO John Greene admitting on an analyst call that the sale was due to "perennial issues" (Compl. ¶138). The complaint further alleges that Discover violated its own Code of Ethics by failing to address these compliance failures. The Code of Ethics required employees to comply with applicable laws and stated, "Misuse of non-public information erodes the Company's trustworthiness and places our business and reputation at risk" (Compl. ¶89). The complaint also alleges violations of Section 5 of the Federal Trade Commission Act (FTCA), which prohibits unfair or deceptive acts or practices in commerce (Compl. ¶143).

Regulatory Scrutiny and Consent Orders Highlighted Compliance Failures

The complaint details a series of regulatory actions against Discover, alleging that the company's weak Compliance Management System (CMS) allowed the continuation of both the Card Misclassification Misconduct and Student Loan Misconduct. In 2021, the FDIC issued a Report of Examination (ROE) that found unsafe and unsound banking practices and consumer-protection violations (Compl. ¶140). This was followed by a 2023 FDIC Consent Order for failure to maintain an effective CMS (Compl. ¶142). The 2023 Consent Order was expanded on April 16, 2025, to include an "Order of Restitution" and an "Order to Pay" (Compl. ¶224).

The complaint alleges that Discover violated multiple federal laws, including Section 5 of the Federal Trade Commission Act (FTCA), the Truth-in-Lending Act (15 U.S.C. § 1601 et seq.), the Servicemembers Civil Relief Act (50 U.S.C. § 501 et seq.), and the Electronic Records and Signatures in Commerce Act (5 U.S.C. § 7001 et seq.) (Compl. ¶143). At one point, Discover had more than 250 open regulatory findings, with months prior having more than 300 (Compl. ¶158). The complaint defines "compliance risks" as "those risks relating to possible violations of applicable laws, regulations, contractual terms, standards, or internal policies where such violation could result in direct or indirect financial liability, civil or criminal penalties, regulatory sanctions, or other" consequences (Compl. ¶113).

The FDIC requires financial institutions to maintain a compliance management system with board oversight, a compliance program, and regular audits (Compl. ¶114). Discover's enterprise risk management framework used a "three lines of defense" model, consisting of business-unit management, compliance and risk management, and internal audit (Compl. ¶108). However, the complaint alleges that this model was ineffective due to understaffing and a culture of non-compliance. For example, compliance testing was delayed by 3–5 months beyond the expected timeline, with actual delays of 8–10 months (Compl. ¶157). The complaint also highlights that in 2020, a project called "Project Operational Excellence" identified control gaps but had no remediation plan, with one former employee stating the project went "way off the rails" (Compl. ¶159–160).

SEC Filings Allegedly Omitted Material Facts About Regulatory Risks

From February 20, 2019, to January 17, 2024, Discover's 10-Ks and 10-Qs repeatedly stated that transaction fees were "recognized as revenue at the time each transaction is captured for settlement" (Compl. ¶162, ¶166, ¶171, ¶177) and that its risk management framework was based upon industry standards for managing risk and controls. The complaint contends these statements were materially false and misleading because they failed to disclose: the 15-year misclassification of interchange fee revenue; the company's failure to maintain an effective Compliance Management System, as required by FDIC Consent Orders; customer overcharges; and the financial and reputational risks posed by these issues (Compl. ¶173). The complaint alleges that Discover's risk governance framework was implemented such that bank-level risk governance requirements were satisfied, and its enterprise risk management principles were executed through a risk management framework based on industry standards (Compl. ¶178). However, the complaint states, "Our risk governance framework is implemented such that bank-level risk governance requirements are satisfied as well," and "Our enterprise risk management principles are executed through a risk management framework that is based upon industry standards for managing risk and controls" (Compl. ¶178). These representations were allegedly false, as Discover's CMS was inadequate and failed to prevent the misconduct (Compl. ¶145).

Discover's earnings calls also allegedly omitted material information. During a July 20, 2022, earnings call, then-CEO Roger Hochschild acknowledged CFPB consent orders related to student loan servicing but did not disclose the extent of the compliance failures. The stock price fell $9.80 (8.9%) the following day, from $109.80 to $100.00 per share (Compl. ¶186). On October 22, 2020, Hochschild disputed claims of "chronic underinvestment" during a third-quarter 2020 earnings call (Compl. ¶169). The complaint further alleges that the Individual Defendants violated Discover's Code of Ethics by failing to ensure accurate and complete disclosure to the investing public, as required by the Code (Compl. ¶90).

