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Judge finds omissions, half-truths in Estee disclosures

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Estee said to conceal impact of gray market crackdown

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Estee not immediately available for comment

By Jonathan Stempel

NEW YORK, March 31 (Reuters) - Estee Lauder ( EL ) must

face a lawsuit accusing the cosmetic giant of defrauding

shareholders by concealing its overdependence on improper

gray-market sales in China, a federal judge in Manhattan ruled

on Monday.

U.S. District Judge Arun Subramanian said shareholders

identified "several misleading omissions" and "half-truths" in

Estee disclosures, related to the negative sales impact from a

January 2022 government crackdown on the "daigou" gray market.

Shareholders in the proposed class action said Estee 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% 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 Estee defendants also include former Chief Executive

Fabrizio Freda and former Chief Financial Officer Tracey Travis.

Estee 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 Estee devoted an entire team to analyze "daigou" sales.

The proposed class action covers shareholders from February

3, 2022 to October 31, 2023.

Estee 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 Estee Lauder Co Securities Litigation

decision, U.S. District Court, Southern District of New York,

No. 23-10669.