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Suit Claims PayPal Not Your Friend

Online payment service and IPO wunderkind PayPal Inc. is the target of a lawsuit claiming that the company is prone to restricting, freezing or closing customer accounts without good reason.

In fact, it's just that sort of (alleged) thing that prompted creation of a Web site called PayPalwarning.com, replete with horror stories from purportedly innocent users whose accounts were shut off.

But despite a patent infringement lawsuit, and regulatory threats in some states, investors continue to favor the stock of the Palo Alto, Calif.-based company - it closed Wednesday at $19.65, up from its $13 IPO price. The stock was down 80 cents in the early going today.

The most recent lawsuit, filed in San Jose, Calif., federal court, also claims that the company makes it too hard for its 14 million customers to resolve complaints against PayPal.

The suit seeks nationwide class-action status and was lodged on behalf of three people who said they had their accounts frozen, or had money taken out of accounts in error by PayPal.

"Based on our reading of the complaint, we believe this suit to be without merit and we'll contest it vigorously," PayPal spokeswoman Julie Anderson was quoted by the Associated Press as saying.

Meanwhile, there was some good news for PayPal as the company said that it has received word from the FDIC Legal Department to the effect that, when PayPal acts as agent for customers and places customer funds with FDIC member banks, the funds will qualify for federal deposit insurance up to $100,000 per customer per bank.