The complaint provides a detailed timeline of Discover's share repurchase program, which allegedly contributed to the inflation of the company's stock price. In Q2 2022 alone, Discover repurchased shares totaling $601 million (Compl. ¶184). The repurchase program was suspended on July 20, 2022, following the disclosure of the internal investigation into student loan servicing (Compl. ¶184). As of year-end 2022, Discover had $2.8 billion remaining on its share repurchase authorization (Compl. ¶192). The complaint also details monthly repurchase amounts in 2021, including $4.9 million in April 2021, $31.7 million in May 2021, $43.8 million in June 2021, $57.7 million in July 2021, $64 million in August 2021, $58.7 million in September 2021, $66.9 million in October 2021, $39.8 million in November 2021, and $34.8 million in December 2021 (Compl. ¶227). In 2022, repurchases included $53.1 million in February and $47.9 million in March (Compl. ¶227). The approximate total repurchase cost during this period was $508.6 million, though the specific context for this figure is unclear.

Stock Drops Followed Disclosures of Misconduct and Leadership Changes

The complaint details a series of stock price declines following disclosures of misconduct and leadership changes, alleging these events revealed the extent of the fraud and its impact on Discover's financial condition. On July 20, 2023, Discover issued a press release disclosing the card misclassification misconduct, causing the stock price to drop $19.40 (15.9%) from $121.85 to $102.45 per share (Compl. ¶204). The company also disclosed a $365 million liability for refunds to merchants and merchant acquirers (Compl. ¶202).

On August 14, 2023, Hochschild resigned as CEO and President, and the stock price fell $9.69 (9.4%) to $92.76 per share. The following day, the stock price dropped an additional $2.70 per share (Compl. ¶209). On October 18, 2023, Discover issued its third-quarter 2023 press release, which disclosed an $83 million year-over-year increase in operating expenses, and the stock price fell $7.26 (7.9%) to $85.50 per share (Compl. ¶210–211).

On January 17, 2024, Discover issued its fourth-quarter 2023 press release, disclosing a $267 million increase in operating expenses, and the stock price fell $11.74 (10.8%) to $97.00 per share the following day (Compl. ¶218). During the fourth-quarter 2023 earnings call, interim CEO John Owen stated that Discover had "made improvements in risk and compliance, but still had quite a bit of work to do" and disclosed a $500 million investment in risk and compliance during 2022 and 2023, along with an $80 million remediation reserve primarily for student loans (Compl. ¶216). The closing stock price on January 17, 2024, was $108.74 per share (Compl. ¶18).

Share Repurchases Allegedly Overpaid Due to Inflated Stock Price

The complaint alleges Discover overpaid for share repurchases during the relevant period due to the artificially inflated stock price, resulting in a total overpayment of $784.8 million. From April 2021 to June 2023, Discover repurchased approximately 57.4 million shares at an aggregate cost of $6.4 billion (Compl. ¶227). The complaint provides a month-by-month breakdown of alleged overpayments, totaling $784.8 million, based on an assumed true share value of $97.00.

In 2021, Discover's monthly share repurchases included $4.9 million in April 2021, $31.7 million in May 2021, $43.8 million in June, $57.7 million in July, $64 million in August, $58.7 million in September, $66.9 million in October, $39.8 million in November, and $34.8 million in December (Compl. ¶227). In 2022, repurchases included $53.1 million in February, $47.9 million in March, $28.9 million in May, $13.5 million in June, $6.4 million in July, $9.2 million in November, and $20.5 million in December (Compl. ¶227). The complaint alleges that these repurchases were conducted at inflated prices, contributing to the total overpayment of $784.8 million.

