Embed Size (px)
Citation preview
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
THOMAS S. SHIN, Individually And On Behalf of All Others Similarly Situated,
Plaintiff,
vs. THE ESTÉE LAUDER COMPANIES INC., WILLIAM P. LAUDER, RONALD S. LAUDER, LEONARD A. LAUDER, AERIN LAUDER, DANIEL J. BRESTLE, PATRICK BOUSQUET-CHAVANNE, and RICHARD W. KUNES,
Defendants.
) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
CIVIL ACTION NO. ________
CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS
JURY TRIAL DEMANDED
INTRODUCTION
1. This is a federal class action on behalf of all those who purchased or otherwise
acquired the securities of The Estée Lauder Companies Inc. (“Estée Lauder” or the “Company”)
between April 28, 2005 and October 25, 2005, inclusive (the “Class Period”), seeking to pursue
remedies under the Securities Exchange Act of 1934 (the “Exchange Act”). As alleged herein,
defendants published a series of materially false and misleading statements that defendants knew
and/or recklessly disregarded were materially false and misleading at the time of such
publication, and which omitted to reveal material information necessary to make defendants’
statements, in light of such material omissions, not materially false and misleading.
OVERVIEW
2. Estée Lauder was founded in 1946 by Joseph and Estée Lauder and today is a
premium-end global manufacturer of skin care, makeup, fragrance and hair care products that are
sold at more than 20,000 points of sale (primarily upscale department stores) under a variety of
brands. In its most recent Form 10-K, filed with the United States Securities and Exchange
Commission (“SEC”) on September 2, 2005, the Company described its distribution network and
strategy as follows:
We sell our prestige products principally through limited distribution channels to complement the images associated with our brands. These channels, encompassing over 20,000 points of sale, consist primarily of upscale department stores, specialty retailers, upscale perfumeries and pharmacies, prestige salons and spas and, to a lesser extent, freestanding company-owned stores and spas, our own and authorized retailer web sites, stores on cruise ships, television direct marketing, in-flight and duty-free shops. We believe that our strategy of pursuing limited distribution strengthens our relationships with retailers, enables our brands to be among the best selling product lines at the stores and heightens the aspirational quality of our brands.
3. The Lauder family remains the dominant Estée Lauder shareholder, with
approximately 82% of the Company’s voting shares. William Lauder, grandson of the founders,
was, at all relevant times, the Company’s Chief Executive Officer, and Leonard Lauder, William
Lauder’s father, its Chairman.
4. Estée Lauder describes itself as a pioneer in the prestige beauty market but, by the
commencement of the Class Period, the Company was losing ground to products that,
increasingly, were being distributed outside of the department store channels upon which Estée
Lauder primarily relied for distribution of its products. Consequently, the Company’s actual net
sales and net earnings were trending downward. This had an adverse effect on the price of Estée
Lauder securities; Estée Lauder common stock, which had traded in a range of approximately
2
$44 to $48 per share throughout the first calendar quarter of 2005, had fallen to a low of $37.48
on April 28, 2005, the first day of the Class Period.
5. Defendants did not disclose the steady erosion of the Company’s market share, or
rectify the conditions leading to this result, but they did launch a largely successful campaign
that employed channel stuffing and the dissemination of materially false and misleading
statements to prop up the Company’s share price long enough for Estée Lauder insiders to sell
3,380,399 shares of their Estée Lauder common stock at artificially inflated prices for proceeds
of $88,077,150. In furtherance of their campaign to increase demand for (and the price of) Estée
Lauder shares, defendants, on May 18, 2005, increased the Company’s share repurchase program
by 20 million shares to 48 million shares and, less than a week later, on May 24, 2005,
defendants caused Estée Lauder to purchase 1,872,000 shares of Estée Lauder common stock
from defendant Ronald S. Lauder at $39.45 per share for a total purchase price of $73,850,400.
6. The truth began to emerge on September 19, 2005 when defendants disclosed that
the Company would not meet its guidance for the first half of fiscal 2006. On this disclosure, the
Company’s stock fell 9%, from $40.51 to $36.05 per share. The stock, however, continued to
trade at artificially inflated levels until October 26, 2005 when defendants were forced to
disclose that, for the first quarter of fiscal 2006, the Company would earn only $61.8 million, or
$0.28 per share, down 38% from the previous year’s earnings of $95.7 million, or $0.41 per
share, on essentially flat sales. These results were well below analysts’ revised consensus
earnings estimate of $0.32 cents a share on revenue of $1.54 billion. Following this disclosure of
the Company’s results and lowered guidance, the Company’s share price fell to $30.71. By this
time, Estée Lauder insiders had, during the Class Period, sold 3,380,399 shares of their Estée
Lauder common stock to unwitting investors for proceeds of $88,077,150.
3
JURISDICTION AND VENUE
7. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by
the SEC [17 C.F.R. § 240.10b-5].
8. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. § 78aa].
9. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and
28 U.S.C. § 1391(b). Estée Lauder maintains its principal place of business in this District and
many of the acts and practices complained of herein occurred in substantial part in this District.
10. In connection with the acts alleged in this complaint, defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not
limited to, the mails, interstate telephone communications and the facilities of the national
securities markets.
PARTIES
11. Plaintiff Thomas S. Shin, as set forth in the accompanying certification,
incorporated by reference herein, purchased the common stock of Estée Lauder at artificially
inflated prices during the Class Period and has been damaged thereby.
12. Defendant Estée Lauder is a Delaware corporation with its principal place of
business at 767 Fifth Avenue, New York, NY. Estée Lauder is a manufacturer and marketer of
skin care, makeup, fragrance and hair care products. The Company’s products are sold globally
under brand names that include Estée Lauder, Aramis, Clinique, Prescriptives, Origins, M-A-C,
La Mer, Bobbi Brown, Tommy Hilfiger, Donna Karan, Aveda, Stila, Jo Malone, Bumble and
Bumble, kate spade beauty, Darphin Paris, Michael Kors and Rodan & Fields, among others.
4
13. Defendant William P. Lauder (“W. Lauder”) was, during the relevant period,
Chief Executive Officer and President of the Company.
14. Defendant Ronald S. Lauder (“R. Lauder”) was, during the relevant period,
director of the Company, having served in that capacity since 1988 and from 1968 to 1986, and
also served as Chairman of Clinique Laboratories, LLC, a subsidiary of the Company.
15. Defendant Leonard A. Lauder (“L. Lauder”) was, during the relevant period,
Chairman of the Board of Directors of the Company.
16. Defendant Aerin Lauder (“A. Lauder”) was, during the relevant period, Senior
Vice President, Global Creative Directions and a Director of the Company.
17. Defendant Daniel J. Brestle (“Brestle”) was, during the relevant period, Chief
Operating Officer of the Company.
18. Defendant Patrick Bousquet-Chavanne (“Bousquet-Chavanne”) was, during the
relevant period, Group President of the Company.
