Estée Lauder must face a lawsuit accusing the cosmetic giant of defrauding shareholders by concealing its overdependence on improper grey-market sales in China, a federal judge in Manhattan ruled on Monday.
US District Judge Arun Subramanian said shareholders identified “several misleading omissions” and “half-truths” in Estée disclosures, related to the negative sales impact from a January 2022 government crackdown on the “daigou” grey market.
Shareholders in the proposed class action said Estée became dependent in China on “daigou,” or duty-free purchases by resellers, after the Covid-19 pandemic began, especially in the Hainan province.
They said the New York-based company concealed the truth about how the crackdown was hurting sales until November 1, 2023, causing its shares to plunge 19 percent and wiping out about $8.7 billion of market value.
“Defendants attributed the decline to everything but the crackdown and reassured investors that an upswing was coming soon,” Subramanian wrote.
“What matters is that Estée Lauder touted the reasons for its success while leaving out the parts of the truth it found inconvenient,” he continued. “The telling of half-truths — that’s what the securities laws don’t tolerate.”
The Estée defendants also include former chief executive Fabrizio Freda and former chief financial officer Tracey Travis.
Estée and lawyers for the defendants did not immediately respond to requests for comment.
In seeking a dismissal, the defendants said there was neither proof of fraudulent intent, nor a showing that legally actionable false statements caused shareholder losses.
But the judge said Freda and Travis should have been able to pinpoint the “daigou” crackdown as a major cause of falling sales, cited accusations about their attentiveness to sales data and that Estée devoted an entire team to analyse “daigou” sales.
The proposed class action covers shareholders from February 3, 2022 to October 31, 2023.
Estée shares have lost nearly half their value since the latter date in part because of China, which accounted for about one-quarter of sales in 2024.
The case is In re Estée Lauder Co Securities Litigation decision, US District Court, Southern District of New York, No. 23-10669.
By Jonathan Stempel; Editor: Sandra Maler
Learn more:
Estée Lauder Companies’ Makeover Begins
In order to reverse its sales decline, the company is reportedly considering selling off poorer-performing, lower-margin brands and cutting other costs. Investors want to see the fat trimmed, and more room created for future growth.