In 2023 alone, Discover's share repurchases totaled $1.89 billion, with the following monthly breakdown of total costs:

• January 2023: $396.6 million (3,783,000 shares at an average price of $104.85) (Compl. ¶263)
• February 2023: $361.4 million (3,157,000 shares at an average price of $114.46) (Compl. ¶265)
• March 2023: $442 million (4,341,133 shares at an average price of $101.82) (Compl. ¶267)
• April 2023: $323.5 million (3,222,300 shares at an average price of $100.39) (Compl. ¶269)
• May 2023: $186.4 million (1,898,752 shares at an average price of $98.15) (Compl. ¶271)
• June 2023: $180.1 million (1,595,280 shares at an average price of $112.90) (Compl. ¶273)

The complaint alleges the following overpayments for each month in 2023:

• January 2023: $29.7 million (Compl. ¶263)
• February 2023: $55.1 million (Compl. ¶265)
• March 2023: $20.9 million (Compl. ¶267)
• April 2023: $10.9 million (Compl. ¶269)
• May 2023: $2.2 million (Compl. ¶271)
• June 2023: $25.4 million (Compl. ¶273)
• December 2022: $20.5 million (Compl. ¶261)

The complaint also highlights insider stock sales by Individual Defendants prior to the disclosure of the misconduct. For example, Defendant Michael Moskow sold 5,115 shares of Discover common stock for approximately $579,153 before the fraud was exposed, demonstrating a potential motive in facilitating or participating in the alleged scheme (Compl. ¶55). Specifically, on May 6, 2021, Moskow sold 3,824 Discover shares at $115.97 per share, totaling $443,469 (Compl. ¶55). Other notable insider sales include:

• Defendant Mary Bush sold 3,824 shares for $471,155 on July 28, 2021 (Compl. ¶43).
• Defendant Cynthia Glassman sold 3,200 shares for $396,576 on October 26, 2021 (Compl. ¶50).
• Defendant John Greene sold 4,443 shares for $568,464 on February 15, 2022 (Compl. ¶39).
• Defendant Moskow sold an additional 1,291 shares at $105.10 per share for $135,684 on December 7, 2022 (Compl. ¶55).

The complaint alleges that these insider sales, combined with the share repurchase program, contributed to the artificial inflation of Discover's stock price, allowing the Individual Defendants to benefit personally while concealing the company's true financial condition.

Compliance Failures Allegedly Violated Discover's Code of Ethics and Audit Committee Charter

The complaint alleges the Individual Defendants violated Discover's internal policies by failing to ensure legal compliance and prevent the dissemination of misleading information. The company's Code of Ethics required employees to provide accurate and complete disclosure to the investing public and to comply with applicable laws. The Code stated, "Misuse of non-public information erodes the Company's trustworthiness and places our business and reputation at risk" (Compl. ¶89). It also emphasized, "We all have a responsibility under the law to provide accurate and complete disclosure to the investing public" (Compl. ¶90), and "Maintaining accurate and complete books and records is not only a requirement of the Company and the Code of Ethics but also vital for us to be able to measure our successes" (Compl. ¶91). The complaint further quotes the Code, stating, "It is your responsibility to understand the laws applicable to your job responsibilities and locations, and to comply with both the letter and the spirit of these laws" (Compl. ¶92), and "The Company's reputation for integrity depends upon you. You are the Company's first line of defense against civil or criminal liability and unethical business practices" (Compl. ¶95). The complaint alleges the Individual Defendants breached these provisions by concealing the card misclassification scheme and student loan servicing violations (Compl. ¶98).

The Audit Committee Charter outlined the committee's oversight responsibilities, including ensuring "the integrity of the Company's consolidated financial statements; the Company's compliance with certain legal and regulatory requirements" (Compl. ¶99). The charter required the committee to review "any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls" (Compl. ¶101) and to establish procedures for "confidential, anonymous submission by Company employees of concerns regarding questionable accounting or auditing matters" (Compl. ¶103). The complaint alleges the Individual Defendants failed to fulfill these responsibilities, allowing the misconduct to persist, and thus violated the Audit Committee Charter (Compl. ¶105). The charter also required the Audit Committee to report to the Board on financial integrity, compliance, internal controls, and auditor performance (Compl. ¶100).

Discover's enterprise risk management framework used a "three lines of defense" model, consisting of business-unit management, compliance and risk management, and internal audit (Compl. ¶108). However, the complaint alleges that this model was ineffective due to understaffing and a culture of non-compliance. For example, compliance testing was delayed by 3–5 months beyond the expected timeline, with actual delays of 8–10 months (Compl. ¶157). The complaint also alleges that Discover's internal controls over financial reporting (ICFR) were deficient, with ICFR failures classified as deficiencies, significant deficiencies, or material weaknesses (Compl. ¶117). The lack of controls to ensure proper card classification was cited as a material weakness in the company's financial reporting (Compl. ¶223).

