Estée Lauder Faces Securities Lawsuit for Daigou “Cover Up”

A federal court ruling has dealt a blow to Estée Lauder, allowing a securities fraud lawsuit against the beauty giant to move forward. The lawsuit alleges that Estée Lauder misled investors by concealing its practice of using daigou channels to maintain sales during the COVID-19 pandemic. The court’s decision to deny Estée Lauder’s motion to dismiss means that the shareholders’ claims under the Securities Exchange Act against Estée Lauder, former CEO Fabrizio Freda, and CFO Tracey Travis will proceed.

The case began when Estée Lauder shareholder Bridgett McAlice filed a lawsuit in December 2023 on behalf of herself and others who purchased Estée Lauder stock between February 2022 and October 2023. The complaint accuses Estée Lauder of violating federal securities laws by providing false information regarding its inventory levels, supply chain management, and financial outlook. It specifically focuses on Estée Lauder’s reliance on the daigou market in China, which refers to the sale of gray market goods by individuals to customers in China to circumvent import duties and taxes.

During the class period, Estée Lauder allegedly issued positive revenue projections and assured investors about its recovery and inventory improvements, especially in Asia. However, the company reportedly increased its dependence on gray market daigou sales to offset declining demand in traditional retail channels. When the Chinese government cracked down on daigou in 2022, Estée Lauder faced challenges, leading to significant sales declines. Instead of attributing these declines to the crackdown, Estée Lauder blamed temporary factors like COVID lockdowns and inventory changes.

In November 2023, Estée Lauder’s stock price plummeted by 19% after the company acknowledged that changes in government and retailer policies in China were significant factors in the sales decline, resulting in an $8.7 billion loss in market value. Estée Lauder, Freda, and Travis attempted to dismiss the securities fraud claims by arguing that their statements were accurate, too vague, or protected under the PSLRA’s safe harbor for forward-looking statements. They also claimed that the plaintiffs failed to demonstrate fraudulent intent.

However, Judge Subramanian’s ruling on March 31 denied Estée Lauder’s motion to dismiss, stating that the plaintiffs had adequately alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act. The court found that Estée Lauder and its executives had misled investors by making statements that omitted crucial information about the company’s operations. This ruling marks a significant development in the ongoing legal battle between Estée Lauder and its shareholders over allegations of securities fraud.