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NEW YORK (Reuters) – Estee Lauder is required to confront a legal challenge alleging that the cosmetics company misled investors by hiding its reliance on questionable gray-market activities in China, as determined by a federal judge in Manhattan on Monday.
U.S. District Judge Arun Subramanian noted that shareholders had highlighted “several misleading omissions” and “half-truths” in the company’s disclosures, especially in relation to the adverse effects on sales following a government crackdown on the “daigou” gray market in January 2022.
Investors involved in the proposed class action suit claimed that Estee Lauder grew increasingly dependent on “daigou” sales—essentially duty-free purchases made by resellers—particularly after the onset of the COVID-19 pandemic, with a significant focus on activities in Hainan province.
The shareholders argued that the company withheld crucial information regarding the negative impact of the crackdown on its sales until November 1, 2023. This lack of transparency is believed to have led to a 19% drop in share prices, resulting in a loss of approximately $8.7 billion in market capitalization.
Subramanian remarked, “Defendants attributed the decline to everything but the crackdown and reassured investors that an upswing was coming soon.” He emphasized, “What matters is that Estée Lauder touted the reasons for its success while leaving out the parts of the truth it found inconvenient. The telling of half-truths—that’s what the securities laws don’t tolerate.”
The defendants in this case also include former Chief Executive Fabrizio Freda and ex-Chief Financial Officer Tracey Travis. In response to calls for dismissal, they argued that there was insufficient evidence of fraudulent intent and that no actionable false statements directly resulted in shareholder losses.
However, the judge indicated that Freda and Travis should have recognized the “daigou” crackdown as a key factor contributing to declining sales. The court pointed to allegations regarding their attentiveness to sales figures and noted that Estee Lauder had a dedicated team focused on analyzing “daigou” transactions.
The proposed class action affects shareholders who held stakes from February 3, 2022, to October 31, 2023. Since that latter date, Estee shares have experienced a substantial decline, losing nearly half of their value, with China accounting for about 25% of the company’s sales in 2024.
The ongoing case is officially titled In re Estee Lauder Co Securities Litigation, filed in the U.S. District Court for the Southern District of New York, under case number 23-10669.
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finance.yahoo.com