The complaint further alleges that the Individual Defendants violated Discover's Code of Ethics by failing to report misconduct. The Code required questions about ethical concerns to be directed to the Human Resource Risk Officer or Employee Relations, and waivers for Directors or Executive Officers required Board approval and SEC/NYSE disclosure (Compl. ¶97). The complaint states, "Any waivers of the provisions of the Code of Ethics for Directors or Executive Officers may be granted only in exceptional circumstances by the Board of Directors" (Compl. ¶97). No such waivers were disclosed, suggesting the Individual Defendants failed to comply with these requirements.

Litigation Demand Rejected by Capital One Board Post-Merger

The complaint alleges that after Capital One Financial Corp. completed its acquisition of Discover on May 18, 2025, the plaintiff served a litigation demand on Capital One's Board on January 9, 2026, seeking to remedy the alleged breaches of fiduciary duty by the Individual Defendants. Capital One acknowledged the demand on January 28, 2026, and referred it to the Board for discussion at a meeting scheduled for May 2026 (Compl. ¶260).

On May 8, 2026, the Capital One Board rejected the litigation demand, prompting the plaintiff to file this derivative action. The complaint alleges the Board wrongfully refused to act on the demand or address the underlying claims, stating that "the Board wrongfully refused to act on the Litigation Demand or address the underlying claims" (Compl. ¶28). The complaint further alleges that the Individual Defendants had a duty to prevent the dissemination of inaccurate and untruthful information about Discover's financial condition, as stated in the complaint: "the Individual Defendants had a duty to prevent and not to effect the dissemination of inaccurate and untruthful information with respect to the Company’s financial condition" (Compl. ¶77).

The plaintiff also alleges that the Individual Defendants declined tolling agreements. The complaint seeks to hold the Individual Defendants liable for breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution under Sections 10(b) and 21D of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b), 15 U.S.C. § 78u-4(f)) (Compl. ¶156). The complaint outlines six derivative claims against the Individual Defendants:

1. Breach of fiduciary duties (trust, loyalty, good faith, due care) (Compl. ¶72, ¶76). The complaint specifies that the Individual Defendants owed a duty of loyalty to Discover and its shareholders (Compl. ¶79) and acted as agents of each other and Discover (Compl. ¶80). The complaint further states that the Individual Defendants had a duty to prevent the dissemination of inaccurate information about Discover's financial condition, performance, and other key aspects (Compl. ¶78). Specific duties outlined include ensuring legal compliance, maintaining accurate records, and avoiding self-benefit at the company's expense (Compl. ¶78(a)-(h)).
2. Unjust enrichment (Compl. ¶321–322).
3. Abuse of control (Compl. ¶313). The complaint alleges that the Individual Defendants exercised control over the wrongful acts complained of (Compl. ¶74) and had access to adverse, nonpublic information about Discover (Compl. ¶81).
4. Gross mismanagement (Compl. ¶311).
5. Waste of corporate assets (Compl. ¶152, ¶227). The complaint alleges that the Individual Defendants' actions resulted in a waste of corporate assets, including the overpayment of $784.8 million for share repurchases (Compl. ¶274).
6. Contribution under Sections 10(b) and 21D of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b), 15 U.S.C. § 78u-4(f)) (Compl. ¶156). The complaint alleges that the Individual Defendants are liable for contribution in connection with a related securities class action for violations of Sections 10(b) and 20(a) of the Exchange Act (Compl. ¶156).

The complaint also details the backgrounds of the Individual Defendants, highlighting their roles and responsibilities. For example, Defendant Thomas Maheras, who served as Independent Chairman from 2020, had significant risk management and capital markets experience from his leadership roles at Citigroup, Tegean Capital Management, and Iron Park Capital Management (Compl. ¶53). The complaint alleges that the Individual Defendants acted in concert, conspired, and aided and abetted each other in breaching their duties, with the purpose of the conspiracy including concealing adverse information and inflating the stock price (Compl. ¶83–84). The complaint states, "the Individual Defendants acted in concert, conspired, and aided and abetted each other in breaching their duties of trust, loyalty, good faith, and due care" (Compl. ¶83).

The allegations described here are taken from the filing and remain unproven; no responsive pleading is reflected in the source document.

David Brunk is a civil litigation attorney. He can be reached at david@newmanbrunk.com.