Estee Lauder, a leading cosmetics company, must face a lawsuit in the U.S. over allegations that it misled shareholders about its reliance on unauthorized gray-market sales in China. This decision was made by U.S. District Judge Arun Subramanian in Manhattan.
The lawsuit claims that Estee Lauder became heavily dependent on “daigou,” which involves duty-free purchases by resellers, especially after the COVID-19 pandemic.
This was particularly significant in China’s Hainan province. Shareholders argue that the company hid the negative impact of a government crackdown on these sales until November 1, 2023. This led to a 19% drop in Estee Lauder’s share price, resulting in a loss of about $8.7 billion in market value.
Judge Subramanian noted that Estee Lauder attributed the decline in sales to various factors but failed to mention the crackdown. The company assured investors that sales would soon improve. The judge emphasized that securities laws do not allow companies to disclose only part of the truth, calling this practice “half-truths.”
Former CEO Fabrizio Freda and former CFO Tracey Travis are also named in the lawsuit. The defendants had sought to dismiss the case, arguing there was no evidence of intentional fraud or that false statements directly caused shareholder losses.
However, Judge Subramanian pointed out that Freda and Travis should have recognized the crackdown as a major factor affecting sales, given their access to detailed sales data and the presence of a team analyzing “daigou” sales.
The lawsuit covers shareholders from February 3, 2022, to October 31, 2023. Estee Lauder’s shares have lost nearly half their value since then, partly due to issues in China, which accounted for about a quarter of the company’s sales in 2024. Neither Estee Lauder nor its lawyers have commented on the ruling.
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