Avon Products Inc. (“Avon”) recently settled a class action lawsuit
brought against the beauty products company and two former executives
concerning Avon’s compliance with the US Foreign Corrupt Practices Act
(“FCPA”). Avon settled the lawsuit despite the fact that the US
District Court for the Southern District of New York (“Court”) had granted a motion to dismiss the lawsuit. In the action, certain of the company's shareholders had alleged that Avon and
its former executives had issued materially false and misleading statements
concerning Avon’s compliance with the FCPA by concealing that the company had
given bribes to Chinese government officials by various means, including
providing lavish gifts and paying travel expenses improperly.
In 2008, Avon publicly announced that it had received allegations of
potential FCPA violations in connection with its business in China and that it
had disclosed such information to the US Department of Justice (“DOJ”)
and the US Securities and Exchange Commission (“SEC”). That
initial press release was the first in a series of public statements by Avon relating
to the potential FCPA violations and after each announcement, Avon’s stock
price fell. The class action claimed that Avon had artificially inflated
its stock price by intentionally misleading shareholders about the company’s
compliance with the FCPA. The shareholders alleged that the defendants
knew that Chinese officials were being bribed years before the company
publicly disclosed it in 2008. The action also alleged that Avon
embraced a corporate culture that was “actively hostile” to effective
oversight and hid its dependence on corrupt activities to boost their sales
revenue.
In December of 2014, the DOJ and SEC levied fines of $135
million to Avon for violating the FCPA - $68 million was paid to settle the DOJ’s criminal investigation and $67 million was paid to settle the SEC’s civil investigation. As part of the settlement, Avon was also required to retain an independent monitor to review its FCPA compliance program for a period of 18 months, followed by an additional 18 months of self-reporting on its ongoing compliance efforts
Shareholder litigation is a common occurrence following or
during FCPA investigations of public companies – both securities class actions
and shareholder derivative actions. In a derivative action shareholders
file suit against members of the board of directors or corporate officers on
behalf of the corporation itself for a wrong the corporation has suffered.
The Court dismissed the action on the grounds that the plaintiffs had failed to demonstrate that Avon made any false statements regarding the use of bribes. The Court held that in order to survive the motion to dismiss, the shareholders were subject to “heightened pleading requirements” but had failed to plead facts that were sufficient to demonstrate that Avon’s officers had met the intent to deceive Avon’s shareholders or the intent to report misleading statements regarding Avon’s business successes in China before or after 2008 when the company reported that it had become aware of the allegations.
Under the heightened pleading requirements for securities
fraud complaints, shareholders must plead sufficient facts with enough
particularity to constitute fraud and plead with particularity facts that
demonstrate a strong inference that Avon and its officers and directors
intended to deceive their shareholders or were severely reckless.
The Court found that Avon’s statements in its ethics
policies regarding its high standards for ethics did not constitute
fraud. It found that these general statements of the company’s
commitments to high standards of business ethics were not materially misleading
to shareholders finding that the statements were mere “puffery” or
generalizations regarding Avon’s integrity upon which reasonable investors
would not rely.
The Court held that bare assertions about executives of Avon
having information adverse to the disclosed filings were not sufficient to
demonstrate that they were actually aware of alleged bribes paid to Chinese
officials. The shareholders merely alleged that executives “should have
been aware” of the bribes. The Court held that such facts were too conclusory and lacked sufficient detail
to demonstrate intent to mislead.
After 2008, the mere fact that Avon received a
whistle-blower report regarding potential violations did not demonstrate that
the company and its directors knew the allegations to be true. They were
permitted to conduct an internal investigation before announcing that the
company received a report of a potential FCPA violations.
The Court also held that the plaintiffs failed to allege
particularized facts showing that the company misled investors with regard to
its internal investigation or compliance procedures.
When Avon first learned about potential FCPA problems in
China through an internal audit report, it consulted an outside law firm but
did not carry out a thorough investigation. Instead, it simply directed
that internal control measures be instituted at its subsidiary. However,
no such measures were taken and there was no follow up on the compliance
initiatives. The full-blown internal investigation only took place a few
years later after a new CEO received a whistle-blower letter. By this
time, much of the damage had been done.
Settlement of the class action came at a time when Avon had moved to dismiss an amended complaint filed by the shareholders' lawyers
Regards,
Blair
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