19. Defendant Richard W. Kunes (“Kunes”) was, at all relevant times, Chief
Financial Officer of the Company.
20. W. Lauder, R. Lauder, L. Lauder, A. Lauder, Brestle, Bousquet-Chavanne and
Kunes are referred to collectively herein as the “Individual Defendants.”
21. Because of the Individual Defendants’ positions with the Company, they had
access to the adverse undisclosed information about its business, operations, products,
operational trends, financial statements, markets and present and future business prospects via
access to internal corporate documents (including the Company’s operating plans, budgets and
forecasts and reports of actual operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management and Board of Directors
5
meetings and committees thereof and via reports and other information provided to them in
connection therewith.
22. It is appropriate to treat the Individual Defendants as a group for pleading
purposes and to presume that the false, misleading and incomplete information conveyed in the
Company’s public filings, press releases and other publications as alleged herein are the
collective actions of the narrowly defined group of defendants identified above. Each of the
above officers of Estée Lauder, by virtue of their high-level positions with the Company, directly
participated in the management of the Company, was directly involved in the day-to-day
operations of the Company at the highest levels and was privy to confidential proprietary
information concerning the Company and its business, operations, products, growth, financial
statements, and financial condition, as alleged herein. Said defendants were involved in drafting,
producing, reviewing and/or disseminating the false and misleading statements and information
alleged herein, were aware, or recklessly disregarded, that the false and misleading statements
were being issued regarding the Company, and approved or ratified these statements, in violation
of the federal securities laws.
23. As officers and controlling persons of a publicly-held company whose common
stock was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the
New York Stock Exchange (the “NYSE”), and governed by the provisions of the federal
securities laws, the Individual Defendants each had a duty to disseminate promptly, accurate and
truthful information with respect to the Company’s financial condition and performance, growth,
operations, financial statements, business, products, markets, management, earnings and present
and future business prospects, and to correct any previously-issued statements that had become
materially misleading or untrue, so that the market price of the Company’s publicly-traded
6
common stock would be based upon truthful and accurate information. The Individual
Defendants’ misrepresentations and omissions during the Class Period violated these specific
requirements and obligations.
24. The Individual Defendants participated in the drafting, preparation, and/or
approval of the various public reports and other communications complained of herein and were
aware of, or recklessly disregarded, the misstatements contained therein and omissions
therefrom, and were aware of their materially false and misleading nature. Because of their
Board membership and/or executive and managerial positions with Estée Lauder, each of the
Individual Defendants had access to the adverse undisclosed information about Estée Lauder’s
business prospects and financial condition and performance as particularized herein and knew (or
recklessly disregarded) that these adverse facts rendered the positive representations made by or
about Estée Lauder and its business issued or adopted by the Company materially false and
misleading.
25. The Individual Defendants, because of their positions of control and authority as
officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Class Period. Each Individual Defendant was provided with copies of the documents alleged
herein to be misleading prior to or shortly after their issuance and/or had the ability and/or
opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the
Individual Defendants is responsible for the accuracy of the public reports and releases detailed
herein and is therefore primarily liable for the representations contained therein.
26. Each of the defendants is liable as a participant in a fraudulent scheme and course
of business that operated as a fraud or deceit on purchasers of Estée Lauder common stock by
7
disseminating materially false and misleading statements and/or concealing material adverse
facts. The scheme: (i) deceived the investing public regarding Estée Lauder’s business,
operations, management and the intrinsic value of Estée Lauder common stock; (ii) enabled
Estée Lauder insiders to sell millions of dollars of their privately held Estée Lauder shares while
in possession of material adverse non-public information about the Company; and (iii) caused
plaintiff and other members of the Class to purchase Estée Lauder common stock at artificially
inflated prices.
PLAINTIFF’S CLASS ACTION ALLEGATIONS
27. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or
otherwise acquired the securities of Estée Lauder between April 28, 2005 and October 25, 2005,
inclusive (the “Class”), and who were damaged thereby. Excluded from the Class are
defendants, the officers and directors of the Company, at all relevant times, members of their
immediate families and their legal representatives, heirs, successors or assigns and any entity in
which defendants have or had a controlling interest.
28. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Estée Lauder common shares were actively traded
on the NYSE. As of August 26, 2005, the Company had more than 134.41 million shares of
common stock issued and outstanding. While the exact number of Class members is unknown to
plaintiff at this time and can only be ascertained through appropriate discovery, plaintiff believes
that there are hundreds or thousands of members in the proposed Class. Record owners and
other members of the Class may be identified from records maintained by Estée Lauder or its
transfer agent and may be notified of the pendency of this action by mail, using the form of
notice similar to that customarily used in securities class actions.
8
29. Plaintiff’s claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by defendants’ wrongful conduct in violation of
federal law that is complained of herein.
30. Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
31. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
a. whether the federal securities laws were violated by defendants’ acts as
alleged herein;
b. whether statements made by defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and management of
Estée Lauder; and
c. to what extent the members of the Class have sustained damages and the
proper measure of damages.
32. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
9
SUBSTANTIVE ALLEGATIONS
Defendants’ Materially False and Misleading Statements Made During the Class Period
33. The Class Period begins on April 28, 2005. On that date, Estée Lauder published
a release announcing relatively weak results for its third fiscal 2005 quarter ended March 31,
2005. The Company reported earnings of $0.46 per share, short of analysts’ expected earnings,
and attributed the earnings shortfall to its investment in the launch of new products. Defendants
also lowered full-year guidance, but only slightly: For the full year, Estée Lauder forecasted
earnings from continuing operations in the range of $1.87 to $1.90 per share, on sales growth of
between 6% to 6.5%. Previously, the Company had projected earnings per share ranging from
$1.88 to $1.93, on sales growth of 7%. The Company reassured investors that, although the third
quarter was disappointing relative to second-half guidance, the Company would make up the
shortfall in the fourth quarter:
Estée Lauder Companies Reports Third Quarter Results; Net Sales and Diluted Per Share Earnings from Continuing Operations Increase 8%
The Company reported net earnings from continuing operations for the quarter ended March 31, 2005 of $106.2 million, a 6% increase versus $100.1 million last year. Diluted earnings per common share from continuing operations for the quarter increased 8% to $.46 compared with $.43 reported in the prior year. Net earnings and diluted earnings per share for the quarter increased 8% and 9%, respectively, compared with the prior year, including discontinued operations.
William P. Lauder, President and Chief Executive Officer, said, “Our Company turned in strong local currency sales growth this quarter despite pockets of economic weakness and soft sales of Estée Lauder brand fragrances. While sales growth was slightly lower than our expectations, most brands reported gains. Our business in the Americas led sales growth, while mixed results in Europe and Asia slightly tempered our overall performance. For the quarter, earnings per share growth reflected planned investment spending to support new launch activity for our fiscal second half.”
