Estee Lauder to face lawsuit over China sales impact

On Monday, a federal judge in Manhattan ruled that Estee Lauder (NYSE:EL) must confront a lawsuit alleging the company misled its shareholders by not disclosing its reliance on unauthorized gray-market sales in China. U.S. District Judge Arun Subramanian found that shareholders pointed out "several misleading omissions" and "half-truths" in the company’s disclosures, particularly concerning the adverse effects on sales following a government crackdown on the "daigou" gray market in January 2022.

Shareholders claim that Estee Lauder became increasingly dependent on "daigou," or duty-free purchases by resellers, in China after the COVID-19 pandemic began, with a significant focus on the Hainan province. They argue that the New York-based cosmetics firm hid the reality of how the crackdown negatively impacted sales until November 1, 2023, which resulted in a 19% drop in its share value, erasing approximately $8.7 billion in market capitalization.

Judge Subramanian noted in his ruling that the defendants attributed the decline to various factors, avoiding any mention of the crackdown, while assuring investors of an imminent recovery. He emphasized that securities laws do not tolerate the practice of disclosing only convenient parts of the truth, referring to the company’s selective sharing of information as "half-truths."

The lawsuit implicates former Chief Executive Fabrizio Freda and former Chief Financial Officer Tracey Travis among the Estee defendants. The company and lawyers for the defendants have not immediately responded to requests for comments on the ruling.

The defendants had requested the dismissal of the case, arguing there was no evidence of intentional fraud or that any alleged false statements directly led to shareholder losses. However, the judge highlighted accusations that Freda and Travis should have recognized the "daigou" crackdown as a significant factor in the declining sales, given their access to detailed sales data and the existence of a team within Estee dedicated to analyzing "daigou" sales.

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