Levi Korsinsky Prevails Once Again — Motion to Dismiss Denied in Avon Securities Class Action.

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Published November 20, 2019

On November 18, 2019, the Firm achieved an important victory in In re Avon Securities Litigation, No. 19 Civ. 01420 (CM), pending in the United States District Court for the Southern District of New York, when it defeated a motion to dismiss the complaint.  In ruling for Plaintiffs, the Court found that they had sufficiently alleged in their complaint that Defendants constructed a false narrative to portray Brazil as a growth center critical to Avon’s business, even though Defendants had dramatically lowered credit standards for their sales Representatives in Brazil—predominately women of lower socioeconomic status—resulting in Avon incurring large, uncollectable debts.  Instead of selling products in physical retail stores, or online, Avon uses a direct sales model in which Avon’s products are first sold on credit to Representatives who then sell the products to the ultimate consumers.  Because of the central relationship between Avon’s Representative count and its revenue, analysts and investors critically focused on Representative growth as an indicator of Avon’s overall economic health.   Plaintiffs sufficiently alleged that between January 21, 2016 and November 1, 2017 (the “Class Period”), Defendants concealed that they had dramatically loosened credit standards for their Representatives in Brazil to mask declining performance, and also entirely stopped training their Brazilian Representatives.  Plaintiffs further alleged that instead of disclosing this material information, Defendants falsely assured the market that both sales and Representative growth were increasing because of robust recruitment.  As detailed in Plaintiffs’ complaint, when Avon’s new Brazilian Representatives predictably and sadly fell heavily into debt and could not pay for the merchandise they purchased on credit, Defendants continued to mislead investors and used aggressive debt collection tactics on their own Representative to further hide the scope of the problem.  Plaintiffs pleaded that Avon’s securities ultimately plunged in value when the truth was revealed.   Plaintiffs’ successful complaint was supported by statements provided by seven former employees demonstrating that in 2015, the Company made a uniform, undisclosed decision to loosen credit standards for Brazilian Representatives.  The witnesses’ information supported Plaintiffs’ allegation that Defendants either knew or acted recklessly by ignoring information in their possession concerning the inevitable, negative consequences the pivot in credit policy would have on the Company.  The District Court’s noteworthy decision further develops recent caselaw concerning the effectiveness of the investigative process that must be employed by sophisticated counsel to craft a pleading which will survive a motion to dismiss.   View the Court's Decision Here