Avon Products Inc., the world’s largest door-to-door seller of cosmetics, agreed to pay $135 million to end a five-year U.S. bribery probe that has cast a pall over the company as it grapples with a slump in sales and management changes.
Avon will enter into a deferred-prosecution agreement with the Justice Department and a subsidiary in China will plead guilty to violating the Foreign Corrupt Practices Act, the company said today in a regulatory filing. The accord, which hasn’t been finalized, would also settle a Securities and Exchange Commission civil probe.
Avon’s legal troubles have become known more for the cost of the investigation than the scale of the misconduct. The company spent about $400 million probing bribery in China and other countries -- more than twice the settlement and almost as much as the company’s cash flow last year.
“Every aspect of this investigation -- from learning about the conduct to negotiating a final settlement -- is indicative of a corporate culture that is just mismanaged and inefficient,” said Michael Volkov, an FCPA lawyer who runs the Corruption, Crime & Compliance blog.
Avon shares have lost more than half their value in the past three years as revenue dried up. The company today posted a wider first-quarter loss as sales declined in all of its regions. Shares dropped 10 percent to $13.72 in New York.
Avon began looking into allegations of improper payments in China in mid-2008, sparked by a whistle-blower’s letter to then-chief executive officer Andrea Jung. It was among the first companies to obtain a license to sell products directly to consumers -– the cornerstone of its business model -- after Chinese authorities ended a ban on direct sales in 2006.
By July 2006, Avon had hired more than 114,000 door-to-door salespeople in China. Jung said at the time the company viewed the country as a potential $1 billion market. Sales in China surged 28 percent to $67.2 million in the company’s fourth quarter that year.
Mayer Brown LLP was brought in to conduct the internal investigation and the company reported the allegations to the Justice Department and SEC, Avon said in an October 2008 statement. Claudius Sokenu, the Mayer Brown partner who was handling the Avon probe, moved to law firm Arnold & Porter LLP in 2009, taking the case with him. Sokenu, who has continued to work on the case, is now a partner at Shearman & Sterling LLP.
Phone calls and e-mails to Mayer Brown, Arnold & Porter and Shearman & Sterling weren’t immediately returned.
Later that year, Avon disclosed that the probe expanded to countries beyond China and involved “travel, entertainment, gifts, use of third-party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others,” according to a company filing.
In May 2011, Avon fired four executives connected to the bribery inquiry and the following year named a new head of the China unit. By that time, revenue in China was down 48 percent in the fourth quarter.
To investigate the allegations, Avon spent more than twice as much as Weatherford International Ltd., a Geneva-based oil services company that resolved a U.S. probe of corruption and sanctions violations last year for $253 million. Weatherford spent under $150 million on the 8-year probe that included allegations of selling drilling equipment to sanctioned countries including Iran and Syria.
The half billion dollar clean-up is more than what Avon plans to save by cutting 650 jobs by 2016.
In a 2010 meeting, government officials took the unusual step of questioning why Avon’s legal costs were so high at that point, according to two people familiar with the meeting who weren’t authorized to discuss it publicly. Avon said its legal bills had ballooned in part because the company operated in more than 100 countries without consolidated transaction records, according to one of the people.
“DOJ doesn’t want a company to have to spend unnecessary millions of dollars on an internal investigation any more than the company itself does,” said Matthew Axelrod, a former senior Justice Department official who wasn’t involved in the case. “Though unusual, DOJ may call in company counsel to discuss when an outside law firm is going too far afield from what is necessary.”
Even after that meeting, the costs continued to rise. From 2010 and 2012, the company’s costs for the probe were more than $90 million per year.
Peter Carr, a Justice Department spokesman, declined to comment on the matter. Jennifer Vargas, an Avon spokeswoman, said the cost of the probe has decreased over the past 18 months.
Chief Executive Officer Sheri McCoy, who took the helm in April 2012 from Jung, sought to settle with the government while working to reduce Avon’s costs and abandon unprofitable markets such as South Korea, Vietnam and Ireland. The agreement announced today -- which requires court approval -- would cover conduct in Asia, Europe and Latin America and involves bribes paid to secure permits and avoid taxes, one of the people said.
McCoy, in a Feb. 13 earnings call, said reversing Avon’s decline in North America was her top concern and that resolving the bribery probe would leave Avon “in better shape to move into the future.”
The company was rebuffed by the SEC last year when it offered to settle the matter for $12 million.
In December, Avon said it planned to cut 650 jobs as part of an effort to trim $400 million in costs by 2016. The cuts and other actions are expected to be completed this year and will result in charges of as much as $45 million before taxes, with about $35 million recorded in the fourth quarter of 2013, Avon said in a Dec. 13 filing.
“The costs of some of these investigations are stupefying and the question is could they have been done differently, less expensively, but still rigorously and in a way that would satisfy the agencies,” Homer Moyer, an FCPA lawyer at Miller & Chevalier in Washington, said in an interview.
In Avon, at least three law firms have been involved during various points of the case, the most recent being Cravath Swaine & Moore LLP.
Mike Koehler, a law professor at Southern Illinois University who writes the FCPA Professor blog, said Avon’s expenses aren’t out of line. It’s common for an investigation to cost about four times the amount of the final penalty, he said.
Even when potential penalties are high, the costs of the case can be reined in, said Paul McNulty, a former deputy attorney general.
“You can’t chase down every lead in every corner of the world. You have to prioritize. And in my experience the government is willing to work with you on this,” McNulty, now a partner at Baker & McKenzie in Washington, said in an interview. “On the other hand, if you tell the government we’re going to look in every corner of the world, they’re not going to stop you.”