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On December 17, 2014, Avon and its China subsidiary resolved the DOJs FCPA investigation into the New York-based cosmetics companys operations in China and agreed to pay $68 million. Avon Products (China) Co. Ltd. (Avon China), a wholly owned subsidiary of Avon, pleaded guilty to a criminal information charging it with conspiring to violate the FCPAs books and records provisions. Avon entered into a deferred prosecution agreement (DPA) and admitted its criminal conduct, including its role in the conspiracy and failure to implement internal controls. Under the terms of the DPA, the DOJ will defer criminal prosecution of Avon for a period of three years and the company will appoint a compliance monitor. According to the companies admissions, from at least 2004 through 2008, Avon and Avon China conspired to falsify Avons books and records by falsely describing the nature and purpose of certain Avon China transactions, including disguising $8 million in gifts, cash and non-business travel, meals and entertainment that Avon China executives and employees gave to government officials in China in order to obtain and retain business benefits for Avon China. Also on Dec. 17 in related civil proceedings, the SEC charged Avon with violations of the Corporate books and records and internal control provisions of the FCPA and announced that Avon agreed to pay more than $67 million in disgorgement and prejudgment interest to settle the charges. The settlement has not yet been approved by the Court.
On September 29, the United States District Court for the Southern District of New York dismissed a putative securities class action lawsuit against Avon Products Inc. (“Avon”) and two senior executives in which shareholders had accused the cosmetics company and its senior management of issuing materially false and misleading statements concerning Avon’s compliance with the FCPA in China. The class action had been pending since mid-2011. The dismissal was without prejudice.
Following a June 2008 internal investigation, Avon disclosed that it was conducting an internal investigation focused on compliance issues related to the FCPA in connection with the company’s conduct in China and other countries. The plaintiffs alleged that this misconduct, detailed in press reports suggesting bribery of Chinese officials, ultimately affected the company’s share price. Company shareholders filed a putative class action in July 2011 under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, 25 U.S.C. §§ 78j(b) and 78t(a). The plaintiffs alleged that Avon made more than 60 materially false and misleading statements, including statements regarding the company’s ethics code and corporate responsibility reports which prohibited the offering or payment of bribes to foreign government officials. Plaintiffs claimed those statements were misleading because at the time, senior management was aware of “material weaknesses in Avon’s system of internal controls” and those failings were not disclosed to investors. The court ruled that general statements proclaiming compliance with ethical and legal standards are not material and actionable because “[a] reasonable investor would not rely on the statements…as a guarantee that Avon would, in fact, maintain a heightened standard of legal and ethical compliance.” Plaintiffs also alleged that several statements concerning Avon’s business success in China and other developing markets was misleading because the statements did not attribute Avon’s success to the bribery of foreign officials or disclose the attendant risks and potential liabilities when such information would become public. The court rejected those allegations for failure to plead the heightened scienter required under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b).
Avon had previously settled with the DOJ and SEC in May 2014 regarding investigations into the same allegations of bribery. That settlement, for alleged violations of the books and records and internal control provisions of the FCPA, totaled $135 million and included a 3-year deferred prosecution agreement and Avon’s retaining of a compliance monitor for 18 months.
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