Yesterday, according to report, Estee Lauder is facing a significant legal challenge in the United States over its sales practices in China, after a federal judge in Manhattan ruled that the company must face a lawsuit accusing it of defrauding shareholders.
The lawsuit stems from claims that Estee Lauder misled investors about its reliance on the gray-market “daigou” sales in China, particularly after a government crackdown in January 2022. The plaintiffs, in this proposed class action, argue that Estee failed to disclose the negative impact of this crackdown on its sales, despite becoming heavily dependent on these unofficial, duty-free purchases by resellers, particularly in the Hainan province, which became a key market during the COVID-19 pandemic.
The lawsuit alleges that Estee Lauder misrepresented the situation to investors by attributing the decline in sales to other factors, instead of being upfront about the harm caused by the Chinese government’s crackdown on the “daigou” market. As a result, Estee’s shares fell 19% on November 1, 2023, erasing about $8.7 billion in market value.
U.S. District Judge Arun Subramanian criticized the company for leaving out inconvenient truths and presenting “half-truths” to the public, which, according to the judge, violated securities laws. Estee Lauder’s executives, including former CEO Fabrizio Freda and former CFO Tracey Travis, are also named as defendants.
Estee has denied allegations of fraudulent intent, arguing that no evidence exists to show that false statements directly led to shareholder losses. However, the judge ruled that the company’s leadership should have been aware of the impact the crackdown was having on sales, especially given that Estee had a dedicated team monitoring “daigou” sales.
The class action lawsuit covers shareholders from February 3, 2022, to October 31, 2023, and highlights the challenges Estee Lauder faces in China, a market that accounted for about a quarter of its sales in 2024. Since the crisis began, Estee shares have lost nearly half of their value, with the Chinese market playing a significant role in the company’s struggles.
