In the summer of 2018, Kylie Jenner landed on the cover of Forbes’ 2018 Self-Made Billionaire issue. “At 21, Jenner becomes the youngest self-made billionaire ever,” the magazine declared in a spread about the youngest member of the Kardashian/Jenner empire. Jenner’s new title was tied in large part to Kylie Cosmetics, her wildly-popular collection of makeup and skincare products that Forbes estimated was worth “at least $900 million,” thereby, enabling the reality mega-star to “reach a ten-figure fortune at a younger age than even Mark Zuckerberg (who was 23 when he hit that mark).”
That valuation of Kylie Cosmetics came into fruition not long after Jenner’s striking Forbes cover. In November 2019, Coty, Inc. acquired a 51 percent stake in her cosmetics collection in exchange for $600 million, putting an eye-popping $1.2 billion price tag on the now-6-year old company. According to a release from the New York-headquartered cosmetics giant, the acquisition would see it “build and further develop Kylie’s existing beauty business,” one that generated“an estimated $177 million innet revenues for the trailing twelve months.”
“Kylie is a modern-day icon, with an incredible sense of the beauty consumer,” Coty chairman Peter Harf asserted at the time, as the parties embarked on what appeared to be a perfect marriage, particularly given Coty’s endeavor to boost its digital footprint and incorporate millennial-focused brands into its lineup of stalwart beauty companies. In short, Coty “is wagering that the celebrity’s brand can revive a struggling beauty business based on CoverGirl and Max Factor,” the Wall Street Journal’s Sharon Terlep put it.
Now, that seemingly impeccable union is coming under fire.
“Inflated” Numbers
As it turns out, Jenner’s business may not have been worth what she – and her high-powered team – said it was. In May 2020, almost two years after Forbes crowned her the “youngest-ever self-made billionaire,” the business magazine had another story to tell: Jenner and her team had been “inflating the size and success of her [Kylie Cosmetics] business for years.”
In an article entitled, “Inside Kylie Jenner’s Web of Lies,” Forbes asserted that inaccurate numbers about the size of the Kylie Cosmetics business have been circulating for years. The Kylie Cosmetics “business was never that big to begin with, and the Jenners have lied about it every year since 2016 – including having their accountant draft tax returns with false numbers – to help juice Forbes’ estimates of Kylie’s earnings and net worth,” Forbes’ Chase Peterson-Withorn and Madeline Berg wrote.
More than that, Forbes’ writers stated that the Kylie Cosmetics revenue numbers cited by countless media outlets – as provided by Jenners’ team – simply did not jive with those listed in “public filings” from the formerly-privately held company’s new publicly-traded parent, Coty.
Counsel for Kylie Jenner shot down the Forbes’ piece, saying, “The article is filled with outright lies. Forbes’ accusation that Kylie and her accountants ‘forged tax returns’ is unequivocally false, and we are demanding that Forbes immediately and publicly retract that and other statements.”
The Aftermath
The article – which is still live on Forbes’ website sans any corrections or retractions – proved to be an internet sensation in much the same way as Jenner’s initial “Billionaires” cover. More than merely garnering sweeping social media traction, the revelations raised questions about whether Coty got a fair deal when it acquired a majority stake just 6 months prior. But while Twitter chatter quickly died down with the fast-moving news cycle, it appears that concerns over Coty’s acquisition of the Kylie Cosmetics company have not.
In fact, Coty and a handful of its highly-ranking officers and directors (the “defendants”) are now being accused of running afoul of U.S. federal securities laws in connection with the acquisition of Kylie Jenner’s cosmetics collection. In a proposed class action lawsuit filed in a New York federal court on September 4, Coty shareholder Crystal Garrett-Evans argues that the defendants engaged in “a fraudulent scheme and course of business that operated [to deceive] purchasers of Coty shares by disseminating materially false and/or misleading statements and/or concealing material adverse facts … about Coty’s business, operations, and prospects.”
Among the things that Coty “misrepresented” and/or failed to disclose? “Despite being no stranger to beauty brand acquisitions, Coty did not have adequate processes and procedures in place to assess and properly value the P&G Specialty Beauty Business and Kylie Cosmetics acquisitions, [and] as a result, Coty overpaid for [them].” More than that, Garrett-Evans claims that the defendants were either “aware or severely reckless in not knowing that Coty did not have adequate processes and procedures in place to assess and properly value acquisitions.”
As a result of its failure to properly value its acquisitions, Garrett-Evans alleges that “Coty’s financial statements and the defendants’ statements about Coty’s business … were materially false and/or misleading at all relevant times.” Due to such “wrongful acts and omissions, and the [resulting] decline in the market value of the Company’s stock,” Garrett-Evans says that she and other class members “have suffered significant losses and damages.” She points to Forbes’ May 29, 2020 article about how Jenner had allegedly “been inflating the size and success of her business for years,” as evidence of Coty “overvaluing yet another acquisition.” (Garrett-Evans claims that Coty had previously overpaid when it acquired P&G’s Specialty Beauty Business).
But not only did Coty allegedly overpay for its stake in P&G’s Specialty Beauty Business and Jenner’s company and make “material misstatements and/or omissions, [which] created an unrealistically positive assessment of Coty … causing the price of the company’s securities to be artificially inflated at all relevant times,” Garrett-Evans argues that when such alleged misrepresentations were disclosed, they “negatively affected the value of the [Coty] shares.” For example, she says that the Forbes’ revelation that Kylie Cosmetics had reportedly been boosting its numbers caused Coty’s stock to fall “$0.56, or over 13 percent, from a close of $4.19 on May 28, 2020 to a close of $3.63 per share on May 29, 2020 on heavy volume.”
“Under these circumstances [and others], all purchasers of Coty’s securities during the class period” – October 3, 2016 to May 28, 2020 – “suffered similar injury through their purchase of Coty’s securities at artificially inflated prices,” Garrett-Evans alleges. And with that in mind, she accuses Coty – as well as Lambertus “Bart” Becht, Camillo Pane, Pierre Laubies, Patrice De Talhouët, and Pierre-Andre Terse, all of whom were allegedly “aware of the Company’s dissemination of information to the investing public that they knew and/or recklessly disregarded was materially false and misleading” – of violating the Securities Exchange Act of 1934. (Neither Jenner nor Kylie Cosmetics are named as defendants).
Specifically, she accuses them of “engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of [Coty’s] securities in an effort to maintain artificially high market prices for Coty’s securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5.” As such, she is seeking a certification of her class action to enable other Coty shareholders to join her case, as well a monetary award to reflect “all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial,” and “such equitable, injunctive or other relief as the Court may deem just and proper.”
Hardly the only interest in Coty’s alleged wrongdoing, a dozen other U.S. law firms have advertised that they are currently seeking plaintiffs to join in class action lawsuits against the cosmetics giant on the same basis.
A rep for Coty was not immediately available for comment.
*The case is Crystal Garrett-Evans v. Coty, Inc., et al, 1:20-cv-07277 (SDNY).
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