Case 1:11-cv-04665-PGG Document 29 Filed 03/16/12 Page 1 of 168 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK CITY OF BROCKTON RETIREMENT SYSTEM, Individually and On Behalf of All Civil Action No. 11 Civ. 4665 (PGG) Others Similarly Situated, CLASS ACTION Plaintiffs, AMENDED COMPLAINT FOR V. VIOLATIONS OF THE FEDERAL SECURITIES LAWS AVON PRODUCTS, INC., ANDREA JUNG, and CHARLES W. CRAMB, DEMAND FOR JURY TRIAL Defendants. Case 1:11-cv-04665-PGG Document 29 Filed 03/16/12 Page 2 of 168 TABLE OF CONTENTS I. INTRODUCTION .....................................................................................................................1 II. EXECUTIVE SUMMARY ..........................................................................................................2 III. JURISDICTION AND VENUE ...................................................................................................8 IV. THE PARTIES .........................................................................................................................9 A. Lead Plaintiffs And Named Plaintiffs......................................................................9 B. Defendants ...............................................................................................................9 V. BACKGROUND ON THE COMPANY, ITS FRAUDULENT SCHEME, AND FCPA RISK ..............11 A. Avon’s Need To Employ An International Growth Strategy ................................11 B. Avon’s Corporate Headquarters Increases Its Involvement In The Day-To- Day Management Of The Company’s China Operations......................................16 C. Avon’s International Growth Strategy In China And Latin America Heightens The Company’s FCPA Risk .................................................................18 D. Avon’s Code Of Business Conduct And Ethics ....................................................23 E. Avon’s 2004 Corporate Social Responsibility Report...........................................26 F. The Bribery Scandal At Avon................................................................................27 G. Avon Obligated Itself To Implement And Follow “Best Practices” For FCPACompliance.................................................................................................35 H. Avon’s Failure To Implement A Uniform FCPA Compliance Program Across The Company’s Global Operations ...........................................................41 I. The Lack Of FCPA Compliance Measures Coupled With A Corporate Culture Focused On Obtaining A Direct Selling License From China At Any Cost Allows FCPA Violations To Override Avon’s Accounting Controls..................................................................................................................49 1. Avon’s Accounting Controls on Expenses and Other Expenditures.........49 2. Avon’s Internal Audit Uncovers Evidence of Bribery in or Around 2005............................................................................................................52 3. Statements from Four Unnamed Chinese Government Officials Regarding Unlawful Payments by Avon to Numerous Chinese Officials......................................................................................................55 4. Despite Discovering FCPA Violations at Avon China, Defendants Fail To Incorporate FCPA Risk into Subsequent Audit Planning.............60 VI. LEGAL BACKGROUND TO THE CLASS PERIOD WRONGDOING – THE FCPA.......................63 A. The Anti-Bribery Provisions Of The FCPA..........................................................63 B. The Auditing And Accounting Provisions Of The FCPA.....................................66 C. Exceptions And Exemptions To The FCPA..........................................................68 i Case 1:11-cv-04665-PGG Document 29 Filed 03/16/12 Page 3 of 168 D. Penalties For Violations Of The FCPA .................................................................69 E. Increased Government Enforcement Of FCPA Violations....................................71 VII. DEFENDANTS ’ FALSE AND MISLEADING STATEMENTS .......................................................74 A. Second Quarter 2006 Form 10-Q And Related Statements...................................75 B. Avon’s 2004 Ethics Code And Corporate Responsibility Report .........................79 C. Third Quarter 2006 Form 10-Q And Related Statements......................................80 D. The February 6, 2007 Form 8-K And Related Statements ....................................82 E. 2006 Form 10-K.....................................................................................................82 F. First Quarter 2007 Form 10-Q And Related Statements .......................................83 G. Second Quarter 2007 Form 10-Q And Related Statements...................................85 H. Third Quarter 2007 Form 10-Q And Related Statements......................................87 I. The February 5, 2008 Form 8-K............................................................................88 J. The 2008 Code of Business Conduct And Ethics..................................................88 K. 2007 Form 10-K.....................................................................................................90 L. First Quarter 2008 Form 10-Q And Related Statements .......................................91 M. Second Quarter 2008 Form 10-Q And Related Statements...................................93 N. The October 20, 2008 Press Release And The October 21, 2008 Form 8-K.........95 O. Third Quarter 2008 Form 10-Q And Related Statements......................................97 P. The February 3, 2009 Form 8-K And Related Statements ....................................98 Q. 2008 Form 10-K.....................................................................................................99 R. First Quarter 2009 Form 10-Q And Related Statements .....................................101 S. Corporate Responsibility Report Dated July 2009 ..............................................102 T. Second Quarter 2009 Form 10-Q And Related Statements.................................104 U. Third Quarter 2009 Form 10-Q............................................................................107 V. 2009 Form 10-K...................................................................................................107 W. First Quarter 2010 Form 10-Q And Related Statements .....................................111 X. Second Quarter 2010 Form 10-Q And Related Statements.................................114 Y. Third Quarter 2010 Form 10-Q And Related Statements....................................115 Z. The February 8, 2011 Form 8-K..........................................................................117 AA. 2010 Form 10-K...................................................................................................118 BB. First Quarter 2011 Form 10-Q And Subsequent News Reports..........................120 CC. Second Quarter 2011 Form 10-Q.........................................................................123 DD. Third Quarter 2011 Form 10-Q............................................................................123 ii Case 1:11-cv-04665-PGG Document 29 Filed 03/16/12 Page 4 of 168 VIII. ALLEGATIONS REGARDING SCIENTER AND FRAUDULENT INTENT ...................................124 A. Jung And Cramb Knew Of Or Recklessly Disregarded Avon’s Failure To Follow “Best Practices” For FCPA Compliance.................................................126 B. Avon’s Internal Investigation And The Resulting Suspension, Termination, Or Re-Assignment Of Certain Key Avon Personnel Provides Further Evidence Of Scienter...............................................................................128 C. The Government Investigation Of Avon Provides Additional Indicia Of Scienter................................................................................................................134 D. Jung And Cramb Knowingly Signed False SOX Certifications Throughout TheClass Period..................................................................................................135 IX. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE.........................................................................................................................138 X. INAPPLICABILITY OF SAFE HARBOR .................................................................................139 XI. LOSS CAUSATION / ECONOMIC LOSS ................................................................................140 A. October 21, 2008 And October 22, 2008.............................................................141 B. April 13, 2010 ......................................................................................................143 C. October 28, 2010..................................................................................................146 D. February 8, 2011 ..................................................................................................147 E. May 4, 2011 And May 5, 2011............................................................................149 F. May 25, 2011 .......................................................................................................152 G. October 27, 2011..................................................................................................153 XII. CONTROL PERSON ALLEGATIONS / GROUP PLEADING ......................................................154 XIII. CLASS ACTION ALLEGATIONS ..........................................................................................156