“As we said publicly, we expect the Company’s second half profit improvement to be substantially weighted towards our fiscal fourth quarter. That said, with three-quarters of the fiscal year behind us, and the lower sales growth this quarter,
10
we now expect full fiscal year local currency sales will grow between 6% and 6.5% and fiscal 2005 diluted earnings per share from continuing operations to be between $1.87 and $1.90” [Emphasis added.]
For the Company’s fiscal 2005 full-year results, reported net sales are expected to grow between 8.5% and 9% in dollars, which reflects a benefit of approximately 2.5 percentage points of foreign currency translation impact, versus fiscal 2004. Based on actual sales to date and expected sales in the fourth fiscal quarter, the Company now expects to achieve diluted earnings per share of between $1.87 and $1.90 for the fiscal 2005 year . . . . [Emphasis added.]
34. On April 28, 2005, defendants hosted a conference call to discuss the Company’s
third quarter results, the transcript of which was published by Fair Disclosure Wire. During the
conference call, Ann Gillin, a Lehman Brothers analyst, asked defendant Kunes whether rising
inventory was an indication that the Company’s sales performance would weaken in 2006.
Kunes denied this. The exchange was as follows:
ANN GILLIN, ANALYST, LEHMAN BROTHERS: Thanks. I’m very confused about the inventory, I guess, and working capital in general. This is isn’t [sic] the first quarter, it’s actually the second sequential quarter where we’ve seen this rise. Given gross margins that you typically print, particularly on inventory levels, it just seems like those numbers are starting to get a way, and, perhaps, suggest a less optimistic outlook than you’re giving us for topline, in particular, going forward.
RICK KUNES: Ann, I think in the last two quarters we’ve seen and we’ve taken down our sales growth guidance slightly. We went from -- coming into the year at 7 to 8%, where last call we said between 6 and around 7%, rather. In this call, we said between 6 and 6.5%. So our sales are slowing down. That’s -- that is really what’s generating that blip in inventory. For us --
ANN GILLIN: But, Rick, my concern is actually that inventories are continuing to rise and that we’re actually -- they, perhaps, are more of a leading indicator of what to expect for FY ‘06 in terms of sales growth for FY ‘06.
RICK KUNES: No, I think our -- the inventory growth that you see now is a result of the sales not coming through this year as much as we had hoped they would be. But it takes us time. I mean, to your point, it takes us time. Because our supply chain is a little bit longer than other consumer products companies, it takes us longer to work those inventory levels down, so when the sales slow down, our inventory goes up, and it takes us a period of time to work that through. [Emphasis added.]
11
35. Similarly, in an exchange with Linda Bolton Weiser, an analyst for Oppenheimer,
William Lauder stated during the conference call that relatively high channel and raw material
inventory levels were to be expected given the size of the Company’s sales distribution chain,
and that they would not have a negative impact on the Company’s sales and margins:
LINDA BOLTON WEISER: Okay. And just one more question about the inventory issue. I recall when you had this problem kind of pre 9/11 and then post 9/11 a couple of years ago. When you were working down the inventory level for many quarters, it was really hurting you margin performance quite a bit. Are you figuring that effect into your guidance now? And also, can you comment on how your inventory levels are in the channel?
WILLIAM LAUDER: Well, our inventory levels in the channel, we start with that one, are pretty close to where they were that last year. I mean, there’s very little change in that, and so we haven’t seen any change in that level of inventory. As far as working down our inventories, it takes us a little while to do that, but the magnitude of this issue is nothing like we faced after 9/11. So we’re not really anticipating any tremendous impact on our margins, per se, but it will take us -- it will take us time to work through the supply chain. I think if you went back in time and looked at the inventory, you first saw a reduction in raw materials that worked its way through finished goods, it took us a couple of quarters -- two to three quarters to get back to a normal level. But, it takes a little time, because our supply chain is longer than some other industries. But you have to remember, we produced in just a few locations, we distribute to 130 markets around the world. We generate tremendous gross margins as a result of that, but it also causes us to carry a little more inventory and have a little bit longer supply chain. [Emphasis added.]
36. Kunes also brushed off speculation that the imminent consolidation of Federated
Department Stores, Inc. and the May Department Stores Company would have a negative impact
on 2006 sales, stating, “I think it’s safe to assume that there is negative near-term and it will
probably be marginal if you realize that the universe of stores covered is approximately 132 out
of a population of 2,200 in North America.” [emphasis added.]
37. 3Q:F05 Form 10-Q. On or about April 29, 2005, defendants filed with the SEC
the Company’s 3Q:F05 Form 10-Q for the quarter ended March 31, 2005, signed by defendant
Kunes, and certified by defendants Kunes and W. Lauder. In addition to reiterating positive
12
statements concerning the Company’s operations and purported financial strength, Estée
Lauder’s 3Q:F05 Form 10-Q stated, in part, the following:
Note 1 - Summary of Significant Accounting Policies Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X . . . .
* * *
Critical Accounting Policies
As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2004, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those estimates and assumptions. Our most critical accounting policies relate to revenue recognition, concentration of credit risk, inventory, pension and other postretirement benefit costs, goodwill and other intangible assets, income taxes and derivatives. Since June 30, 2004, there have been no changes in our critical accounting policies and no significant changes to the assumptions and estimates related to them. [Emphasis added.]
38. Controls. The Company’s 3Q:F05 Form 10-Q also contained attestations to the
purported effectiveness and sufficiency of the Company’s controls and procedures, as follows:
Item 4. Controls and Procedures.
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of March 31, 2005 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date. [Emphasis added.]
13
39. Certifications. In addition to the foregoing, the Company’s 3Q:05 Form 10-Q
also contained certifications by Kunes and W. Lauder, which attested to the purported accuracy
and completeness of the Company’s financial and operational reports, as follows:
1. I have reviewed this quarterly report on Form 10-Q of The Estée Lauder Companies Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
14
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. [Emphasis added.]
Date: April 28, 2005 /s/ WILLIAM P. LAUDER President and Chief Executive /s/ RICHARD W. KUNES Executive Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO RULE 13A-14(B) OR RULE 15D-14(B) AND 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002)
Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), the undersigned officer of The Estée Lauder Companies Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (the “10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78m or 78o(d)), and the information contained in the 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. [Emphasis added.]
