Overview
In an opinion today, Judge Gardephe dismissed a securities class action accusing Avon of defrauding its investors about its compliance with the FCPA. Avon’s management received a whistleblower letter about bribes to Chinese officials, and Judge Gardephe found that it was not fraudulent for Avon to investigate the allegations before disclosing them:
[Then-CEO Andrea] Jung's receipt of the whistleblower letter in June 2008 put Defendants on notice that FCPA violations had potentially occurred in connection with Avon's Chinese operations. Avon did not disclose the letter or its internal investigation of the allegations in its July 30, 2008 Form 10-Q, accompanying SOX certification, or quarterly earnings call . . . . The mere fact that Jung received the whistleblower letter, however, does not demonstrate that Avon knew that the allegations in the letter were true or consciously disregarded proof of the alleged bribery scheme in making Avon's financial disclosures. Moreover, the fact that Avon commenced an internal investigation tends to undermine any inference of scienter. . . . “[D]efendants are permitted a reasonable amount of time to evaluate potentially negative information and to consider appropriate responses before a duty to disclose arises." . . . Although Plaintiffs allege that Defendants were acting with an intent to defraud investors, "[a]n alternative and much more reasonable inference" as to why the internal investigation and whistleblower letter were not disclosed in July 2008" is that Defendants [were] us[ing] this time to investigate, to gather more information, and to confer with [the DOJ and the SEC] before taking any action." This alternate inference is bolstered by the fact that, after a preliminary investigation, Defendants disclosed in their next public filing in October 2008 the whistleblower letter and the resulting internal investigation, and also announced that the allegations in the letter appeared to be credible.