Dated: April 28, 2005 /s/ WILLIAM P. LAUDER President and Chief Executive Officer
* * *
Dated: April 28, 2005 /s/ RICHARD W. KUNES Executive Vice President and Chief Financial Officer
40. On May 24, 2005, defendants announced that the Company had agreed to
purchase 1.872 million shares of Class A Common Stock directly from R. Lauder. The
Company agreed to pay R. Lauder $39.25 per share, for total gross proceeds of more than $74.47
15
million. This transaction was approved by Estée Lauder’s directors. Following this transaction,
R. Lauder owned less than 57,553 shares of Estée Lauder Class A Common Stock.
41. The statements set forth in ¶¶ 33-40 above were materially false and misleading
when made, and were known by defendants to be materially false and misleading, or were
recklessly disregarded as such, for the following reasons, among others:
a. The Company’s overhead was bloated with unnecessarily high sales,
general and administrative costs;
b. Approximately 35% of Estée Lauder’s business was driven by “gift with
purchase promotions,” but the Company, unlike certain of its competitors, did not have the
ability to analyze the effectiveness of such promotions with respect to specific brands. The
Company, therefore, could not cut its marketing costs, and thereby increase margins and
earnings, by identifying and eliminating unprofitable promotional programs;
c. The number of consumers who bought cosmetic products through the
channels Estée Lauder utilized (i.e., traditional department stores) was sharply decreasing and
this trend was having a materially adverse effect on Estée Lauder’s sales and earnings
performance and prospects. Specifically, mid-level consumers, increasingly, were purchasing
cosmetic products from discount retailers such as Target and Kohl’s, while at the higher end,
cosmetic consumers were increasingly turning to specialty boutiques, pharmacies and spas for
their cosmetic products. In contrast, the lion’s share of Estée Lauder sales were through
traditional department stores;
d. To conceal the shortfall in sales and earnings, defendants offered their
products to retailers with unusually favorable sales terms that created an overhang of product in
the retail channel that defendants knew would subsequently cut into 2006 sales;
16
e. As a result of the foregoing, defendants lacked any reasonable basis to
claim that Estée Lauder was operating according to plan, or that Estée Lauder could achieve
guidance sponsored and/or endorsed by defendants; and
f. The Company lacked adequate internal controls and, consequently, the
information disseminated by defendants, with respect to, among other things, Estée Lauder’s
operational performance, prospects and financial condition, was inherently unreliable.
42. On August 16, 2005, Estée Lauder published a release announcing results for its
fourth quarter and full fiscal year 2005, ended June 30, 2005, that were purportedly consistent
with defendants’ guidance. Specifically, the Company reported net sales of $6.34 billion, a 9%
increase over the $5.79 billion reported in the prior year, and net earnings before special charges
of $1.90 per diluted share:
Estée Lauder Companies Reports 9% Full Year Net Sales Growth; EPS From Continuing Operations, Before Special Tax Charge, Up 17% to $1.90 for Full Year; Up 36% to $.42 for Fourth Quarter; Company Provides Fiscal 2006 Expectations
For the full fiscal year 2005, the Company reported net earnings from continuing operations of $406.1 million, up 8% from $375.4 million last year. Diluted earnings per common share from continuing operations for the year rose 10% to $1.78 from $1.62 reported in the prior year.
Net earnings and diluted earnings per share for the year increased 19% and 20%, respectively, compared with the prior year, including discontinued operations.
William P. Lauder, President and Chief Executive Officer, said, “This year we achieved yet another significant milestone by ending the year with sales well over the six billion dollar mark. The strong local currency sales growth we turned in translated into significant bottom line growth, demonstrating our ability to follow through on our commitment to create value for our stockholders. We will continue to manage our Company with that commitment foremost in our minds.”
“We are optimistic about the coming year, and we see opportunities to expand our global leadership in prestige beauty. Launches across product categories and regions augur well for us not only in the coming fiscal year but in future years as
17
well, enabling us to optimize the strength of our brand portfolio and leverage our global distribution capabilities.” [Emphasis added.]
43. The Company’s August 16, 2005 release provided guidance for the first half and
full fiscal year 2006 stating, in part, as follows:
Estimate of Fiscal 2006 First Half and Full Year
Net sales for the first half of fiscal 2006 are expected to grow between 7% and 8% in dollars, including a benefit of approximately 50 basis points due to foreign currency exchange, versus the first half of fiscal 2005 . . . . The Company expects diluted earnings per share for the first half to be essentially flat, including the $.10 impact from expensing stock options.
For fiscal 2006 the Company’s reported net sales are expected to grow between 5.5% and 6.5% versus fiscal 2005, with essentially no foreign currency translation impact. At the same time the Company expects to achieve diluted earnings per share of between $1.95 and $2.00 for the fiscal 2006 year, which includes the above mentioned $.17 per share impact from expensing stock options as well as the potential impact of the pending Federated Department Stores, Inc. and The May Department Stores Company merger . . . . [Emphasis added.]
44. On August 16, 2005, defendants hosted a conference call to discuss the
Company’s fourth quarter results, the transcript of which was published by Fair Disclosure Wire.
In his introduction to the call, W. Lauder stated, “During the year, we took many actions that
strengthened our Company, positioned us for future growth, and increased stockholder value.”
With respect to the Company’s operational performance and prospects, W. Lauder stated as
follows:
Now, to get a closer look at our operational performance, first, foremost, and most importantly, we grew sales in each major product category and in each region. Fiscal 2005 sales growth in constant currency was led by strength in makeup, hair care and skin care, followed by less buoyant growth in fragrance. In our skin care category for the full year we reported sales of $2.35 billion, a 10% increase and grew 7% in constant dollars. We remain at the forefront of innovation and technology. For example, the Company developed poly peptide technology for the repair segment of skin care product leveraging its use across four brands. Additionally, our La Mer brand continued its strong growth in key products in the Estée Lauder Clinique and Origins brands helped drive the category also. Makeup sales of 2.42 billion rose 13% in dollars and an impressive 11% in local currency. Our makeup artist brands turned in very strong sales gains led again by M.A.C
18
and Bobbi Brown. We saw solid increases in certain foundation, eye, mascara, and lip gloss products from Clinique and Estée Lauder, and Flirt! and American Beauty, two of our newer brands, also provided incremental sales in this category.
* * *
Looking ahead, there are a few main questions we ask ourselves. First, how do we continue to create value for our stockholders? Second, what will it take to continue growing our Company at or above our targeted goal? And third, how will we maintain our leadership position or even better, enhance it? The fundamental strategies that have made us successful in the past will continue to drive us well into the future. But the focus and emphasis have shifted with the changes in the industry, the retailing environment, and of course, the consumer’s needs and desires. As such we have five strategic imperatives that we are confident will drive our growth and enhance our leadership in prestige beauty. They are -- optimizing our brand portfolio, strengthening our product categories, strengthening and expanding geographic presence, diversifying distribution, and achieving operational and cost excellence.
* * *
Fourth, our strategic imperative is diversifying distribution. A critical distribution development is the Federated and May Department Store merger. We have experienced this situation previously with the absorption of Broadway on the West Coast by Macy’s, and the closing of Eden’s in Canada. Long-term, the impact on our business should be positive, having a strong nationwide retailer operating with fewer name places as our largest customer will increase the efficiency of our training, sales, promotion and advertising, and logistical support. Most importantly, our experience bears out that our strong brands speak directly to consumers who will still have access to our brands at their favorite shopping venues. [Emphasis added.]
45. Following the release of the Company’s 2005 results and the conference call, the
Company’s share price surged by 9%, from a closing price of $36.96 on August 15, 2005 to a
closing price of $40.32 on August 16, 2005.
46. The statements set forth in ¶¶ 42-44 above were materially false and misleading
when made, and were known by defendants to be materially false and misleading, or were
recklessly disregarded as such thereby, for the reasons set forth in ¶ 41.
47. FY: 2005 Form 10-K. On or about September 2, 2005, defendants filed with the
SEC the Company’s FY: 2005 Form 10-K for the year ended June 30, 2005, signed and certified
19
by Kunes and W. Lauder. In addition to reiterating statements concerning the Company’s
operations and results, and in addition to containing certifications that were the same as, or
substantially similar to, those filed previously with the SEC, the Company’s FY: 2005 Form 10-
K stated, in part, the following:
Information Systems
Information systems support business processes including product development, marketing, sales, order processing, production, distribution and finance. Of the many systems currently being utilized, the most significant to our business needs are: (i) a centralized data repository of essential attributes for each of the products we offer, or plan to offer, which enables us to globally manufacture and market products of consistent quality; (ii) a sales analysis system to track weekly sales at the stock keeping unit (SKU) level at most significant retail sales locations (i.e., sell-through data), increasing our understanding of consumer preferences and enabling us to coordinate more effectively our product development, manufacturing and marketing strategies; (iii) an automated replenishment system with many of our key domestic customers, allowing us to replenish inventories for individual points of sale automatically, with minimal paperwork; and (iv) an inventory management system to provide us with a global view of finished goods availability relative to actual requirements, facilitating inventory control and distribution for both existing product lines and new product launches.
The efficiencies provided by these systems have resulted in increased sales, fewer out-of-stocks and reduced retail inventories. We expect that these systems will continue to provide inventory and sales efficiencies in the short and medium terms. As part of our long-term effort to enhance these efficiencies, we are implementing enterprise-wide global programs that we expect will deliver a single set of integrated data, processes and technologies, which would be scalable and used to standardize business processes across brands, operating units and sales affiliates. [Emphasis added.]
48. Additional Controls. The Company’s FY:2005 Form 10-K also contained
representations that attested to the purported effectiveness and sufficiency of the Company’s
controls, procedures and information systems, as follows:
Item 9A. Controls and Procedures.
Our disclosure controls and procedures (as defined in Rules13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
20
reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2005 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
* * *
Management’s Report on Internal Control over Financial Reporting
Management of The Estée Lauder Companies Inc. (including its subsidiaries) (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules13a-15(f) of the Securities Exchange Act of 1934, as amended).
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
* * *
Under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, the Company’s management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework and criteria established in Internal Control — Integrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company’s management has concluded that, as of June 30, 2005, the Company’s internal control over financial reporting was effective…. [Emphasis added.]
/s/ William P. Lauder William P. Lauder President and Chief Executive Officer /s/ Richard W. Kunes
21
Richard W. Kunes Executive Vice President and Chief Financial Officer August 23, 2005
THE TRUE FINANCIAL AND OPERATIONAL CONDITION OF ESTÉE LAUDER IS BELATEDLY DISCLOSED
The “First Shoe” Drops
49. FY:06 Outlook Affirmed. On September 19, 2005, defendants revised
downward their guidance for the first half of fiscal 2006, but reaffirmed defendants’ outlook for
full-year fiscal 2006 stating, in part, the following:
Estée Lauder Companies Reaffirms Outlook for Fiscal 2006 Full Year; Modifies First Half Expectations
NEW YORK--(BUSINESS WIRE)--Sept. 19, 2005--The Estée Lauder Companies Inc. (NYSE: EL) today reaffirmed its previously announced guidance for sales and earnings per share for its fiscal full year ending June 30, 2006 and revised its outlook for its first half results.
For the 2006 full fiscal year, the Company continues to expect net sales in constant currency to grow between 5.5% and 6.5% versus fiscal 2005. The Company now expects foreign currency translation to negatively impact its reported results by approximately 1%. At the same time the Company also continues to expect to achieve diluted earnings per share of between $1.95 and $2.00 for the fiscal 2006 year . . . .
The combined impact of these business conditions, the Company’s planned product launches and investment spending, as well as the timing of expensing of stock-based compensation, is expected to result in the Company’s fiscal 2006 first quarter net earnings being significantly below the same prior-year period.
Notwithstanding the expected first quarter decline, the Company’s business plan reflects improvement in its fiscal second quarter. As a result of the abovementioned business conditions, net sales for the first half of fiscal 2006 are now expected to grow between 5% and 6% in constant currency compared with previous expectations of between 7% and 8% . . . . The Company said that its estimate for earnings per share for the first half of fiscal 2006 is now expected to be between $.87 and $.92, including a $.10 impact from expensing stock based compensation.
22
The Company believes that with the product launches and programs in place for the fiscal second half it will be able to recoup the expected first half sales and earnings shortfall . . . . [Emphasis added.]
50. Despite the fact that defendants stated that full-year results were expected to meet
guidance, the belated revelation that the Company would not meet guidance for the first half of
fiscal 2006 caused shares of the Company to trade lower; shares of the Company fell from a
close of $40.48 per share on September 19, 2005, to a close of $36.48 per share on September
20, 2005, and a close of $35.98 per share on September 21, 2005, as investors digested the
significance of this news. Had defendants revealed the true adverse condition of the Company,
shares of Estée Lauder would have traded even lower.
51. Following publication of these results, on September 20, 2005, analysts at
Deutsche Bank Securities issued a report that, although critical of the Company, retained a near-
term price target on shares of the Company at $40.00. The relatively high price target reflected
the analysts’ continued belief in the overall credibility of management, yet the report did raise
the following important issues:
Management was applauded, and deserved to be, for its candor, preparedness and concise message on the last earnings call, introducing what many believed was achievable FY06 guidance (which we actually thought was back-half loaded then!) and a strategic roadmap to attain its 13% operating margin target by 2007, driven by 6-7% top-line growth.
The key question is what happened to throw such a huge wrench in the works in the last month or so. Department store same store sales have been trending okay, and any softness hereafter on consumer spending has disproportionately impacted the low end consumer (although sentiment is terrible), not exactly the sweetspot for Lauder’s $20 lipstick. Moreover, in meetings with L’Oreal over the last few days, we learned that Lancome was not feeling the same burn, which is surprising given distribution overlap between Lancome and most of Estée Lauder’s brand portfolio is significant.
The other big question is FY06 guidance, which now seems impossibly back-half loaded with little rational for why we should assume growth will miraculously recover in the back half of the fiscal year despite some pretty touch comps, especially in the fourth quarter. We have lowered our top-line growth estimate to
23
5% and EPS to $1.90 ($0.05 below management’s rage for the year), noting that our numbers could prove aggressive since a lot can and will happen as gas and oil inflation works its way through the economy. Hopefully management has something powerful up its sleeve in the back half of the year that it won’t divulge for competitive reasons, but absent that, it is hard to imagine a scenario where numbers come in in-line with expectations.
52. On October 6, 2005, analysts at Deutsche Bank Securities issued a report that
reported that “poor execution” and problems with key retailers had hurt the Company. These
analysts also speculated that defendants had engaged in channel stuffing in earlier quarters that
had the effect of artificially inflating earlier results and depressing later ones. In this regard, the
Deutsche Bank report stated, in part, the following:
If department stores continue to muddle through, particularly at the high end, why are Lauder’s results flagging?
As for the first question, we have gathered a number of data-points that suggest that Lauder’s problems this quarter are, in fact, Lauder’s problems. In our discussions with the company’s prestige competitors, we have heard that the US business is basically status quo ante-hurricanes, or uninspiring but certainly not falling off a cliff. Lauder management itself admitted problems with a specific retailer (which we believe to be the legacy May company) and missteps with regard to its August gift with purchase program.
Could this quarter’s slowdown in the US be a result of shipping beyond consumption in the back half of 2005?
For the second question, we are not asserting that the company is indiscriminately loading the trade. However, the salesforce may have gotten overzealous in getting its extensive new product pipeline to store customers, anticipating sell-through trends witnessed in the June quarter carrying forward to the balance of the summer. Given the additional 2H05 sell-in, weakening demand for the company’s products in the US in late August and September could have been exacerbated by bloated trade inventory levels . . . . [Emphasis added.]
53. Similarly, in a report published on September 20, 2005, Citigroup stated as
follows:
. . . We are left to believe that something has gone wrong within the company from an execution standpoint. Specifically, while the company cites as an additional rationale for the shortfall in earnings the lower-than-expected boost to sales from promotional programs, we also wonder if in fact perhaps certain new
24
product launches have failed to live up to expectations. Further, given that the Company’s 4Q05 results were in fact a pleasant surprise at the time (sending the stock up 9% intraday in August), we now fear that perhaps the Company’s robust 9% sales growth in the Americas region specifically was overstated (implying that perhaps the company over-shipped inventory to retailers, and is now paying the price as that inventory is drawn down.) [Emphasis added.]
The “Second Shoe” Drops
54. Having put some time between defendants’ vigorous insider selling and the
publication of the last belated disclosure about the true operational and financial condition of the
Company, on October 26, 2005, before the market opened, defendants shocked investors by
publishing a release that announced financial and operational results well below analysts’
expectations – including a decline of as much as 33% in profits, and significantly lowered
guidance for fiscal 2006. For the first quarter of fiscal 2006, defendants revealed that the
Company would earn only $61.8 million, or $0.28 per share, down 38% from a year-ago profit of
$95.7 million, or $0.41 per share. Sales too were essentially flat year over year – representing
the smallest change in sales growth in three years. These results were well below analysts’
revised consensus estimates of earnings of $0.32 cents a share on revenue of $1.54 billion.
55. On this news, Estée Lauder shares tumbled – closing down almost 8% in the
single trading day, falling $2.55 per share to close at $30.71 per share. Earlier in the trading
session, shares of Estée Lauder reached a 30-month low of $29.98 per share.
56. The market for Estée Lauder’s common stock was open, well-developed and
efficient at all relevant times. As a result of these materially false and misleading statements and
failures to disclose, Estée Lauder securities traded at artificially inflated prices during the Class
Period. Plaintiff and other members of the Class purchased or otherwise acquired Estée Lauder
securities relying upon the integrity of the market price of Estée Lauder securities and market
information relating to Estée Lauder, and have been damaged thereby.
25
57. During the Class Period, defendants materially misled the investing public,
thereby inflating the price of Estée Lauder securities by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to make defendants’ statements, as
set forth herein, not false and misleading. Said statements and omissions were materially false
and misleading in that they failed to disclose material adverse information and misrepresented
the truth about the Company, its business and operations, as alleged herein.
58. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by plaintiff and other members of the Class. As described herein, during the
Class Period, defendants made or caused to be made a series of materially false or misleading
statements about Estée Lauder’s business, prospects and operations. These material
misstatements and omissions had the cause and effect of creating in the market an unrealistically
positive assessment of Estée Lauder and its business, prospects and operations, thus causing the
Company’s securities to be overvalued and artificially inflated at all relevant times. Defendants’
materially false and misleading statements during the Class Period resulted in plaintiff and other
members of the Class purchasing the Company’s securities at artificially inflated prices, thus
causing the damages complained of herein.
LOSS CAUSATION
59. Defendants’ wrongful conduct, as alleged herein, directly and proximately caused
the damages suffered by plaintiff and the Class. During the Class Period, plaintiff and the Class
purchased securities of Estée Lauder at artificially inflated prices and were damaged thereby.
The price of Estée Lauder common stock declined when the misrepresentations made to the
market, and/or the information alleged herein to have been concealed from the market, and/or the
effects thereof, were revealed, causing investors’ losses
26
ADDITIONAL SCIENTER ALLEGATIONS
60. As alleged herein, defendants acted with scienter in that each defendant knew that
the public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violations of the
federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their
receipt of information reflecting the true facts regarding Estée Lauder, their control over, and/or
receipt and/or modification of Estée Lauder’s allegedly materially misleading misstatements
and/or their associations with the Company that made them privy to confidential proprietary
information concerning Estée Lauder, participated in the fraudulent scheme alleged herein.
61. Defendants were motivated to materially misrepresent to the SEC and investors
the true financial condition of the Company because: (i) it enabled defendants to mislead
investors and to artificially inflate the price of Estée Lauder shares; and (ii) it enabled Estée
Lauder insiders – primarily members of the Lauder Family who dominated and controlled the
Company – to sell over $88 million of dollars of their privately held Estée Lauder shares while in
possession of material adverse non-public information about the Company. The insider stock
sales that occurred within the Class Period are set forth below:
Ronald Lauder: Director and Chairman, Estée Lauder Transaction Date # Shares Sold Price ($) Proceeds ($)
5/24/2005 1,872,000 5 73,476,000.00 39.29/7/2005 23,800 41.10 978,180.00 9/7/2005 1,200 41.11 9,332.00 4
9/14/2005 7,200 40.00 288,000.00 9 188/14/2005 4,700 40.01 ,047.00 9 132/14/2005 3,300 40.02 ,066.00 9 290,5/15/2005 7,300 39.80 40.00 9/15/2005 6,600 39.77 262,482.00
27
9/15/2005 6,300 39.82 250,866.00 9/15/2005 6,200 39.73 246,326.00 9/15/2005 4,500 39.78 179,010.00 9/15/2005 4,300 40.08 173,344.00 9/15/2005 3,800 39.96 151,848.00 9/15/2005 3,300 39.95 131,835.00 9/15/2005 3,300 40.09 132,297.00 9/15/2005 2,700 39.95 107,865.00 9/15/2005 2,700 40.04 108,108.00 9/15/2005 2,500 39.79 99,475.00 9/15/2005 2,500 39.98 99,950.00 9/15/2005 2,500 40.04 100,100.00 9/15/2005 2,000 40.07 80,140.00 9/15/2005 1,900 39.77 75,563.00 9/15/2005 600 39.76 23,856.00 9/15/2005 500 39.81 19,905.00 9/15/2005 400 39.90 15,960.00 9/15/2005 300 39.75 11,925.00 9/15/2005 300 39.88 11,964.00 9/15/2005 200 39.74 7,948.00 9/15/2005 100 39.91 3,991.00
1,97 77,695,97,000 23.00
Trust FB Jane LaudO Aerin & er Transac # Shares Pric Proceetion Date Sold e ($) ds ($)
8/24/2005 6,200 40.15 248,930.00 8/24/2005 5 216,7,400 40.13 02.00 8/24/2005 4 172,8,300 40.19 17.00 8/24/2005 3,900 40.40 157,560.00 8/24/2005 3 148,4,700 40.12 44.00 8/24/2005 2 92,1,300 40.05 15.00 8/24/2005 2,300 40.20 92,460.00 8/24/2005 2 80,42,000 40.21 0.00 8/24/2005 1 56,32,400 40.23 2.00 8/24/2005 1,200 40.32 48,384.00 8/24/2005 1,100 40.37 44,407.00 8/24/2005 40.09 900 36,081.00 8/24/2005 900 40.33 36,297.00 8/24/2005 300 40.14 12,042.00
1,442,981.00 35,900
28
Daniel B ief Operatin cer
Transact # Shares S Price ( Proceed
5 1,811,816,702.20
5 1755 175
145,775.005 1455 141
141,746.005 1375 1375 1125 1125 835 83
1,7 70,737.008/19/2005 1,700 41.61 0,737.008/19/2005 41.608/19/2005 41.648/19/2005 900 41.60 37,440.008/19/2005 900 41.64 37,476.008/19/2005 200 41.56 8,312.008/19/2005 200 41.67 8,334.008/19/2005 200 41.56 8,312.008/19/2005 200 41.67 8,334.008/19/2005 100 41.72 4,172.008/19/2005 100 41.72 4,172.00
133,332 5,557,846.40
restle: Ch g Offi
ion Date old $) s ($)
8/19/2008/19/2005
43,56643,566
41.7041.70
6,702.20
8/19/200 4,200 41.68 ,056.008/19/200 4,200 41.68 ,056.008/19/20058/19/200
3,5003,500
41.6541.65 ,775.00
8/19/200 3,400 41.69 ,746.008/19/20058/19/200
3,4003,300
41.6941.63 ,379.00
8/19/200 3,300 41.63 ,379.008/19/2008/19/200
2,7002,700
41.6241.62
,374.00,374.00
8/19/200 2,000 41.71 ,420.008/19/2008/19/2005
2,00000
41.7141.61
,420.00
7900900
37,440.0037,476.00
29
Malcolm Bond: Exec VP-Global Operations
Transaction Date # Shares Sold Price ($) Proceeds ($)
8/23/2005 15,300 40.75 623,475.008/23/2005 15,300 40.75 623,475.008/23/2005 8,100 40.74 329,994.008/23/2005 8,100 40.74 329,994.008/23/2005 3,000 40.70 122,100.008/23/2005 3,000 40.70 122,100.008/23/2005 2,700 40.72 109,944.008/23/2005 2,700 40.72 109,944.008/23/2005 2,300 40.80 93,840.008/23/2005 2,300 40.80 93,840.008/23/2005 1,999 40.96 81,879.048/23/2005 1,999 40.96 81,879.048/23/2005 1,700 40.75 69,275.008/23/2005 1,700 40.75 69,275.008/23/2005 1,500 40.73 61,095.008/23/2005 1,500 40.73 61,095.008/23/2005 1,100 40.76 44,836.008/23/2005 1,100 40.76 44,836.008/23/2005 900 40.97 36,873.008/23/2005 900 40.97 36,873.008/23/2005 867 40.79 35,364.938/23/2005 867 40.79 35,364.938/23/2005 800 40.71 32,568.008/23/2005 800 40.71 32,568.008/23/2005 700 40.77 28,539.008/23/2005 700 40.77 28,539.008/23/2005 400 40.80 16,320.008/23/2005 200 40.88 8,176.008/23/2005 200 40.88 8,176.008/23/2005 100 40.81 4,081.008/23/2005 100 40.81 4,081.00
82,932 3,380,399.94
Applicability Of Presumption Of Reliance:
Fraud-On-The-Market Doctrine
62. At all relevant times, the market for Estée Lauder’s common stock was an
efficient market for the following reasons, among others:
a. Estée Lauder’s stock met the requirements for listing, and was listed and
actively traded on the NYSE, a highly efficient market;
30
b. As a regulated issuer, Estée Lauder filed periodic public reports with the
c. Estée Lauder regularly communicated with public investors
rket communication mechanisms, including through regular dissem
rcuits of major newswire services and thro
ranging public disclosures, such as communications with the financial press and other sim
d. Estée Lauder was followed by several securities analysts em
(s) who wrote reports that were distributed to the sales force an
ers of their respective brokerage firm(s). Each of these reports wa
arketplace.
As a result of the foregoing, the market for Estée Lauder securities prom
ation regarding Estée Lauder from all publicly
ation in Estée Lauder stock price. Under these circum
or acquired Estée Lauder securities during the Class Period suffered simi
purchase of Estée Lauder securities at artificially inflated prices and a presum
SEC and the NYSE;
via
established ma inations of
press releases on the national ci ugh other wide-
ilar
reporting services; and
ployed by
major brokerage firm d certain
custom s publicly available and
entered the public m
63. ptly
digested current inform available sources and
reflected such inform stances, all purchased
lar injury through their
ption of reliance
applies.
NO SAFE HARBOR
64. The statuto statements under certain
circum es
not identified as “forward-looking
statements” when mad o
ld cause actual results to
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
ry safe harbor provided for forward-looking
stanc does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were
e. To the extent there were any forward-looking statements, there were n
meaningful cautionary statements identifying important factors that cou
31
extent that the statut d
liable for those false forward-looking statements because at the time each
of those forwa look particular
zed
s were
BASIS OF ALLEGATIONS
ory safe harbor does apply to any forward-looking statements pleade
herein, defendants are
rd- ing statements was made, the particular speaker knew that the
forward-looking statement was false, and/or the forward-looking statement was authori
and/or approved by an executive officer of Estée Lauder who knew that those statement
false when made.
65. ff’s
gs
by the Company, and media reports about the Company, and
plaintif
Plaintiff has alleged the following based upon the investigation of plainti
counsel, which included a review of SEC filings by Estée Lauder, as well as regulatory filin
and reports, securities analysts’ reports and advisories about the Company, press releases and
other public statements issued
f believes that substantial additional evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for discovery.
FIRST CLAIM
Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder Against All Defendants
66. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
67. During the Class Period, defendants carried out a plan, scheme and course of
conduct that was intended to
artificially inflate the price of Estée Lauder shares; (iii) enable Estée Lauder insiders to sell
and, throughout the Class Period, did: (i) deceive the investing
public, including plaintiff and other Class members, as alleged herein; : (ii) enable defendants to
3,380,399 shares of their privately held Estée Lauder stock for proceeds of $88,077,150 while in
possession of material adverse non-public information about the Company; and (iv) cause
32
plaintiff and other members of the Class to purchase Estée Lauder securities at artificially
inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants,
jointly and individually (and each of them) took the actions set forth herein.
68. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business that
operated as a fraud and deceit u any’s securities in an effort to
maintain artific
formation about the business,
operations and future prospects of Estée Lauder as specified herein.
70. ud, while in
possession of
lleged herein in an effort to assure investors of Estée Lauder’s value and
perform
pon the purchasers of the Comp
ially high market prices for Estée Lauder’s securities in violation of Section 10(b)
of the Exchange Act and Rule 10b-5. All defendants are sued either as primary participants in
the wrongful and illegal conduct charged herein or as controlling persons as alleged below.
69. Defendants, individually and in concert, directly and indirectly, by the use, means
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material in
These defendants employed devices, schemes and artifices to defra
material adverse non-public information and engaged in acts, practices, and a
course of conduct as a
ance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about Estée Lauder and its business
operations and future prospects in the light of the circumstances under which they were made,
not misleading, as set forth more particularly herein, and engaged in transactions, practices and a
33
course of business that operated as a fraud and deceit upon the purchasers of Estée Lauder
common stock during the Class Period.
71. Each of the Individual Defendants’ primary liability, and controlling person
liability ses
f the
Company’s m
misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by
, ari from the following facts: (i) the Individual Defendants were high-level executives
and/or directors at the Company during the Class Period and members of the Company’s
management team or had control thereof; (ii) each of these defendants, by virtue of his
responsibilities and activities as a senior officer and/or director of the Company was privy to and
participated in the creation, development and reporting of the Company’s internal budgets, plans,
projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and
familiarity with the other defendants and was advised of and had access to other members o
anagement team, internal reports and other data and information about the
Company’s finances, operations, and sales at all relevant times; and (iv) each of these defendants
was aware of the Company’s dissemination of information to the investing public, which they
knew or recklessly disregarded was materially false and misleading.
72. The defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts. Such defendants’ material misrepresentations and/or
omissions were done knowingly or with recklessly for the purpose and effect of concealing Estée
Lauder’s operating condition and future business prospects from the investing public and
supporting the artificially inflated price of its common stock. As demonstrated by defendants’
overstatements and misstatements of the Company’s business, operations and earnings
throughout the Class Period, defendants, if they did not have actual knowledge of the
34
recklessly refraining from taking those steps necessary to discover whether those statements
were false or misleading.
73. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Estée Lauder
securities was artificially inflated during the Class Period. In ignorance of the fact that market
prices of Estée Lauder’s publicly traded common stock were artificially inflated, and relying
directly or indirectly on the false and misleading statements made by defendants, or upon the
integrity of the market in which the securities trade, and/or on the absence of material adverse
information that was known to or recklessly disregarded by defendants but not disclosed in
public statements by defendants during the Class Period, plaintiff and the other members of the
Class acquired Estée Lauder securities during the Class Period at artificially high prices and were
damaged thereby.
74. At the time of said misrepresentations and omissions, plaintiff and other members
of the Class were ignorant of their falsity, and believed them to be true. Had plaintiff and the
other m ersemb of the Class and the marketplace known the truth regarding the problems that
Estée Lauder was experiencing, which were not disclosed by defendants, plaintiff and other
members of the Class would not have purchased or otherwise acquired their Estée Lauder
securities, or, if they had acquired such securities during the Class Period, they would not have
done so at the artificially inflated prices that they paid.
75. By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act, and Rule 10b-5 promulgated thereunder.
35
76. As a direct and proximate result of defendants’ wrongful conduct, plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sal thes of e Company’s securities during the Class Period.
SECOND CLAIM
Violation Of Section 20(a) Of The Exchange Act Against Individual Defendants
77. Plaintiff repeats and realleges each and every allegation contained above as if
78. The Individual Defendants acted as controlling persons of Estée Lauder within the
Company’s operations and/or intimate knowledge of the false financial statements filed by the
SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
these statements were issued and had the ability to prevent the issuance of the statements or
is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
fully set forth herein.
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions, and their ownership and contractual rights, participation in and/or awareness of the
Company with the
decision-making of the Company, including the content and dissemination of the various
statements that plaintiff contends are false and misleading. The Individual Defendants were
provided with or had unlimited access to copies of the Company’s reports, press releases, public
filings and other statements alleged by plaintiff to be misleading prior to and/or shortly after
cause the statements to be corrected.
79. In particular, each of these defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore,
36
80. As set forth above, Estée Lauder and the Individual Defendants each violated
Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue
of their positions as controlling persons, the Individual Defendants are liable pursuant to Section
20(a) of the Exchange Act. As a dir ult of defendants’ wrongful conduct,
plaintiff and other members of th nection with their purchases of
the Company’s common stock during the Class Period.
, plaintiff prays for relief and judgment, as follows:
B. Awarding compensatory damages in favor of plaintiff and the other Class
D. Awarding extraordinary, equitable and/or injunctive relief as permitted by law,
appropriate state law remedies to assure that the Class has an effective remedy; and
ay deem just and proper.
ect and proximate res
e Class suffered damages in con
WHEREFORE
A. Determining that this action is a proper class action, designating plaintiff as Lead
Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federal Rules of
Civil Procedure and plaintiff’s counsel as Lead Counsel;
members against all defendants, jointly and severally, for all damages sustained as a result of
defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding plaintiff and the Class their reasonable costs and expenses incurred in
this action, including counsel fees and expert fees;
equity and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and any
E. Such other and further relief as the Court m
37
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: March 30, 2006
MILBERG WEISS BERSHAD & SCHULMAN LLP
By: __________________________ Steven G. Schulman (SS-2561)
69)
Tel.: (212) 594-5300
NCY BINKOW & GOLDBERG
1801 Avenue of the Stars
Fax: (310) 201-9160
Eric Belfi, Esq. 275 Madison Avenue
DOCS\335 2
Peter E. Seidman (PS-87One Pennsylvania Plaza New York, NY 10119-0165
Fax: (212) 868-1229 GLA
LLP Michael Goldberg, Esq.
Suite 311 Los Angeles, CA 90067 Tel.: (310) 201-9150
MURRAY, FRANK & SAILER LLP
New York, NY 10016 Tel.: (212) 682-1818 ext 305 Fax: (212) 682-1892 Attorneys for Plaintiff
452v
38
